Item 1. Business
The Company: Organization and Changes of Control - -------------------------------------------------
The Company was organized under the laws of the State of Delaware on December 16, 1987, under the name Taylor Equities, Inc. ("Taylor"). The Company was formed as a "blank check" company, with its sole purpose being to offer its stock to the public in a public offering and thereafter use the proceeds to find an acquisition or merger candidate. On December 23, 1991, Taylor entered into an Agreement and Plan of Merger (the "Merger Agreement") with The Freight Connection, Inc., ("FCI") a Florida corporation organized in October 1983 ("FCI") by Michael Jackson, former President of the Company, under the name "Expert Freight of Tampa, Inc." FCI was organized as an intermodal marketing company and carried on that business until its combination with Taylor, when FCI was dissolved. The Company's name was changed from Taylor Equities, Inc., to The Freight Connection, Inc., and the officers and directors of FCI became the officers and directors of the Company.
On July 14, 1993, Vitran Corporation Inc. ("Vitran"), a corporation organized under the laws of the Province of Ontario and having a principal place of business at 70 University Avenue, Suite 350, Toronto, Canada, M5J 2M4, acquired 3,218,030 shares of the Company's Common Stock. During 1997, Vitran purchased an additional 700,000 shares of the Company's common stock, changing its ownership to 3,918,030 shares, or 81.19% of the Company's outstanding common stock. Vitran is a North American multi-divisional operating company providing services to the freight and environmental industries with over 3,000 employees and associates at over one hundred service centers and offices in Canada and the United States. Vitran's Distribution Services Group, of which the Company is a part, provides a complete range of services for the movement of freight throughout the continent, utilizing both highway and rail modes. Services include less than truckload, full load, dedicated contract carriage, warehousing and inventory management. Vitran solicits business between the United States and Canada as an agent for the Company through a Vitran sales office in Toronto. Vitran and the Company have an agreement that all intermodal trans-border rail shipments shall be written by the Company, with Vitran receiving an agency commission from the Company for such business. Trans-border over-the-road shipments may be made by the Company or other Vitran subsidiaries, depending on the type of service required by the shipper of such freight. Each shipper has unique requirements for the movement of its freight, including time, shipment size and volume, and the shipper's inventory carrying costs. Vitran's common stock is traded on the Toronto Stock Exchange under the symbol VTN.A and on AMEX under the symbol VVN. See Item 13 of this Report.
In May 1998, Vitran transferred its ownership in The Freight Connection, Inc. to Vitran Corporation, a U.S. holding company organized in the state of Nevada. The purpose of this transaction was to have common ownership for Vitran's various U.S. subsidiaries, all of which are owned by the Nevada Corporation.
The Intermodal and Highway Brokerage Industry - ---------------------------------------------
The Company provides intermodal transportation services and operates as an intermodal marketing company ("IMC"). Intermodal transportation involves the movement of freight by more than one mode of transportation, principally by truck or a combination of truck and rail. The Company also has a highway brokerage division, which involves the movement of freight by truck.
For freight moving in excess of 500 miles, intermodal shipping often represents a cost-effective alternative to over-the-road trucking. The Company includes, as its target market, freight which is currently being shipped via intermodal transportation as well as freight moving in excess of 500 miles via for-hire trucking companies and private trucking fleets. Intermodal freight is divided equally into shipments generated domestically and those generated by the import/export market, with international movements slightly exceeding domestic traffic. Traditionally, the domestic shipments have been long-haul truck movements, principally truckload. Intermodal has primarily attracted long-haul freight of 700 miles to 1,000 miles or more; in some corridors, intermodal can be cost effective for distances as short as 500 miles.
IMCs have created additional opportunities for intermodal shipping by providing a full door-to-door service to their clients at a price and service level that would not be available to the shipper on its own. IMCs assist the railroads in balancing freight originating in or destined to specific geographic regions, resulting in improved asset utilization. IMCs provide value to shippers by passing on certain economies of scale by being volume purchasers of rail and drayage service, providing access to a large equipment pool, consolidating each carrier's invoice into one single invoice and handling the logistics of an intermodal move.
During the latter part of 1999 continuing throughout 2000, the industry experienced a narrowing of the gap between intermodal pricing and highway pricing in certain major corridors. This fact coupled with a few service issues that existed with certain rail carriers that lingered after a merger, made our highway brokerage service more viable as an option. The highway brokerage division represented 26.3% of the company's revenue in 2000, 29.1% in 1999 and 18.3% in 1998.
According to statistics reported by the Intermodal Association of North America, ("IANA"), IMC rail intermodal traffic for the year ended December 31, 2000 experienced zero growth over 1999. For the same period, the highway brokerage volume declined by 8%. Revenue per unit for intermodal traffic grew by 1% during 2000 while the highway brokerage revenue per unit was up 5.8% compared to 1999 data. (1)
Historically, establishing an IMC was easy because of the low capital cost required to enter the carrier business. However, in the last few years the railroads have restricted the number of IMCs with which they will enter into wholesale contracts. They increasingly deal only with those that can deliver certain volumes, and have in most cases required the posting of financial guarantees before they will extend credit. In addition, market conditions require that an IMC be able to demonstrate to carriers and shippers its ability to interface with customers and carriers electronically. These requirements limit the ability of start-up IMCs to enter the market and may force small IMCs out of the market if they are unable to continue to meet these requirements. The Company believes that this trend will continue to be advantageous to the Company. The Company believes that its financial resources, staff, and computer hardware and software are sufficient to offer substantially the same or better services than any of its competitors, and that the Company is able to compete effectively with any other company engaged in its business.
- ------------------- (1) IANA IMC Market Activity Report, Intermodal Association of North America, February 2001.
Operations - ----------
The Company's services include the tracking of its customers' freight in-transit, the daily reporting through electronic means of each load's status, expediting each shipment to ensure it meets its schedule, and the consolidation of all freight bills within a movement into a single door-to-door invoice, regardless of how many carriers are utilized. The Company contracts with all major North American railroads along with drayage carriers and independent stack train operators.
The Company believes that a primary component of its business strategy is the continued improvement of its software and other technology to enhance its information processing for its intermodal transportation services. The Company believes that a significant portion of its future growth will depend on its information technology and accordingly it continues to concentrate in this area. The Company purchased operational and financial software in 2000 to enhance customer service, load tracking, vendor payables, margin analysis, and financial reporting. Initial installation was completed in the 1st Quarter of 2001 with implementation continuing through 2001. The Company has several customers online with full electronic data interchange of information from a shipment's original loading through delivery at destination.
