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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(AS FILED VIA EDGAR ON NOVEMBER 15, 1999)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
--- ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the transition period from __________ to _________________
Commission file number 0-14060
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INTRENET, INC.
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(Exact name of registrant as specified in its charter)
INDIANA 35-1597565
- ------------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer Identification No)
incorporation or organization)
400 TECHNECENTER DRIVE, SUITE 200, MILFORD, Ohio 45150
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (513) 576-6666
--------------------
Not Applicable
---------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, without par value, 13,724,066 shares issued and
outstanding at November 1, 1999.
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INTRENET, INC.
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FORM 10-Q
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SEPTEMBER 30, 1999
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INDEX
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PAGE
Part I - Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
September 30, 1999 and December 31, 1998 ................. 3
Condensed Consolidated Statements of Operations
Three Months and Nine Months Ended ................. 4
September 30, 1999 and 1998
Condensed Consolidated Statement of Shareholders' Equity
Nine Months Ended September 30, 1999 ................. 5
Condensed Consolidated Statements of Cash Flows
Three Months and Nine Months Ended ................. 6
September 30, 1999 and 1998
Notes to Condensed Consolidated Financial Statements ................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................. 13
Part II - Other Information:
Item 1. Legal Proceedings ................. 14
Item 2. Changes in Securities ................. 14
Item 3. Defaults Upon Senior Securities ................. 14
Item 4. Submission of Matters to a Vote of Security Holders ................. 14
Item 5. Other Information ................ 15
Item 6. Exhibits and Reports on Form 8-K ................. 15
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INTRENET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(In Thousands of Dollars)
Assets 1999 1998
------ ---- ----
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 918 $ 271
Receivables, principally freight revenue less
allowance for doubtful accounts of $1,820 in 1999
and $1,537 in 1998 41,082 33,233
Prepaid expenses and other 5,809 5,402
------- -------
Total current assets 47,809 38,906
Property and equipment, at cost, less accumulated
depreciation 25,196 28,833
Reorganization value in excess of amounts allocated
to identifiable assets, net of accumulated amortization 4,652 4,967
Deferred income taxes, net 2,886 2,886
Other assets 573 2,208
------- -------
Total assets $81,116 $77,800
======= =======
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current debt and capital lease obligations $ 3,863 $ 5,789
Accounts payable and cash overdrafts 11,480 9,439
Current accrued claim liabilities 7,429 7,878
Other accrued expenses 7,744 7,418
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Total current liabilities 30,516 30,524
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Long-term debt and capital lease obligations 25,590 20,105
Long-term accrued claim liabilities 2,800 2,800
------- -------
Total liabilities 58,906 53,429
------- -------
Shareholders' equity:
Common stock, without par value; 20,000,000
shares authorized; 13,724,066 and 13,662,066 shares
issued and outstanding, respectively 16,991 16,856
Retained earnings since January 1, 1991 5,219 7,515
------- -------
Total shareholders' equity 22,210 24,371
------- -------
Total liabilities and shareholders' equity $81,116 $77,800
======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
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INTRENET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
(In Thousands of Dollars, Except Per Share Data)
Three Months Nine Months
Ended Sept 30, Ended Sept 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
Operating revenues $ 74,702 $ 69,794 $ 213,188 $ 196,820
Operating expenses:
Purchased transportation
and equipment rents 35,246 31,526 99,338 88,624
Salaries, wages, and benefits 18,281 16,952 53,386 47,183
Fuel and other operating expenses 13,876 12,759 38,588 35,919
Operating taxes and licenses 2,304 2,604 7,423 7,672
Insurance and claims 1,847 2,145 5,855 6,090
Depreciation 970 973 2,938 2,937
Other operating expenses 998 840 3,177 2,763
------------ ------------ ------------ ------------
73,522 67,799 210,705 191,188
------------ ------------ ------------ ------------
Operating income 1,180 1,995 2,483 5,632
Interest expense (607) (638) (1,848) (1,941)
