UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
---------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended September 30, 2000
or
[_] 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 000-18601
TRANSIT GROUP, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-2576629
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2859 Paces Ferry, Suite 1740
Atlanta, GA 30144
(Address of principal executive offices) (Zip Code)
(770) 444-0240
Registrant's telephone number, including area code
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
As of November 14, 2001, 32,366,692 shares of TRANSIT GROUP, INC.'s common
stock, par value $.01 per share, were outstanding.
Page 1 of 29 Pages
TRANSIT GROUP, INC.
TABLE OF CONTENTS
-----------------
ITEM PAGE
---- ----
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements 3
ITEM 2. Management's Discussion and Analysis of 11
Financial Condition and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 23
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 24
ITEM 2. Changes in Securities and Use of Proceeds 25
ITEM 3. Defaults Upon Senior Securities 25
ITEM 4. Submission of Matters to a Vote of Security Holders 27
ITEM 5. Other Information 27
ITEM 6. Exhibits and Reports on Form 8-K 27
2
PART I.--FINANCIAL INFORMATION
ITEM 1. Financial Statements
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Transit Group, Inc.
Consolidated Balance Sheets
As of September 30, 2000 and December 31, 1999
(In thousands, unaudited)
September 30, December 31,
2000 1999
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 5,749 $ 2,156
Accounts receivable, net of allowance of $4,999 in 2000
and $2,838 in 1999 70,968 71,543
Other current assets 8,406 10,259
Refundable income taxes - 4,210
Deferred income taxes - 9,655
------------------ -------------------
Total current assets 85,123 97,823
Property and equipment, net 64,509 114,718
Goodwill, net - 112,197
Other assets, net 525 1,676
------------------ -------------------
Total assets $ 150,157 $ 326,414
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 14,366 $ 11,043
Bank overdraft 6,718 2,856
Accrued expenses and other current liabilities 22,017 16,679
Long-term debt and capital leases classified as current 162,685 23,990
------------------ -------------------
Total current liabilities 205,786 54,568
Long-term debt and capital leases, less current maturities - 139,530
Other liabilities 21 267
Deferred income taxes - 25,482
------------------ -------------------
Total liabilities 205,807 219,847
Redeemable common stock 3,675 3,675
Redeemable preferred stock 24,830 24,795
Stockholders' equity (deficit):
Preferred stock; no par value; 20,000,000 shares authorized
and 5,000,000 shares issued - -
Common stock; $.01 par value; 100,000,000 shares authorized
31,974,780 shares issued and outstanding 320 320
Additional paid-in capital 94,565 94,565
Accumulated deficit (179,040) (16,788)
------------------ -------------------
Total stockholders' equity (deficit) (84,155) 78,097
------------------ -------------------
Total liabilities and stockholders' equity (deficit) $ 150,157 $ 326,414
================== ===================
The accompanying notes are an integral part of these consolidated financial
statements.
3
ITEM 1. Financial Statements
Transit Group, Inc.
Consolidated Statements of Operations
For the three and nine months ended September 30, 2000 and 1999
(In thousands, except per share amounts, unaudited)
Three Months Ended Nine Months Ended
2000 1999 2000 1999
---- ---- ---- ----
Operating revenues $ 123,532 $ 93,272 $ 388,873 $ 233,382
Operating expenses:
Purchased transportation 52,852 31,934 166,859 84,366
Salaries, wages and fringe benefits 28,248 24,762 92,638 59,517
Operating supplies and expenses 19,711 9,900 48,958 24,574
Fuel 11,628 8,696 38,597 19,890
Rental expense 6,437 5,634 19,676 14,245
Depreciation and amortization 6,317 4,048 16,938 9,193
General and administrative expense 6,900 2,295 15,366 6,263
Insurance 1,752 1,450 6,421 3,235
Loss (gain) on disposition of assets 5,067 (33) 5,067 (246)
Loss on impairment of goodwill 111,420 - 111,420 -
Loss on impairment of fixed assets 33,000 - 33,000 -
---------------- --------------- ---------------- ---------------
Total operating expenses 283,332 88,686 554,940 221,037
Operating (loss) income (159,800) 4,586 (166,067) 12,345
Interest expense, net 3,992 1,647 10,469 4,167
(Loss) income before income tax expense (163,792) 2,939 (176,536) 8,178
Income tax expense (13,027) 1,559 (15,972) 1,493
---------------- --------------- ---------------- ---------------
Net (loss) income (150,765) 1,380 (160,564) 6,685
---------------- --------------- ---------------- ---------------
Preferred stock dividends (563) (562) (1,688) (858)
---------------- --------------- ---------------- ---------------
Net (loss) income available to common shareholders $ (151,328) $ 818 $ (162,252) $ 5,827
================ =============== ================ ===============
Basic earnings (loss) per common share $ (4.74) $ 0.03 $ (5.09) $ 0.22
================ =============== ================ ===============
Diluted earnings (loss) per common share $ (4.74) $ 0.03 $ (5.09) $ 0.21
================ =============== ================ ===============
Weighted average number of common shares used in
computation of basic earnings (loss) per share 31,943 29,836 31,884 26,788
================ =============== ================ ===============
Weighted average number of common shares used in
computation of diluted earnings (loss) per share 31,943 30,872 31,884 27,740
================ =============== ================ ===============
The accompanying notes are an integral part of these consolidated financial
statements.