The Company is primarily a provider of intermodal and highway brokerage transportation services, yet it continues to expand its service capabilities as customers increasingly outsource their transportation needs. The Company now performs logistics functions for a small number of its clients and intends to expand its logistics capabilities and offer new or additional services to meet or exceed customer demands.
The Company's Carrier Vendors - -----------------------------
An important element of the Company's strategy is to continue to build and strengthen its close working relationship with each of the major intermodal railroads in the United States, Canada and Mexico. The Company has contracts with each of the following Class 1 railroads:
BNSF Illinois Central Norfolk Southern Union Pacific CSX Transportation Canadian National Canadian Pacific Wisconsin Central Kansas City Southern
These contracts govern the terms of transportation with each railroad, which include payment terms and the various services to be provided by each rail. The Company negotiates with each railroad in an effort to provide the best quality service at a favorable price to its client base. These contracts usually have staggered renewal dates at which time the Company revisits its volume with that rail and seeks to establish even more favorable contracts for the continuing years, including rebates for volume shipments. The Company is also able to negotiate special commodity pricing which provides price discounts on certain commodities based on competitive factors. The special pricing quotations are designed, in part, by the railroads to attract new business that the railroads have not previously handled.
The Company also sees its local cartage ("drayage") and over-the-road carrier base as an integral part of its operations, since the Company's ability to perform on-time pick up and delivery of product is partially based on the level of service provided by these carriers. Accordingly, the Company has programs in place that monitor the performance of each of its carriers. The Company's data base of carriers is maintained and updated regularly to ensure that only approved carriers with adequate insurance are available for use. The Company continues to seek out quality carriers throughout North America to enhance its ability to provide faster service and facilitate the Company's expansion.
The Company's Customers - -----------------------
The Company continued in its efforts to diversify and increase its customer base in 2000. This was accomplished primarily through the soliciting of new business by each of the offices (see "Sales and Marketing," below). The Company performs credit checks on all potential customers to ensure that they are credit worthy and are able to meet the payment terms established by the Company.
The Company has transportation agreements with various companies to perform substantial portions of their transportation needs on agreed-upon pricing terms for specified routes. Many of these agreements are verbal and non-binding. Others are binding and in written form, but are cancelable on short notice. All of the Company's agreements are based upon the Company's price quotes as accepted by its customers. The quotation document sets forth all of the terms of the agreement between the parties and includes a liability disclaimer (see "Liability Issues," below). Quotation documents establish pricing and delivery terms of freight, and are often used by shippers on a continuous basis. Either party can cancel all agreements, based on the Company's written quotations, at any time, prior to shipment, without penalty.
Many of the Company's customers in the automotive, scrap metal, food services, retail and spirit industries operate within a multi-divisional environment. The Company does business with more than one division of several of its principal customers, and is dependent on the various divisions of such companies for a substantial portion of its business. As its agreements with those customers are made on a divisional rather than a corporate basis, management believes it is not likely that the Company would lose all of the business of any of its principal customers if it were to lose the business of any one of their divisions.
During the year ended December 31, 2000, the Company had sales to various divisions of one major customer, an automobile manufacturer, which amounted to 27% in 2000, 33% in 1999 and 43% in 1998. The Company's business with this customer is conducted on a multi-divisional basis and the above percentages are for the aggregate of all divisions of this customer. The Company has separate agreements with each division and the percentage of business represented by each division is substantially less than the corporate aggregate. During June 1999, this customer placed its business out for bid in a tender process resulting in the Company losing a substantial portion of the business with a negative impact on revenues. Due to the fact that the customer evaluates each division separately, the Company was able to retain agreements with certain divisions. The maximum percentage of sales by any one division is approximately 5% of the Company's total sales.
Sales and Marketing - -------------------
The Company believes that developing long-term relationships with its client base is crucial to its continued growth. By developing these long-term relationships, the Company is able to better understand its customers' needs and is then able to customize its services to each client. The Company has an extensive database of existing and potential new clients to which it continually markets its services.
The Company undertakes a variety of marketing initiatives, including the use of direct surveys on a client-by-client basis to determine new or additional customer needs and meet the demand. An approach to a new client generally involves the assessment of that customer's transportation requirements. In making its analysis, the Company reviews the customer's business patterns and determines if the customer is maximizing its transportation dollar. The Company also seeks to integrate itself into the customer's environment to determine if there are additional logistic services the Company can provide. The objective of the Company's analysis is to market the Company's services by presenting to the customer a program of reducing the customer's overall costs while offering the customer a superior level of transportation service.
The Company regularly surveys its customers in order to continually receive evaluations of the Company's performance, keep abreast of customer needs, and develop leads for new business.
The Company maintains a corporate office in Atlanta, Georgia with sales offices in Los Angeles, California, and Chicago, Illinois. In addition, the Company utilizes a combination of outside commission agents and internal marketing staff to support its sales efforts. During 2000, a new sales office was opened in Lincoln, Nebraska and in
1999 offices were closed in Minneapolis, Minnesota, San Francisco, California and the Tampa, Florida corporate office was relocated to Atlanta, Georgia in March, 2000. The Company's commissioned agents are located in major geographic locations across North America. A unit of Vitran based in Concord, Ontario, Canada represents the Company as its Canadian agent. Each outside sales person receives a commission based on a percentage of the gross profit generated on each movement. The Company is striving to develop commission sales agreements in all major markets within North America.
Computer Systems - ----------------
The Company has invested in the purchase and development of computer programs that provide pertinent tracking information to its customers on a daily basis. The Company purchased operational and financial software in 2000 to enhance customer service (scheduling, pricing, quotations, routing, dispatch, tracing), vendor relations, billing and collections, margin analysis and financial reporting. Initial installation was completed in the 1st Quarter of 2001, with implementation continuing through 2001.
With the Company's computer systems capability, the Company can advise its customers on a regular basis of the exact location of any shipment. Customers receive a daily shipment tracking report, which provides the location of each shipment in transit within the United States, Mexico and Canada. This technology permits the Company to solve problems with customers' shipments in many instances before they cause any delay to the shipper.
All of the Company's offices are networked into the system so that up-to-date information is always available for the customers of each location.
The Company uses both in-house and external trained computer technicians who support the system on an on-going basis. They make the necessary modifications and enhancements to the system to ensure that the Company is up-to-date on the latest technological advancements. In addition, they are able to customize programs to meet specific customer reporting requirements.
Liability Issues - ----------------
Brokers, such as the Company, do not generally assume liability for loss or damage to freight. Since the Company operates as a transportation broker (that is, a company that finds a carrier to haul a shipper's freight) of property and a shipper's agent, it does not take possession of the freight and is therefore not liable for the carrier's failure to perform or the carrier's negligent performance. The Company has a liability disclaimer as a part of each freight agreement signed with its customers. This liability disclaimer sets forth the Company's legal responsibilities and states that since the Company is acting as a transportation intermediary and not as a carrier, it will not be liable for loss or damage resulting from the transportation of freight.