Contigent liability special charge (293) -- (2,500) --
Other expense, net (105) (105) (315) (315)
------------ ------------ ------------ ------------
Earnings (loss) before income taxes 175 1,252 (2,180) 3,376
Provision for income taxes (24) (284) (116) (775)
------------ ------------ ------------ ------------
Net earnings (loss) $ 151 $ 968 $ (2,296) $ 2,601
============ ============ ============ ============
Earnings (loss) per common and common
equivalent share
Basic $ 0.01 $ 0.07 $ (0.17) $ 0.19
============ ============ ============ ============
Diluted $ 0.01 $ 0.07 $ (0.17) $ 0.19
============ ============ ============ ============
Weighted average shares outstanding during period 13,701,077 13,550,638 13,681,579 13,550,171
============ ============ ============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
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INTRENET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(Unaudited)
(In Thousands of Dollars)
Retained Shareholders'
Common Stock Earnings Equity
------------------------- ---------- ----------
Shares Dollars
---------- ----------
Balance, December 31, 1998 13,662,066 $ 16,856 $ 7,515 $ 24,371
Exercise of stock options 62,000 135 -- 135
Net loss for 1999 -- -- (2,296) (2,296)
---------- ---------- ---------- ----------
Balance, September 30, 1999 13,724,066 $ 16,991 $ 5,219 $ 22,210
========== ========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
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INTRENET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
(In Thousands of Dollars)
Three Months Nine Months
Ended Sept 30, Ended Sept 30,
----------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
Cash flows from operating activities:
Net earnings (loss) $ 151 $ 968 $(2,296) $ 2,601
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Deferred income taxes -- 284 -- 775
Depreciation and amortization 1,089 1,089 3,281 3,293
Provision for doubtful accounts 21 129 249 262
Contigent liability charge -- -- 2,118 --
Changes in assets and liabilities, net:
Receivables (2,441) (1,229) (8,098) (4,821)
Prepaid expenses 294 763 (407) (980)
Accounts payable and accrued expenses 1,608 (664) 1,435 217
------- ------- ------- -------
Net cash provided by (used in)
operating activities 722 1,340 (3,718) 1,347
------- ------- ------- -------
Cash flows from financing activities:
Net borrowings on line of
credit, net 274 (184) 6,187 2,645
Principal payments on long-term debt (769) (945) (2,627) (2,771)
Proceeds from exercise of stock options 110 -- 135 5
------- ------- ------- -------
Net cash provided by (used in)
financing activities (385) (1,129) 3,695 (121)
------- ------- ------- -------
Cash flows from investing activities:
Additions to property and equipment (215) (421) (1,271) (1,067)
Disposals of property and equipment 456 12 1,941 109
------- ------- ------- -------
Net cash provided by (used in)
investing activities 241 (409) 670 (958)
------- ------- ------- -------
Net increase (decrease) in cash
and cash equivalents 578 (198) 647 268
Cash and cash equivalents:
Beginning of period 340 1,064 271 598
------- ------- ------- -------
End of period $ 918 $ 866 $ 918 $ 866
======= ======= ======= =======
The accompanying notes are an integral part of
these consolidated financial statements.
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INTRENET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
(1) UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------
The accompanying unaudited consolidated financial statements include
the accounts of Intrenet, Inc. and all of its subsidiaries (collectively, the
Company). Operating subsidiaries at September 30, 1999 were Roadrunner Trucking,
Inc. (RRT), Eck Miller Transportation Corporation (EMT), Advanced Distribution
System, Inc. (ADS), and Roadrunner Distribution Services, Inc. (RDS). Also
included is the Company's broker and logistics manager, INET Logistics, Inc.
(INL). All significant intercompany transactions are eliminated in
consolidation. Through its subsidiaries, the Company provides general and
specialized truckload carrier, brokerage and logistics management services
throughout North America.
The consolidated financial statements included herein have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). In management's opinion, these financial statements include
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of the results of operations for the interim periods
presented. Pursuant to SEC rules and regulations, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted from these statements unless significant changes have taken place since
the end of the most recent fiscal year. For this reason, the accompanying
consolidated financial statements and notes thereto should be read in
conjunction with the financial statements and notes for the year ended December
31, 1998, included in the Company's 1998 Annual Report on Form 10-K.