4
ITEM 1. Financial Statements
Transit Group, Inc.
Consolidated Statements of Cash Flows
For the nine months ended September 30, 2000 and 1999
(In thousands, unaudited)
2000 1999
---- ----
Cash flows from operating activities:
Net (loss) income $ (160,564) $ 6,685
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 16,938 9,193
Loss (gain) on disposition of assets 5,067 (246)
Loss on impairment of goodwill 111,420 -
Loss on impairment of fixed assets 33,000 -
Deferred income taxes (15,827) (2,389)
Changes in assets and liabilities:
Accounts receivable 575 (11,868)
Other current assets 6,063 (922)
Accounts payable and accrued expenses 7,349 (4,321)
Other (1,397) (691)
------------- -------------
Net cash provided by (used in) operating activities 2,624 (4,559)
------------- -------------
Cash flows from investing activities:
Business acquisitions, net of cash acquired - (13,657)
Proceeds from disposal of equipment 9,791 21,722
Purchase of equipment (11,731) (3,506)
Collection of shareholder loan 258 -
------------- -------------
Net cash (used in) provided by investing activities (1,682) 4,559
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock - 24,795
Repayment of long-term debt and capital lease obligations (26,089) (38,862)
Issuance of long-term debt and capital lease obligations 25,254 15,138
Increase in bank overdrafts 3,862 2,445
Stock redeemed and retired (1,548)
Dividends (376) (858)
Stock options exercised - 219
------------- -------------
Net cash provided by financing activities 2,651 1,329
------------- -------------
Increase in cash and cash equivalents 3,593 1,329
Cash and cash equivalents, beginning of period 2,156 2,020
------------- -------------
Cash and cash equivalents, end of period $ 5,749 $ 3,349
============= =============
Supplemental cash flow information:
Cash paid during the period for interest $ 11,194 $ 4,512
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
5
Transit Group, Inc.
Notes to Consolidated Financial Statements
1. Basis of Presentation
The condensed consolidated financial statements include the accounts of Transit
Group, Inc., a Florida corporation, and its subsidiaries (the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation.
The 1999 Annual Report on Form 10-K for the Company includes a summary of
significant accounting policies and should be read in conjunction with this Form
10-Q. The statements for the periods presented are condensed and do not contain
all information required by accounting principles generally accepted in the
United States of America to be included in a full set of financial statements.
In the opinion of management, all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position as of
September 30, 2000 and December 31, 1999 and the results of operations and cash
flows for the periods ended September 30, 2000 and 1999, respectively, have been
included. The Company's operations are subject to seasonal trends common to the
trucking industry. Results of operations for the quarters ending in December and
March are materially lower than the quarters ending in June and September due to
reduced shipments and higher operating costs in the winter months. The results
of operations for any interim period are not necessarily indicative of the
results of operations to be expected for the entire year. Certain
reclassifications were made to the 1999 accounts to reflect classifications
adopted in 2000.
2. Financial Results and Liquidity
During the nine months ended September 30, 2000, the Company incurred an
operating loss of approximately $166.1 million. This loss is primarily
attributable to the impairment of all of the Company's goodwill and other
intangible assets, an impairment in the Company's fleet, reduced shipper demand,
difficulties in efficiently integrating the Company's acquisitions and rising
fuel prices, among other factors. Late in the third quarter of 2000 and
continuing into the third quarter of 2001, the Company experienced severe cash
flow difficulties, which combined with the factors noted above, resulted in
violations of the debt covenants under all of the Company's credit facilities
and many of its lease agreements. In April 2001, the Company restructured all of
its debt, as more fully described in Note 3 of the notes to consolidated
financial statements. As of November 14, 2001, the Company was not in compliance
with its new credit facilities; accordingly the lenders are entitled to require
immediate repayment of all outstanding amounts.