Although as a broker it is not responsible for loss of or damage to freight, the Company will assist the shipper as its agent in the claim collection process. In compliance with provisions in the Company's contracts with certain railroads, the Company has obtained an unsecured surety bond in the amount of $150,000. In addition, the Federal Highway Administration requires the Company to maintain a surety bond in the amount of $10,000, which is secured by a certificate of deposit. The Company also maintains an unsecured surety bond in the amount of $500,000 as a requirement of one of its major customers.
Competition - -----------
The transportation services industry is highly competitive. The Company competes against other IMCs, as well as brokers of freight, logistic service companies and with railroads that attempt to market their own intermodal services. The Company also competes with over the road carriers who have entered the intermodal market by converting their long-haul traffic to intermodal. Competition is based primarily on freight rates, quality of service, reliability and transit times.
The Company competes with several other IMCs, such as The Hub Group, Mark VII Transportation, AP Distribution, Alliance Shippers, GST Corporation, and numerous small regional and local firms. Many of these firms have larger gross revenues than the Company, however the Company believes that it is an established IMC able to meet the requirements of railway carriers and shippers and that it is competitive with the largest IMCs. With the trend towards further consolidation in the industry, the Company believes that its stability and its continual investment in information systems will uniquely position the Company for continued growth both through external sales development and the possible acquisition of other IMCs.
Employees - ---------
At December 31, 2000 and March 23, 2001, the Company had 38 full-time employees engaged in performing executive, administrative, sales and clerical duties. These employees were located in each of the offices, with the majority of the administrative duties being performed from the Atlanta, Georgia headquarters. Management intends to adjust employment throughout the coming year, as it deems necessary, in order to provide continuous quality service.
Executive Officers of the Registrant - ------------------------------------
As of the date hereof, there are two executive officers of the Company. Richard E. Gaetz serves as the Chief Executive Officer of the Company and has served in that capacity since October 11, 1996. Geoff Duncan serves as the President of the Company. He has served in that capacity since April 1, 1998, replacing Richard Gaetz in that position. Prior to that date, Mr. Duncan served as the Executive Vice President of the Company. For information as to Mr. Gaetz and Mr. Duncan's prior business experience, see Item 10 of this Report.
Environmental Matters - ---------------------
The Company does not believe that compliance with federal, state and local laws and regulations, which have been enacted or adopted regulating the discharge of materials into the environment, will have any material adverse impact upon the capital expenditures, earnings, or competitive position of the Company.
Item 2.
Item 2. Properties
The Company's corporate headquarters were relocated from Tampa, Florida to Atlanta, Georgia in March 2000. The relocation cost approximately $29,000. Prior to this date, the Company leased approximately 5,000 square feet in Tampa, Florida in a lease, which expired February 29, 2000. The annual rent for this space was $7,443 for the year ended December 31, 2000 and $44,442 for the year ended December 31, 1999.
The Company rented an office in Atlanta, Georgia under a lease expiring June 30, 2001. Rent expense incurred under this lease was $25,332 for the year ended December 31, 1999. In order to accommodate the relocation of the Company's headquarters to Atlanta, Georgia in March 2000, additional space would be needed. In December 1999, management of the Company entered into a lease commitment with the landlords to replace the existing lease with a new agreement for increased square footage. The new lease expires January 31, 2005. Rent Expense for the corporate office for the year ended December 31, 2000 was $42,811.
The Company rented an executive suite for its Los Angeles, California office until the expiration of the lease on November 30, 1999. At that time, the Company determined that an executive suite no longer met its needs, so it entered into a lease in an office building with additional space. This lease expires November 30, 2004. Rent expense for the Los Angeles location for the year ended December 31, 2000 was $49,580and for the year ended December 31, 1999, was $33,690.
The Company opened an office in Lincoln, Nebraska in July 2000 with a term and renewal through September 2001 and rent expense for the year ended December 31, 2000 was $4,316 The Company also closed offices in San Francisco, California, Chicago, Illinois, and Minneapolis, Minnesota and the existed leases expired.
Item 3.
Item 3. Legal Proceedings
As of the date of this Report, and for the fiscal year covered by this Report, the Company was not a party to any material legal proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fiscal year covered by this Report.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is quoted on the NASD electronic bulletin board and in the "pink sheets" under the symbol FTCN. There has never been an active trading market for the Company's Common Stock, nor does one now exist.
Pink Sheets, LLC (formerly The National Quotation Bureau, Inc.) reports the close as of December 31, 2000 at $.25 per share and reports the following bid quotations:
Bid Prices ---------- Period High Low ------ ---- ----
January 1 - March 31, 1998 .69 .56 April 1 - June 30, 1998 .75 .69 July 1 - September 30, 1998 .75 .63 October 1 - December 31, 1998 .63 .38 January 1 - March 31, 1999 .41 .38 April 1 - June 30, 1999 .56 .31 July 1 - September 30, 1999 .53 .53 October 1 - December 31, 1999 .53 .34 January 1 - March 31, 2000 .55 .34 April 1 - June 30, 2000 .55 .51 July 1 - September 30, 2000 .56 .39 October 1 - December 31, 2000 .39 .25 January 1 - March 31, 2001 .30 .25
Such quotations reflect inter-dealer prices, without retail mark-up's, mark-down's or commission. Such quotes are not necessarily representative of actual transactions, or of the value of the Company's securities, and are in all likelihood not based upon any recognized criteria of securities valuation as used in the investment banking community.
There are no meaningful trading transactions currently for the Company's stock, nor have there ever been any such transactions. The Company believes that the absence of such transactions is due in substantial part to its shares of Common Stock being held by few individuals. There is no assurance that an active trading market will develop which will provide liquidity for the Company's existing shareholders.
Neither the Company's certificate of incorporation, its by-laws, nor any agreement to which it is currently a party restricts the payment of dividends. The Company has not paid any dividends on its Common Stock.
As of March 30, 2001, there were 27 holders of record of the Company's Common Stock. Certain of the shares of Common Stock are held in "street" name and may, therefore, be held by several beneficial owners.
Item 6.
Item 6. Selected Financial Data
The following data illustrates the results of operations for the five years ended December 31, 1996, 1997, 1998 1999 and 2000 respectively. The data has been derived from and should be read in conjunction with, the Company's Financial Statements and related notes included elsewhere in this Report. All data has been derived from the Company's audited financial statements.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the Financial Statements appearing elsewhere in this Report. The information which follows includes results for the years ended December 31, 2000, 1999 and 1998.