Earnings per common and common equivalent share have been computed on
the basis of the weighted average common shares outstanding during the periods.
The results for the three month and nine month periods ended September
30, 1999, are not necessarily indicative of the results to be expected for the
entire year.
(2) INCOME TAXES
- ----------------
Due to the year-to-date loss in 1999, the Company did not record
Federal tax expense for the year. The tax assets created in 1999 have been fully
reserved. Tax expense reflected in the Statement of Operations as of September
30, 1999, consist of a provision for state and local income taxes.
(3) CONTINGENT LIABILITIES
- --------------------------
On June 13, 1997, the Company received notice from the Central States
Southeast and Southwest Areas Pension Fund (the "Fund") of a claim pursuant to
the Employee Retirement Income Security Act of 1974, as amended by the
Multi-employer Pension Plan Amendments Act of 1980 ("MPPAA"). MPPAA provides
that, if an employer withdraws from participation in a multi-employer pension
plan, such as the Fund, the employer and members of the employer's "controlled
group" of businesses are jointly and severally liable for a portion of the
plan's under funding. The claim was based on the withdrawal of R-W Service
System, Inc. ("RW") from the Fund in 1992. RW was an indirect subsidiary of the
Company's predecessor, Circle Express, Inc., from March 1985 through April 1988,
when it and certain other subsidiaries were sold. The Fund claimed that RW's
withdrawal liability was approximately $3.7 million plus accrued interest in the
amount of approximately $1.7 million. The Company filed a formal request for
review of the claim and began making interim payments to the Fund as provided by
the MPPAA. Through September 30, 1999, the Company had made payments to the Fund
that total approximately $2.3 million. As previously reported, the Company
offered to pay the Fund $2.2 million and established a special charge of $2.2
million with respect to this claim in the second quarter of 1999. In September
1999, the Company finalized negotiations and settled the claim with the Fund for
a total of $2.5 million. Accordingly, the Company recorded an additional $0.3
million special charge for the third quarter of 1999. Under the terms of the
settlement, the Company will continue to make monthly payments of $88,500
through November 1999, with a final payment in December 1999, of approximately
$30,000.
The Company's subsidiary, RDS, was a defendant in an action brought on
March 20, 1997, in the 327th District Court, El Paso, Texas, by a former
employee. The plaintiff alleged that he was injured as a result of the
negligence and gross negligence of RDS and received discriminatory treatment in
violation of the Texas Health and Safety Code. On March 13, 1998, a default
judgment was entered against RDS in the approximate amount of $1.0 million,
representing damages for medical expenses, loss of wage earning capacity,
physical pain and mental anguish, physical
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impairment, disfigurement and punitive damages. RDS filed an appeal to the 8th
Circuit Court of Appeals in El Paso, Texas and on July 29, 1999, the 8th Circuit
Court of Appeals in El Paso issued a favorable ruling for RDS, reversing the
default judgment and remanding the case for trial. The case remains in an early
stage. Management believes that this action should not have a material adverse
effect on the Company's liquidity, results of operations or financial condition.
There are no other material pending legal proceedings to which the
Company or any of its subsidiaries is a party or of which any of their property
is the subject, other than routine litigation incidental to its business,
primarily involving claims for personal injury and property damage incurred in
the transportation of freight. The Company maintains insurance which covers
liability resulting from such transportation related claims in amounts customary
for the industry and which management believes to be adequate.
(4) TRANSACTIONS WITH AFFILIATED PARTIES
- ----------------------------------------
To date, in 1999, the Company has leased approximately 224 tractors
from an unaffiliated leasing company which had purchased the trucks from a
dealership affiliated with the Company's chief executive officer. The lessor
paid a selling commission to the dealership. The terms of the lease were the
result of negotiations between the Company and the lessor. The Company believes
the involvement of the selling dealership did not result in lease terms that are
less favorable to the Company than would otherwise be available to it. During
the last three years, the Company has leased an average of 225 tractors a year
that were purchased from the dealership. The Company also purchases maintenance
parts and services from the dealership from time to time. Total payments to the
dealership for these services have average approximately $500,000 per year for
the last three years.
In the third quarter of 1999, the Company accepted the placement of a
fleet automobile policy from an unaffiliated insurance company through an agency
that is affiliated with the Company's chief executive officer. The annual
premium is approximately $30,000 for a one year coverage beginning October 1,
1999. The Company believes the terms of the policy are not less favorable to the
Company than policies from unaffiliated agencies.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
INTRODUCTION
- ------------
The following discussion should be read in conjunction with the
condensed consolidated financial statements and notes thereto appearing
elsewhere in this report. Certain statements made in this report relating to
trends in the Company's business, as well as other statements including such
words as "believe", "expect", "anticipate", and other similar expressions
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements involve a
variety of risks and uncertainties, known and unknown, including but not limited
to: changes in general economic and market conditions; the availability and cost
of qualified drivers; the availability and price of diesel fuel; the impact and
cost of government regulations and taxes on the operation of the Company's
business, as well as other risks specifically described in this report.
The Company reported net income of $151,000 on revenues of $74.7
million in the three months and a net loss of $2,296,000 on revenues of $213.2
million in the nine months ended September 30, 1999. This compares with net
earnings of $968,000 on revenues of $69.8 million, and net earnings of
$2,601,000 on revenues of $196.8 million in the comparable periods of 1998,
respectively. The Company's revenue grew by 7.0 percent in the third quarter of
1999 and all of its operating subsidiaries reported revenue improvements for the
quarter and the full year. Diesel fuel prices have been increasing all year. The
national average price per gallon at the end of the third quarter was
approximately $1.22, nearly $0.25 higher than the beginning of the year. Revenue
miles increased for the quarter and year to date; however, increased fuel cost,
driver compensation increases and a shortage of drivers have adversely affected
profitability. The Company experienced a final settlement expense of $0.3
million this quarter in connection with a legal proceeding, for a year to date
charge of $2.5 million. Barring any unforeseen changes in the overall economy,
the Company expects that future operations will benefit from continuing cost
reduction programs in the areas of a better fuel purchase network, safety and
technological enhancements.
Revenue miles for the third quarter of 1999, increased to 46.7 million
miles from 43.6 million miles as a result of a greater average number of
tractors in the fleet. Revenue per revenue mile in the third quarter of 1999,
improved by 1.5 percent to $1.40 per mile, up from $1.38 last year.
In July 1999, RRT entered into an agency agreement in the Dallas,
Texas, area which added approximately 100 company drivers and 50 owner
operators. The cost related to the effect of positioning equipment for this new
business negatively impacted profitability in the third quarter 1999.
The Company's total operating fleet, including owner-operators, at the
end of the third quarter of 1999 was 2,564 tractors, up from 2,249 at the end of
the third quarter of 1998, an increase of approximately 14 percent. The number
of Company owned tractors, at the end of the third quarter in 1999, grew by 9
percent, while the owner operator tractors grew by 19%, as compared with 1998.
A discussion of the impact of the above and other factors on the
results of operations in the three months and nine months ended September 30,
1999, as compared to the comparable periods of 1998 follows.
1999 COMPARED TO 1998
- ------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Sept 30 % Nine Months Ended Sept 30 %
---------------------------------- --------------------------------
KEY OPERATING STATISTICS 1999 1998 Change 1999 1998 Change
- ------------------------ ---- ---- ------ ---- ---- ------
Operating Revenues ($ millions) $74.7 $69.8 7.0% $213.2 $196.8 8.3%
Average Number of Tractors 2,543 2,268 12.1% 2,404 2,245 7.1%
Total Loads (000's) 98.0 92.0 6.5% 286.5 266.9 7.3%
Revenue Miles (millions) 46.7 43.6 7.1% 132.5 125.7 5.4%
Average Revenue per
Revenue Mile * $1.40 $1.38 1.5% $1.39 $1.37 1.5%
- ------------------------------------------------------------------------------------------------------------------------------
* Excluding brokerage revenue
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OPERATING REVENUES
Operating revenues for the three months and nine months ended September
30, 1999, totaled $74.7 million and $213.2 million, respectively, as compared to
$69.8 million and $196.8 million for the same periods in 1998, reflecting better
freight availability and selection than the prior year. All of the Company's
operating subsidiaries continued to grow in 1999. Revenue increased by $4.9
million, or 7.0 percent, in the three months, and $16.4 million, or 8.3 percent,
in the nine months ended September 30, 1999, over the comparable 1998 periods.