Forward-Looking Statements - --------------------------
Except for the historical statements and discussions contained herein, statements contained in this report constitute "forward-looking statements" as defined in the Securities Act of 1933 and the Securities Exchange Act of 1934, as amended. These forward-looking statements rely on a number of assumptions concerning future events, and are subject to a number of risks and uncertainties and other factors, many of which are outside the control of the Company, that could cause actual results to differ materially from such statements.
Readers are cautioned not to put undue reliance on such forward-looking statements, each of which speaks only as of the date hereof. Factors and uncertainties that could affect the outcome of such forward-looking statements include, among others, market and industry conditions, increased competition, changes in governmental regulations, general economic conditions, pricing pressures, and the Company's ability to continue its growth and expand successfully into new markets and services. The Company disclaims any intention or obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Liquidity and Capital Resources - -------------------------------
The Company's working capital decreased from $2,126,665 at December 31, 1999 to $1,923,239 at December 31, 2000, a decrease of 9.6%.
The cash position of the Company at December 31, 2000 was $680,627 compared to $746,353 at December 31, 1999. Most of the Company's customers require supporting documentation before they will remit payment for an invoice. The Company continues to experience difficulty with collecting this paperwork from its carrier vendors. Throughout 1999 and 2000, the Company has emphasized and refined the procedure enabling the Company to provide an invoice to the customer in a more timely manner.
The accounts receivable balance at December 31, 2000 was $3,637,801, an increase of $147,290, or 4.2% from December 31, 1999. The accounts payable balance at December 31, 2000 was $2,615,906, an increase of $396,781 or 17.9%, from the prior year. The Company intends to pursue collection efforts on the accounts written off with outside agencies. The increase in the accounts payable balance is primarily due to the growth of the highway brokerage division.
The Company had a net increase in cash from operations of $49,826 and $296,651 for the years ended December 31, 2000 and 1999, respectively. For the year ended December 31, 1998, the Company had a net decrease in cash from operations of $710,376. The net increase in cash from operations for the year ended December 31, 2000 was primarily due to the increase in accounts receivables slightly offset by the increase in the accounts payable balances. The net increase in cash from operations for the year ended December 31, 1999, was primarily due to the
reduction in the accounts receivable balance offset by the reduction in the accounts payable balance. The net reduction in cash from operations for the year ended December 31, 1998, was primarily due to the significant increase in the accounts receivable balance from the prior year, as well as the start-up costs associated with the opening of sales offices.
The Company continues to purchase fixed assets as it deems necessary. For the years ended December 31, 2000, 1999 and 1998, the Company purchased fixed assets in the amounts of $115,552, $65,423 and $60,428 respectively, the majority of which was computer software and equipment.
Stockholders' equity was $2,184,115 at December 31, 2000 compared to $2,360,910 at December 31, 1999. Earnings (Loss) per share for the year ended December 31, 2000, was $(.04) compared to $.00 and $.04 for the years ended December 31, 1999 and 1998, respectively.
In compliance with provisions in the Company's contracts with certain railroads, the Company has obtained an unsecured surety bond in the amount of $150,000. In addition the Federal Highway Administration requires the Company to maintain a surety bond in the amount of $10,000, which is secured by a certificate of deposit. In March 1999, the Company obtained an unsecured surety bond in the amount of $500,000 as a requirement of one of its major customers.
The revolving line of credit with Republic Bank, St. Petersburg, Florida, in the amount of $2,000,000 expired and was not renewed. On December 20, 2000, the Company obtained a line of credit agreement with a commercial bank for $500,000, which expires on April 1, 2001. Interest is at the monthly Libor index rate plus 300 basis points or the bank's base rate. Any outstanding principal balance plus unpaid interest is due on demand. The line is secured by the Company's accounts receivable and fixed assets. As of December 31, 2000 no amounts are outstanding on this credit line. As of the date of this Report, this line of credit has expired and negotiations for renewal are in process.
At December 31, 2000, 1999 and 1998, the Company did not have any capital lease obligations, nor did it have any long-term debt.
Results of Operations - ---------------------
Revenues for the year ended December 31, 2000 were $22,545,855 compared to $26,872,967 and $28,094,511 for the years ended December 31, 1999 and 1998, respectively. In June 1999, the Company lost a substantial portion of business from one of its major customers in a tender process. As a result, revenues generated by this customer decreased by $3,504,553 for the year ended December 31, 1999 compared to the prior year. Although the Company obtained new clients during 2000 and 1999 and increased the volume from its existing customers, it was not sufficient to replace the business that was lost. This is the primary reason for the 16.1% and 4.3% reduction in revenues for the years ended December 31, 2000 and December 31, 1999, respectively, compared to the prior year. The Company also closed the Minneapolis, Minnesota and San Francisco, California offices during November 1999, which impacted revenues. The Company retained the majority of the business from the Minneapolis office; however, most of the business generated by the San Francisco office was lost to competition. The Company is targeting new customers through its marketing efforts to replace the lost revenues. The Company is also continuing to expand its highway brokerage division, and revenues from this division represented 26.3% of revenue for 2000, 29.1% of revenues for 1999 and 18.3% of revenue for 1998. Freight income includes rebate income, late charge income and accounts receivable credit balances in excess of six months. These items totaled $89,484, $192,463 and $327,398 for the years ended December 31, 2000, 1999, and 1998.
The gross profit margin was 9.1%, 9.0% and 8.9% for the years ended December 31, 2000, 1999, and 1998, respectively. Gross profit margins were impacted by two significant items in 2000. They included write-offs of bad debts which totaled approximately $413,000 an increase of approximately $275,000 compared to 1999, which decreased gross profits, and a change in accounting estimate of approximately $180,000, which increased gross profits. The net affect of these two significant items to the 2000 gross margin was a decrease of 0.5%. The industry is extremely competitive; however, through better pricing and expense management, the Company continues to maintain its margin percentage. Through the expansion of the Company's highway brokerage division, the gross profit margin should improve further, as these moves generally offer higher profit margins.
The Company's selling, general and administrative expenses ("SG&A") were $2,272,555 or 10.1% of revenue for the year ended December 31, 2000 and $2,347,904, or 8.7% of revenue for the year ended December 31, 1999, and $2,299,108, or 8.2% of revenue for the year ended December 31, 1998. The Company's SG&A as a percentage of revenue for the years ended December 31, 2000 and December 31, 1999, increased due to the decrease in revenue that the Company experienced during 2000 and 1999. Although the revenue reduction from one of the Company's major customers was substantial, the corresponding reduction in overhead was slight. The Company merged its two Chicago, Illinois offices in February, 1999, closed two offices in November, 1999, and relocated the Corporate Headquarters to Atlanta, Georgia in March, 2000. These property changes allowed the Company to improve productivity resulting in the lower selling, general, and administrative expenses in 2000 compared to 1999 and 1998.