The average number of Company owned tractors increased approximately 10.0
percent from 1,227 to 1,349 in the nine month period ended September 30, 1999,
from the comparable period in 1998, and the average owner-operator tractor count
increased 3.5 percent from 1,018 to 1,054. Approximately 49.5 percent of the
Company's revenue was generated by Company-operated equipment, and 37.0 percent
by owner-operator equipment in the nine months ended September 30, 1999, which
is comparable to the 1998 period. The remaining revenues were from freight
brokered to other carriers ("brokered freight").
The Company experienced a 1.5 percent improvement in the average
revenue per revenue mile for the nine months of 1999, as compared to 1998. This
improvement is attributable to the installation of load selection software, in
use for the entire quarter, and a tightening of capacity in the markets served
by the Company.
OPERATING EXPENSES
- ------------------
The following table sets forth the percentage relationship of operating
expenses to operating revenues for the three months and nine months ended
September 30.
Three Months Ended Sept 30 Nine Months Ended Sept 30
------------------------------------- -------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Operating revenues 100 % 100 % 100 % 100 %
Operating expenses:
Purchased transportation
and equipment rents 47.2 45.1 46.6 45.0
Salaries, wages and benefits 24.4 24.3 25.0 24.0
Fuel and other operating expenses 18.6 18.3 18.1 18.2
Operating taxes and licenses 3.1 3.7 3.5 3.9
Insurance and claims 2.5 3.1 2.7 3.1
Depreciation 1.3 1.4 1.4 1.5
Other operating expenses 1.3 1.2 1.5 1.4
--- --- --- ---
Total operating expenses 98.4% 97.1% 98.8% 97.1%
==== ==== ==== ====
Purchased transportation and equipment rents increased as a percentage
of revenue due to the increased amount of brokered and owner operator freight.
Salaries, wages and benefits remained constant for the quarter despite the
increased cost related to equipment positioning for the RRT agency agreement.
Salaries and wages are higher year to date because of the increases in driver
pay at all of the trucking subsidiaries plus one time charges in the second
quarter relating to severance agreements with two former executives that totaled
approximately $550,000. The driver pay increases have been made in response to
the highly competitive marketplace for driver services. Fuel and other operating
expenses are attributable to Company-operated equipment and these expenses have
remained relatively unchanged compared to 1998 despite the rapid rise in fuel
prices. Fuel prices for the third quarter of 1999 were approximately 20 percent
higher than the same period of 1998 equating to nearly $1,000,000 additional
fuel cost in the third quarter of 1999, as compared to 1998. The effect of this
rise in fuel prices has been offset slightly by an average MPG gain in the
overall Company fleet, lower maintenance costs, reduced miscellaneous fleet cost
and lower commission agent fees. Operating taxes and licenses are down as a
percent of revenue due to the growth in owner-operator and brokerage revenues
not requiring licensing from the Company. Insurance costs as a percent of
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revenues are lower for the quarter and year to date due to reductions in fleet
insurable repairs and claim costs related to revenues. All other operating
expenses have remained relatively unchanged.
In summary, driver turnover and wages, fuel price increases, severance
expenses and a shortage of drivers have adversely affected the Company's
operating expenses for the third quarter and the first nine months of 1999.
INTEREST EXPENSE
- ----------------
Bank borrowings were higher in 1999, than 1998, while capitalized lease
debt was lower. The less expensive bank debt and the reduction in the borrowing
rate due to the amended bank agreements in 1999 caused interest expense to be
slightly less compared to 1998.
CONTINGENT LIABILITY SPECIAL CHARGE
- -----------------------------------
During the third quarter of 1999, the Company charged the income
statement $0.3 million representing the final portion of the Company's $2.5
million settlement of a claim asserted by the Central States Southeast
and Southwest Areas Pension Fund (the "Fund"). The Company made interim
payments to the Fund that total approximately $2.2 million through August 1999,
and recognized that expense at June 30, 1999, when it offered to settle the
claim for that amount. The Company and the Fund have now agreed on the terms of
a settlement. The remaining balance of the settlement will be paid monthly with
a final payment in December. The balance due is recorded in the Company's
Condensed Balance Sheet as a current liability. For further information, see
Part II - Item 1 of this report.
PROVISION FOR INCOME TAXES
- --------------------------
Due to the year-to-date loss in 1999, the Company did not record
Federal tax expense for the year. The tax assets created in 1999 have been fully
reserved. Tax expense reflected in the Statement of Operations as of September
30, 1999, consist of a provision for state and local income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $647,000 of cash in the nine months of 1999,
compared to $268,000 in 1998. As reflected in the accompanying Consolidated
Statements of Cash Flows, $3.7 million of cash was used in operating activities,
primarily by increased accounts receivable, offset by depreciation, other
noncash charges related to the pension fund and other working capital. The
largest working capital need was incurred in accounts receivable of $8.1
million. Net cash of $3.7 million was generated by financing activities,
primarily bank borrowings. Net cash of $670,000 was provided in financing
activities, primarily from the net disposal of property and equipment.
The Company's day-to-day financing is provided by borrowings under its
bank credit facility. The credit facility, as amended on May 7, 1999, consists
of a $2 million term loan and a $5 million capital expenditure loan, both with a
maturity date of December 31, 2000 and a $28 million revolving line of credit,
which expires January 1, 2001. The current interest rate margin on all credit
lines from the August 17, 1999, amendment, is 175 basis points over LIBOR.
Quarterly principal payments of $100,000 on the term loan are required. There is
currently nothing outstanding under the capital expenditure loan. The line of
credit includes provisions for the issuance of standby letters of credit which,
as issued, reduce available borrowings under the line of credit. Borrowings
under the line of credit are limited to amounts determined by a borrowing base
formula tied to the Company's eligible accounts receivable and inventories, as
defined in the credit facility. Borrowings under the revolving line of credit
totaled $15.2 million at September 30, 1999, and outstanding letters of credit
totaled $7.5 million at that date. The combination of these two bank credits
totaled $22.7 million at September 30, 1999.
The credit facility contains financial covenants that required the
Company to maintain certain net worth and other financial ratios. As a result of
the loss in 1999, the Company would not have been in compliance with all of the
financial covenants contained in the May 7, 1999, amended bank agreement. The
Company's bank agreement was amended again on August 17, 1999. The amended
agreement, which became effective June 30, 1999, amended the financial covenants
for June 1999, and future periods in a manner to accommodate the expenses
related to the contingent liability special charge and the severance
arrangements with former management. This amendment also limited the
availability to the Company's capital expenditure loan of $5,000,000 until the
Company has met a specified fixed charge ratio coverage for three consecutive
months.
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The Company was in compliance with all its debt covenants, as amended,
for the period ending September 30, 1999. The capital expenditure loan is not
available at this time.
On November 5, 1999, the Company was notified by the bank that the
recently conducted collateral audit as of June 30, 1999, indicated that the
Company may have incorrectly calculated the borrowing base upon which advances
have been made. As a result, the bank concluded that at June 30, the Company's
aggregate amount outstanding pursuant to Letters of Credit plus aggregate unpaid
balance of the Revolving Line was very close, or may have exceeded the borrowing
base. The bank is now reviewing the borrowing base as of September 30, 1999. The
bank and the Company believe that at September 30, 1999, the aggregate amount
outstanding pursuant to Letters of Credit plus aggregate unpaid principal
balance did not exceed the amount permitted by the borrowing base. Management
expects to meet with bank representatives in the near future to discuss this and
other issues relating to the bank credit facility.