The pre-tax income (loss) of the Company was $(269,595), or 12% of revenue for the year ended December 31, 2000, $43,294, or 0.2% of revenue for the year ended December 31, 1999, and $301,669, or 1.1% of revenue, for the year ended December 31, 1998. The pre-tax income for the Company for the years ended December 31, 2000 and December 31, 1999 decreased due to the 16.1% and 4.3% reduction in revenue without a corresponding significant reduction in SG&A expense percentage .
Income tax expense (benefit) for the years ended December 31, 2000, 1999 and 1998 was $(92,800), $22,000 and $125,000, respectively.
Net income (loss) for the years ended December 31, 2000, 1999 and 1998, was $(176,795), $21,294 and $176,669, respectively. Although the Company maintained its gross profit margin percentage, the revenue shortfall and the increased SG&A as of percentage of revenue negatively affected the profitability of the Company. The Company will concentrate on generating new business and using existing resources to service this business.
The Company will continue to market its services and strive to open sales offices and obtain sales representation in the major geographic areas of North America.
Outlook - -------
The downturn in the economy is having an effect on all businesses and transportation providers are no exception. Many U.S. manufacturers are shipping less and are examining all pricing for various modes of transportation. The rail service provided by the Company can be an efficient alternative to the shipping public and our highway brokerage operation, which uses major carriers that are in a back haul situation, could benefit as well.
The fuel surcharges applied to the Company by its vendors is being passed on to the Company's customers. It is the Company's expectation that fuel prices will remain at or higher than current levels for all of 2001.
Year 2000 - ---------
The Company's transition into the Year 2000 was seamless to the customer. The Company had systems in place that were Year 2000 compliant enabling the Company to provide the same quality service to its customers in the Year 2000 as it did in 1999. The Company's carrier vendors were also able to meet expectations.
Item 8.
Item 8. Financial Statements and Supplementary Data
See accompanying Table of Contents to Financial Statements on.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
There were no changes in or Disagreements with Accountants on Accounting and Financial Disclosure to be reported for the year ended December 31, 2000.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant; Compliance with Section 16 (a) of the Exchange Act.
The Directors and Executive Officers of the Company are as follows:
Name Age Position ---- --- --------
Richard E. Gaetz 43 Officer, Director
Geoff Duncan 52 Officer
Albert Gnat 62 Director
Richard D. McGraw 57 Director
Kevin A. Glass 43 Director
Richard E. Gaetz has been the President of Vitran Distribution System and Chief Operating Officer of Vitran since August 1989. From October 1987 to August 1989, he was Vice President, Clarke Transport Canada. Effective October 11, 1996, Mr.Gaetz began serving as the Company's President and Chief Executive Officer. He continues in his role as Chief Executive Officer as of the date of this Report.
Geoff Duncan was appointed President on April 1, 1998. From November 1996 through this date, he was Executive Vice President of the Company. From May 1996 through November 1996, he was Vice President of Sales and Marketing. Prior to joining the Company, he was Vice President of Sales and Marketing at APL.
Albert Gnat has been Vice-Chairman of the Board and a director of Vitran since 1983. He is a partner in the law firm of Lang Michener, Toronto, Ontario, Canada.
Richard D. McGraw has been the President, Chief Executive Officer and a director of Vitran since 1983.
Kevin A. Glass has been the Vice President of Finance and Chief Financial Officer of Vitran since October 1998. Prior to this he was the Chief Financial Officer of Livingston Group Inc.
Messrs. Gaetz, Gnat and McGraw were elected directors of the Company on December 1, 1993. Kevin Glass was appointed a director on November 16, 1998. Vitran may be deemed a "parent" of the Company under Securities Act Rule 405. See Item 13 of this Report.
Directors are elected to serve for one (1) year or until the next annual meeting of shareholders and until their successors have been elected and have qualified. Executive officers are elected to serve at the discretion of the directors for one (1) year or until the first meeting of the Board of Directors following the next annual meeting of shareholders and until their successors have been elected and have qualified.
No compensation is paid to any director, as such, for his or her services, but by resolution of the Board of Directors, a fixed sum or expense for actual attendance at each regular or special meeting by the Board may be authorized.
Compliance with Section 16(a) of the Exchange Act - -------------------------------------------------
The Company does not have a class of equity security that is registered pursuant to Section 12 of the Securities Exchange Act of 1934. Accordingly, no compliance with Section 16(a) of the Exchange Act is required of any officer, director, or principal shareholder.
Item 11.
Item 11. Executive Compensation
The following table sets forth, for the fiscal years ended December 31, 1998, 1999 and 2000, all compensation of the Company's President. No other executive officer or director of the Company received total annual salary and bonus exceeding $100,000 in any of such fiscal years. The information provided should be read in conjunction with the Company's Financial Statements and related notes thereto.
SUMMARY COMPENSATION TABLE --------------------------
Name and Fiscal All Other Principal Position Year Salary Bonus Compensation ------------------ ------ ------ ------ ------------ Geoff Duncan, President 2000 $128,045 $ - 0 - $ 9,240(1) 1999 $128,045 $9,850 $ 8,880(1) 1998 $123,120 $11,400 $ 8,640(1)
--------------------------------------------------------------------- (1) Automobile allowance of $770, $740 and $720 per month for 2000,1999 and 1998, respectively.
OPTION GRANTS -------------
The purpose of the following table is to report grants of stock options to the named officers during the years ended December 31, 1998, 1999 and 2000.
- -------------------------- (1) Mr. Duncan's options vest over a five-year period (20% per year) and expire five years from the date that the options are vested. At December 31, 2000, Mr. Duncan had 65,000 vested options. (2) On May 14, 1998, the Board of Directors approved an option repricing program to which essentially all current employee stock options with an exercise price of $1.25 were reduced to $1.00.
- ---------------------------- During May 1996, the Company adopted a Stock Option Plan (the "Plan") whereby employees of the Company may be granted incentive or non-qualified options to purchase shares of the Company's common stock. The Board of Directors has direct responsibility for the administration of the Plan. The exercise price of the incentive options to employees must be equal to at least 100% of the fair market value of the common stock at the date of grant. The exercise price of incentive options to officers or affiliated persons must be at least 110% of the fair market value as of the date of the grant. The fair market value of options granted was determined using the exercise price of the Vitran stock purchase warrant ($.650631 per share; the warrant expired July 31, 1997) as well as other criteria that the Board deemed relevant. This value may not relate to the trading value on the NASD Bulletin Board as there is not an active market for the Company's stock and trades are sporadic. Upon termination of employment, all options held by the grantee shall immediately terminate. The Board may waive any conditions or rights under, or amend, alter, suspend, discontinue, or terminate, any Option theretofore granted and any Stock Option Agreements relating thereto; provided, however, that without the consent of an affected grantee, no such action may materially impair the rights of such grantee under such option.