On October 1, 1999, the Company elected to change its insurance
carriers for renewal of certain policies. The new insurance companies require
that $3.4 million of letters of credit be posted in securement of deductible
exposure, ratably over the 12 month period ending September, 2000. In addition,
the Company was recently notified by the former carrier of certain of its
insurance policies that the Company would need to provide additional collateral
in the form of approximately $2.8 million of letters of credit to secure the
Company's deductible obligations for outstanding claims. The Company has
disputed the calculations which form the basis of the request. The insurer has
agreed to defer any request for additional collateral pending a claims audit
scheduled to be completed by November 24, 1999. Final collateral will be
communicated within 10 days of the audit. If the audit cannot be completed, the
requirement will revert back to the additional $2.8 million due by December 10,
1999.
If the Company is not able to make additional borrowings under its
bank credit facility or if the Company would need to provide significant amounts
of additional collateral to its former insurer, the Company's ability to meet
its cash needs for operations and capital investments would be materially and
adversely affected. In such event, management believes that the Company would
have to obtain other sources of liquidity, including obtaining a credit facility
from another institution or an equity offering. There can be no assurance that
these alternative courses of action would succeed.
YEAR 2000
The Company has assessed, and continues to assess, the impact of the
Year 2000 Issue on its reporting systems and operations. The Year 2000 Issue
exists because many computer systems and applications currently use two-digit
date fields to designate a year. As the century date occurs, date sensitive
systems will recognize the year 2000 as 1900 or not at all. This inability to
recognize or properly treat the year 2000 may cause our systems to process
critical financial and operational information incorrectly or may cause the
system to discontinue functioning altogether. One of the more significant Year
2000 issues faced by the Company is from its fully integrated dispatch and
equipment control systems, which were not Year 2000 compliant. The Company
updated and worked with the vendors of any products it is using to install new
models and/or modify all of its applications and computer systems and, in
particular, its dispatch and equipment control system to insure that they will
be Year 2000 compliant. All programs have been tested and problems identified
have been resolved. The Company incurred cost of approximately $50,000 and
expects any future costs, if any, to be minimal. These costs have been charged
to operations as incurred. Management has not developed any contingency plan
regarding its dispatch and equipment control systems at this time, but will
develop one, if deemed necessary.
As part of the Company's comprehensive review, it is continuing to
verify the Year 2000 readiness of third parties (vendors and customers) with
whom the Company has material relationships. Based on efforts to date, the
Company believes that there will be no material adverse effect on the Company's
results of operations, liquidity, and financial condition in the event the
Company's material vendors and customers are not Year 2000 compliant. The
Company will continue to monitor its material vendors and customers and
formulate a contingency plan when the Company believes a material vendor or
customer will not be compliant.