Michael Jackson, former president of the Company, held 80,000 options with an exercise termination date of August 22, 1999. On that date, the options did terminate without being exercised.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information with respect to (i) any person or "group" known to the Company to be the beneficial owner, as of March 31, 2001, of more than five percent of the Common Stock, and (ii) all Directors and executive officers of the Company, individually and as a group. Amounts set forth for shareholders, who are not members of management, are based on shareholder records. The owner may hold additional shares in street name, which are not shown below. Each beneficial owner has advised the Company that he, she or it has sole voting and investment power as to the shares of the Common Stock.
- -------------------- (1) The percentages in this column are computed on the basis of 4,825,630 shares of Common Stock outstanding, as of the date of this Report. (2) Four persons who are officers or directors of Vitran are directors of the Company. See Item 10 of this Report.
Item 13.
Item 13. Certain Relationships and Related Transactions
For information as to changes in control of the Company see Item 1 of this Report.
Vitran is a North American multi-divisional operating company headquartered in Toronto, Ontario, Canada. Vitran provides services to the freight and environmental industries and has over 3000 employees and associates at over one hundred service centers and offices across Canada and the United States. Vitran's Distribution Services Group, of which the Company is a part, provides a complete range of services for the movement of freight throughout the continent, utilizing both highway and rail modes. Services include less than truckload, full load, intermodal, dedicated contract carriage, warehousing and inventory management. The members of the Vitran Distribution Services Group are Transwestern Express, a less than truckload ("LTL") company concentrating on central and western markets of Canada, as well as the Northwest United States; G & W Freightways, which has five facilities in Quebec and Ontario, Canada, and specializes in next-day delivery in all of its service corridors; CAN-AM LTL, which offers cross-border LTL service between the United States and Canada and has facilities in Toronto and Chicago; CAN-AM Logistics, which provides logistic services to its customers; Frontier, which performs truckload services; Vitran Express, which performs LTL services, and the Company.
Vitran solicits business between the United States and Canada as an agent for the Company through a Vitran sales office in Toronto. Vitran and the Company have an agreement that all intermodal trans-border rail shipments shall be written by the Company, with Vitran's receiving an agency commission from the Company for such business. Trans-border over-the-road shipments may be made by the Company or other Vitran subsidiaries, including the Overland Group, depending on the type of service required by the shipper of such freight. The Company does not believe that, given the different businesses of the Company and the other Vitran subsidiaries, the Company will compete for any freight business with another Vitran subsidiary, nor does the Company anticipate that the Company and any other Vitran subsidiary will bid the same trans-border over-the-road business. However, in the event that any such unanticipated conflict does occur, the Company and Vitran intend to resolve any such conflict on a case-by-case basis, with resolution depending solely on which entity can best serve the needs of potential customers. For information concerning the Company's relationship with Vitran and the other members of Vitran's Distribution Services Group, see Item 1 of this Report.
For information with respect to the relationship between the Company's directors and Vitran, see Item 10 of this Report.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
a) Exhibits and Financial Statement Schedules ------------------------------------------
Number Description - ------ -----------
2.1 Agreement and Plan of Merger dated December 1, 1991 (2)
3.1 Certificate of Incorporation (1)
3.2 By-Laws (1)
3.2.1 Amended and Restated By-Laws (1)
3.3 Articles of Merger - Florida (1)
3.4 Certificate of Merger - Delaware (1)
4.1 Specimen Certificate of Common Stock (1)
4.2 Specimen Certificate of Class A Warrant (1)
4.2(a) Specimen Certificate of Class B Warrant (1)
4.3 Form of Four Year Common Stock Purchase Warrant (1)
4.4 (Intentionally left blank)
4.5 Form of Warrant Agency Agreement (1)
4.5(a) Amendment dated June 1, 1994, to Warrant Agency Agreement (1)
4.5(b) Amendment dated September 1, 1994, to Warrant Agency Agreement (1)
4.5(c) Amendment dated December 7, 1995, to Warrant Agency Agreement (1)
4.6 Warrant for the purchase of Common Stock issued to Vitran Corporation Inc. and dated July 14, 1993 (3)
10.1 Subscription Agreement between Vitran Corporation Inc. and The Freight Connection, Inc., dated July 14, 1993 (3)
10.2 Employment Agreement between The Freight Connection, Inc., and Michael J. Jackson dated July 14, 1993 (1)
10.3 Form of Lockup Agreement (1)
10.4 Agreement with Robert and Patricia Johnston dated June 14, 1993 (1)
10.5 Shareholders' Agreement between Vitran Corporation Inc. and Michael J. Jackson (1)
10.6 Extended Lease Agreement dated February 4, 1997. (4)
10.7 Loan Agreement between Republic Bank, St. Petersburg, Florida, and The Freight Connection, Inc., dated August 19, 1995, as amended to date (1), (6)
(1) Incorporated by reference to post-effective amendments to the Company's Registration Statement on Form SB-2. (2) Incorporated by reference to Report on Form 8-K filed January 27, 1992. (3) Incorporated by reference to Report on Form 8-K filed July 21, 1993. (4) Incorporated by reference to Report on Form 10-K filed March 26, 1997. (5) Incorporated by reference to Report on Form 8-K filed December 1, 1997. (6) Fourth Addendum to the Loan Agreement, dated September 1, 1999 included herewith.
b) Reports on Form 8-K -------------------
During the year ended December 31, 2000, no reports were filed on Form 8-K.
THE FREIGHT CONNECTION, INC. INDEX TO AUDITED FINANCIAL STATEMENTS
THE FREIGHT CONNECTION, INC. PAGE ----
Report of Independent Auditors - Margolies, Fink, and Wichrowski
Balance Sheets - December 31, 2000, and December 31, 1999
Statements of Income - Years ended December 31, 2000, 1999, and 1998
Statements of Stockholders' Equity
Statements of Cash Flows - Years ended December 31, 2000, 1999, and 1998
Notes to Financial Statements -
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors The Freight Connection, Inc.
We have audited the accompanying balance sheets of The Freight Connection, Inc. as of December 31, 2000 and 1999, and the related statements of income, stockholders' equity and cash flows for the years ended December 31, 2000, 1999 and 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly, in all material respects, the financial position of The Freight Connection, Inc. as of December 31, 2000 and 1999, and the results of its operations and its cash flows for the years ended December 31, 2000, 1999 and 1998 in conformity with generally accepted accounting principles.
January 12, 2001 Pompano Beach, FL /S/ Margolies, Fink and Wichrowski
THE FREIGHT CONNECTION, INC. BALANCE SHEETS DECEMBER 31, 2000 AND 1999
The accompanying notes are an integral part of these financial statements
THE FREIGHT CONNECTION, INC. STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
The accompanying notes are an integral part of these financial statements
THE FREIGHT CONNECTION, INC. STATEMENT OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
The accompanying notes are an integral part of these financial statements
THE FREIGHT CONNECTION, INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
The accompanying notes are an integral part of these financial statements
THE FREIGHT CONNECTION, INC. NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and basis of presentation The Company operates as a transportation freight broker and coordinates both truck and rail shipments from point of origin to delivery at destination for its clients' freight shipments. The Company is responsible for paying carriers for hauling the freight and extends credit to its clients for the shipment. The Company's primary office facilities are located in Atlanta, Georgia with additional sales offices located in, Los Angeles California, Niles Illinois, and Lincoln Nebraska.
Cash equivalents Cash equivalents are short-term, highly liquid investments readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates.
Property and equipment Property and equipment are carried at cost. The Company provides depreciation for financial purposes over the estimated useful lives of fixed assets using the straight-line method. Upon retirement or sale of fixed assets, their net book value is removed from the accounts and the difference between such net book value and proceeds received is recorded in income. Expenditures for maintenance repairs are charged to expense; renewals and improvements are capitalized.
Revenue recognition The Company recognizes freight income, freight charges and expenses when the shipment leaves its point of origin. Quick-pay rebates are recognized in the month earned, and volume rebates are recorded annually per contract agreements. Accounts receivable credit balances are taken into income after six months months.
Fair value of financial instruments The fair value of the Company's financial instruments such as accounts receivable and accounts payable, approximate their carrying value.
Accounting estimates The Management of the Company occasionally uses accounting estimates in determining certain revenues and expenses. Estimates are based on subjective as well as objective factors and, as a result, judgment is required to estimate certain amounts at the date of the financial statements.
THE FREIGHT CONNECTION, INC. NOTES TO FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income taxes The Company has adopted Statement of Financial Accounting Standard No. 109 "Accounting for Income Taxes" which requires an asset and liability approach to financial accounting for income taxes. Deferred income tax assets and liabilities are computed annually for the difference between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period, plus or minus the change during the period in deferred tax assets and liabilities. On May 29, 1998 the Company entered into a tax allocation agreement with its parent company Vitran Corporation, and has elected to file its future federal income tax returns on a consolidated basis.
Net income per share In 1998, the Company adopted SFAS No. 128, ("Earnings Per Share") which requires the reporting of both basic and diluted earnings per share. Basic net income per share is determined by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted income per share reflects the potential dilution that could occur if options or other contracts to issue common stock were exercised or converted into common stock, as long as the effect of their inclusion is not anti dilutive. For the years ended December 31, 2000, 1999, and 1998 outstanding options have not been reflected in the computation of diluted earnings per share because the market price of common stock outstanding has not been in excess of the option price.
2. CHANGE IN ACCOUNTING ESTIMATE
During the year ended December 31, 2000 the Company changed its method of estimating their liability for freight costs on invoices that have not been received from vendors as of the balance sheet date. The Company's policy prior to the change was to retain in accounts payable an estimate of these freight costs for a period of one year from the transaction date. The Company has changed this policy to six months. This change resulted in a decrease in freight costs of $180,130, and has been reflected as a reduction in freight expense for the year ended December 31, 2000.
THE FREIGHT CONNECTION, INC. NOTES TO FINANCIAL STATEMENTS (Continued)
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2000 and 1999 consist of the following:
2000 1999 ---- ---- Computer software $ 111,097 $ 76,413 Leasehold improvements 2,650 2,650 Office furniture and equipment 441,298 360,430 ------------- -------------
555,045 439,493 Less accumulated depreciation 350,046 263,276 ------------- -------------
$ 204,999 $ 176,217 ============= =============
Depreciation and amortization expense for the years ended December 31, 2000, 1999 and 1998, were $86,770, $ 82,398, and $73,144, respectively.
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 2000 and 1999 consist of the following:
2000 1999 ---- ---- Accounts payable - trade $ 2,524,025 $ 2,042,728 Accounts receivable credit balances 21,174 107,487 Accrued expenses 70,707 68,910 ------------- ------------- $ 2,615,906 $ 2,219,125 ============= =============
5. LEASES
The Company leases various office facilities under non-cancelable operating leases which expire between years 2001 and 2005. The Company also leases office equipment under non-cancelable operating leases which expire over the next five years. Rent expense incurred under these leases was $131,442, $155,283, and $130,881, for the years ended December 31, 2000, 1999 and 1998 respectively.
Future minimum lease payments for operating leases with initial terms in excess of one year as of December 31, 2000 are as follows; 2001 - $113,860, 2002 - $106,536, 2003 - $104,901, 2004 - $99,180, and, 2005 - $3,700.
THE FREIGHT CONNECTION, INC. NOTES TO FINANCIAL STATEMENTS (Continued)
6. FREIGHT INCOME
Freight income includes rebate income, late charge income, and accounts receivable credit balances in excess of six months. These items totaled $89,484, $192,463, and $327,398, for the years ended, December 31, 2000, 1999, and 1998, respectively.
7. INCOME TAXES
The provision (benefit) for income taxes consisted of the following:
December 31, ------------ 2000 1999 1998 ---- ---- ---- Current: Federal $ (60,000) $ 33,000 $ 70,800 State (12,900) 9,500 16,400 Deferred: Federal (16,400) (16,700) 32,300 State (3,500) (3,800) 5,500 ------------- ------------ ------------
$ (92,800) $ 22,000 $ 125,000 ============= ============== ============
Reconciliation of the Company's provision for income taxes to the federal statutory rate is as follows:
THE FREIGHT CONNECTION, INC. NOTES TO FINANCIAL STATEMENTS (Continued)
7. INCOME TAXES (continued)
The components of deferred tax assets and liabilities were as follows:
December 31, ------------ 2000 1999 ---- ---- Deferred tax assets: Accounts receivable reserve $ 76,900 $ 63,975 Deferred tax liability: Depreciation (16,044) (23,019) ------------ ------------
60,856 40,956 Valuation allowance -- -- ------------ ------------ Total deferred tax asset $ 60,856 $ 40,956 ============ ============
SFAS No. 109 requires a valuation allowance to be recorded when it is more likely than not that some or all of the deferred tax asset will not be realized. As a result of the Company's likelihood for future continuing profitability, management has determined that more likely than not, future taxable income will be sufficient to enable the Company to realize all of its deferred tax assets. Accordingly, no valuation allowance has been recorded at December 31, 2000 and 1999.