The percentage of completion, the date on which the Company believes it
had completed with its Year 2000 compliance efforts, and the expenses related to
the Company's Year 2000 compliance efforts are based on management's best
estimates. Actual results could materially differ from those anticipated. There
can be no assurances that the systems or products of third parties on which the
Company relies will be timely converted or that a failure by a third party, or a
conversion that is incompatible with the Company's systems, would not have a
material adverse effect on the Company.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings are impacted by financial risk related to
volatility in interest rates related to variable debt instruments. These debt
instruments are non-trading in nature and are used to fund the Company's
day-to-day operations. Based upon the principal amounts outstanding at September
30, 1999, for those variable rate debt instruments, a market change of 100
basis-points in interest rates would correspond to an approximately $150,000
impact in interest expense for a one-year period. This sensitivity analysis does
not account for any change in the borrowings outstanding, which may be reduced
through payments or increased through additional borrowings, and does not
consider the Company's ability to fix the interest rate on one of the three
variable rate debt instruments. The Company has no material future earnings
impact or cash flow expense from changes in interest rates related to its
financing of operating equipment as all of the Company's equipment financing has
fixed rates.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On June 13, 1997, the Company received notice from the Central States
Southeast and Southwest Areas Pension Fund (the "Fund") of a claim pursuant to
the Employee Retirement Income Security Act of 1974, as amended by the
Multi-employer Pension Plan Amendments Act of 1980 ("MPPAA"). MPPAA provides
that, if an employer withdraws from participation in a multi-employer pension
plan, such as the Fund, the employer and members of the employer's "controlled
group" of businesses are jointly and severally liable for a portion of the
plan's under funding. The claim was based on the withdrawal of R-W Service
System, Inc. ("RW") from the Fund in 1992. RW was an indirect subsidiary of the
Company's predecessor, Circle Express, Inc., from March 1985 through April 1988,
when it and certain other subsidiaries were sold. The Fund claimed that RW's
withdrawal liability was approximately $3.7 million plus accrued interest in the
amount of approximately $1.7 million. The Company filed a formal request for
review of the claim and began making interim payments to the Fund as provided by
the MPPAA. Through September 30, 1999, the Company had made payments to the Fund
that total approximately $2.3 million. As previously reported, the Company
offered to pay the Fund $2.2 million and established a special charge of $2.2
million with respect to this claim in the second quarter of 1999. In September
1999, the Company finalized negotiations and settled the claim with the Fund for
a total of $2.5 million. Accordingly, the Company recorded an additional $0.3
million special charge for the third quarter of 1999. Under the terms of the
settlement, the Company will continue to make monthly payments of $88,500
through November 1999, with a final payment in December 1999, of approximately
$30,000.
The Company's subsidiary, RDS, was a defendant in an action brought on
March 20, 1997, in the 327th District Court, El Paso, Texas, by a former
employee. The plaintiff alleged that he was injured as a result of the
negligence and gross negligence of RDS and received discriminatory treatment in
violation of the Texas Health and Safety Code. On March 13, 1998, a default
judgment was entered against RDS in the approximate amount of $1.0 million,
representing damages for medical expenses, loss of wage earning capacity,
physical pain and mental anguish, physical impairment, disfigurement and
punitive damages. RDS filed an appeal to the 8th Circuit Court of Appeals in El
Paso, Texas and on July 29, 1999, the 8th Circuit Court of Appeals in El Paso
issued a favorable ruling for RDS, reversing the default judgment and remanding
the case for trial. The case remains in an early stage. Management believes that
this action should not have a material adverse effect on the Company's
liquidity, results of operations or financial condition.
There are no other material pending legal proceedings to which the
Company or any of its subsidiaries is a party or of which any of their property
is the subject, other than routine litigation incidental to its business,
primarily involving claims for personal injury and property damage incurred in
the transportation of freight. The Company maintains insurance which covers
liability resulting from such transportation related claims in amounts customary
for the industry and which management believes to be adequate.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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ITEM 5. OTHER INFORMATION
On September 15, 1999, the Company hired John P. Chandler as Executive
Vice-president and Chief Operating Officer. Mr. Chandler was Chief Executive
Officer for Tow America/Reliable Recovery Services, Inc., since 1998. From 1984
to 1997 he was with Caliber System, Inc., and it's subsidiary RPS, the nation's
second largest ground carrier of small package freight.
On November 1, 1999, ADS appointed Robert J. Christie as President
replacing Leo D. Blumenauer. Mr. Christie was Chief Operating Officer with
Eastern Connection prior to joining the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 10.1 - Sixth Amendment to the Fourth
Amended and Restated Loan Agreement
dated as of August 17, 1999.
Exhibit 10.2 - Employment Agreement with John P. Chandler
Exhibit 10.3 - Option Agreement with Eric C. Jackson
Exhibit 10.4 - Option Agreement with John P. Chandler
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTRENET, INC.
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(Registrant)
/S/ Eric C. Jackson,
President and Chief
Executive Officer
November 15, 1999 /S/ Russell L. Deeg,
Vice-President, Finance and
Administration
(Principal Financial and
Accounting Officer)
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