8. RELATED PARTY TRANSACTIONS
The Company transacts business with various subsidiaries of its parent company, Vitran Corporation Inc. Billings to these companies approximated $334,000, $1,010,000, and $176,000, for the year ended December 31, 2000, 1999, and 1998, respectively. Billings from these companies approximated $66,000, $110,000, and $93,000, respectively. At December 31, 2000 and 1999 accounts receivable from these companies approximated $65,000 and $126,700, respectively, and accounts payable to these companies approximated $16,000 and $20,000, respectively.
9. ECONOMIC DEPENDENCY
During the years ended December 31, 2000, 1999 and 1998, sales to one major customer exceeded 10% of the Company's total sales. This customer, an automobile manufacturer, accounted for 27%, 33%, and 43% of total sales for the years ended December 31, 2000, 1999 and 1998, respectively. In addition, the Company is dependent upon its continuing business relationship with its freight carriers, particularly the railroads.
THE FREIGHT CONNECTION, INC. NOTES TO FINANCIAL STATEMENTS (Continued)
10. PENSION PLAN
The Company sponsors a 401(k) profit sharing plan which covers all full time employees of the Company who meet certain age and length of service requirements. Plan contributions are based on participant voluntary payroll deductions, subject to a maximum contribution per participant. Expense for contributions to the plan was $19,168 and $24,670 for the years ended December 31, 2000 and 1999 respectively.
11. CONCENTRATION OF CREDIT RISK
The Company's financial instruments subject to credit risk are primarily trade accounts receivable. The Company does not require collateral or other security to support customer receivables. The Company's clients generally pay in thirty days or less; however, occasionally payments are not received until invoices age to 60 days. Other concentrations of credit risk with respect to trade receivables are limited due to the dispersion of the majority of the Company's customers across different industries throughout North America. The rail carriers generally draft the Company's bank accounts for payment. The carrier is responsible to the client for lost or damaged merchandise, therefore, the Company does not assume liability for such loss, if any. During the year, the Company has maintained cash balances in excess of the Federally insured limits. The funds are with a major money center bank. Consequently, the Company does not believe that there is a significant risk in having these balances in one financial institution.
12. STOCK OPTIONS
During May 1996, the Company adopted a Stock Option Plan (the "Plan) whereby employees of the Company may be granted incentive or non-qualified options to purchase shares of the Company's common stock. The Board of Directors has direct responsibility for the administration of the plan. The exercise price of the incentive options to employees must be equal to at least 100% of the fair market value of the common stock at the date of grant. The exercise price of incentive options to officers, or affiliated persons, must be at least 110% of the fair market value as of the date of the grant. Options are granted subject to terms and conditions determined by the Board of Directors, and generally are exercisable in increments of 20% for each year of employment beginning one year from the date of grant and generally expire five years from date of grant.
On May 14, 1998 the Board of Directors approved an option repricing program to which essentially all current employee stock options with an exercise price of $1.25 were reduced to $1.00.
At December 31, 2000, the Company has granted 106,000 incentive stock options at an exercise price of $1.00; of this total, 74,000 incentive stock options were vested but not exercised. To date the Company has issued no non-qualified stock options.
THE FREIGHT CONNECTION, INC. NOTES TO FINANCIAL STATEMENTS (Continued)
12. STOCK OPTIONS (continued)
Transactions and other information relating to the plans are summarized as follows:
Incentive Stock Options ----------------------- Weighted Shares Ave. Price ------ ----------
Outstanding at December 31, 1997 261,000 .95
Granted during 1998 31,000 1.00 Canceled during 1998 (1,000) .95 -------------
Outstanding at December 31, 1998 291,000 .95
Granted during 1999 9,000 1.00 Canceled during 1999 (129,000) .94 -------------
Outstanding at December 31, 1999 171,000 .95
Canceled during 2000 (65,000) .90 -------------
Outstanding at December 31, 2000 106,000 1.00 =============
The following table summarizes information about all of the stock options outstanding at December 31, 2000:
THE FREIGHT CONNECTION, INC. NOTES TO FINANCIAL STATEMENTS (Continued)
12. STOCK OPTIONS (continued)
Pro forma Disclosure
The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" issued in October 1995. Accordingly, no compensation cost has been recognized for its fixed stock option plans with respect to its employees. Had compensation cost for the Company's fixed-based compensation plan been determined based on the fair value at the grant dates for awards under this plan consistent with the method of SFAS 123, the Company's proforma net income, and proforma net income per share would have been as indicated below:
For purposes of the preceding proforma disclosures, the weighed average fair value of each option has been estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2000, 1999, and 1998, respectively: no dividend yield, volatility approximating 50%, risk free interest rate of 6.0%, and an expected term approximating 3.5 years.
13. COMMITMENTS AND CONTINGENCIES
On December 20, the Company obtained a line of credit agreement with a commercial bank for $500,000, which expires on April 1, 2001. Interest is at the monthly Libor index rate plus 300 basis points or the bank's base rate. Any outstanding principal balance plus unpaid interest is due on demand. The line is secured by the Company's accounts receivable, and fixed assets. As of December 31, 2000, no amounts are outstanding on this credit line.
SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report and any subsequent amendments thereto to be signed on its behalf by the undersigned, thereunto duly authorized.
THE FREIGHT CONNECTION, INC. a Delaware corporation
Dated: April 13, 2001 By: /s/ Richard E. Gaetz -------------------- -------------------- Richard E. Gaetz, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in their respective capacities with the Registrant and on the dates indicated.
Signatures Title Date - ---------- ----- ----
/s/ Richard E. Gaetz Chief Executive Officer April 13, 2001 - -------------------- and Director ------------------------ Richard E. Gaetz
/s/ Geoff Duncan President April 13, 2001 - ---------------- ------------------------- Geoff Duncan
/s/ Albert Gnat Director April 13, 2001 - --------------- ------------------------ Albert Gnat
/s/ Richard D. McGraw Director April 13, 2001 - --------------------- ------------------------- Richard D. McGraw
/s/ Kevin A. Glass Director April 13, 2001 - ------------------ ------------------------- Kevin A. Glass
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORT PURSUANT TO SECTION 15(d) OF THE ACT
During the year ended December 31, 2000, the Company provided each shareholder with a copy of its Annual Report on Form 10-K for the year ended December 31, 1999. The Company did not provide any other annual report or proxy materials to its shareholders during 2000.