In response to these problems, the Company has developed an action plan which
contemplates, among other actions, certain new senior management, reduction in
the size of the Company's fleet and number of terminals, effective and efficient
integration of the Company's acquisitions and reductions in the amount of fixed
costs. The Company faces several significant challenges, including declining
economic conditions, competition from larger and financially stronger trucking
firms, and uncertainties with respect to the availability of credit. There can
be no assurance that management will be able to successfully implement the
action plan, nor that those actions will be sufficient. In the event additional
corrective actions are required, the Company will consider further reductions in
its fleet, terminals, and sales of its businesses.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
6
Notes to Consolidated Financial Statements, Continued
3. Subsequent Events - Reorganization
On April 19, 2001, the Company sold $7.0 million of its Series B preferred stock
and restructured its outstanding bank debt, its outstanding equipment leases,
certain stock purchase obligations, $1.875 million in accrued dividends payable
to the holder of its Series A preferred stock and certain other indebtedness
(collectively, the "Reorganization").
Debt Owed to Institutional Lenders and Equipment Lessors
In connection with the Reorganization, on April 19, 2001, the Company entered
into a new credit facility with Congress Financial Corporation ("Congress") and
the Company obtained an aggregate revolving credit facility of up to $30 million
based on certain lending formulas and bearing interest at 1.0% above the prime
rate. Congress will make an additional $29 million available under this credit
facility if the Company meets certain performance criteria. The new credit
facility has an initial term of two years with automatic annual renewals
thereafter. The Company is required to pay a fee upon early termination of the
new credit facility. Under its new credit facility, the Company will make
monthly payments of interest only, the exact amount of which will depend on the
outstanding loan amount and the Company's financial performance. All of the
Company's revenues are deposited in a cash management account, which amounts are
applied to the revolving loan. The Company's additional cash requirements are
drawn against such account to the extent funds are available under the terms of
the new credit facility. The amounts loaned under the Company's new credit
facility are collateralized by a security interest in all of the Company's
present and future assets.
On July 13, 2001, the Company received notice from Congress that the Company is
in default under the credit agreement because the Company failed to maintain a
tangible net worth of not less than $63 million and the Company failed to
furnish Congress with complete monthly financial statements within 30 days of
May 31, 2001. Because of these defaults, Congress has increased the interest
rate payable by the Company on the outstanding principal amount of the credit
facility by 2% per annum in excess of the interest rate otherwise in effect
under the credit facility and may demand immediate repayment of all amounts
outstanding on the facility.
On April 19, 2001, the Company also entered into an amended and restated credit
agreement with the bank group led by Bank One, N.A. ("Bank One"), the Company's
primary lenders prior to the new credit facility with Congress. The Company used
approximately $26.5 million of the proceeds from its new credit facility to
repay amounts owed under the Company's original credit facility with Bank One.
After the $26.5 million payment, approximately $74.5 million remained
outstanding under the Bank One original credit facility. The amended and
restated credit agreement with Bank One provides for two term loans. The first
term loan shall be in the amount of $49.5 million bearing interest at 10.5% and
shall mature on September 30, 2005. Interest only payments will be due for the
first six months, with principal and interest payments due thereafter through
maturity. The second loan shall be in the amount of $25 million bearing interest
at 10.5% and shall mature on September 30, 2005. Interest is payable monthly and
the principal will be reduced by mandatory and voluntary payments. Mandatory
payments will include (i) 100% of the proceeds from the sale of certain assets
and collections under certain insurance policies, and (ii) 50% of excess cash
flow. The amounts loaned under both term loans are collateralized by a first and
second security interest in certain of the Company's assets. As consideration
for restructuring the Company's credit facility with Bank One, the Company
issued options to Bank One to purchase a total of 5% of the Company's common
stock on a fully diluted basis with an exercise price of $.05 per share and
warrants to purchase an additional 5% of the Company's common stock on a fully
diluted basis with an exercise price of $3.00 per share. As of November 14,
2001, the Company is in violation of certain covenants contained in its credit
agreement with Bank One. As a result, Bank One may demand immediate repayment of
all amounts outstanding under the credit agreement.
In connection with the Reorganization, the Company also modified or
significantly changed the terms of virtually all of its capital leases,
equipment notes and operating leases. Such modified terms include the return of
equipment to certain lenders and lessors, payment of deficient amounts and the
restructuring of lease
7
Notes to Consolidated Financial Statements, Continued
3. Subsequent Events - Reorganization, Continued
payments. In connection with these modifications, the Company issued to General
Electric Capital Corporation an option to purchase 5% of the Company's common
stock on a fully diluted basis at an exercise price of $.05 per share.
Sales of Series B Preferred Stock
In connection with the Reorganization, on April 19, 2001, the Company sold an
aggregate of $7.0 million of its Series B preferred stock. The ECD Trust, an
entity related to T. Wayne Davis, the Company's Chairman, purchased 700,000 of
the Series B preferred stock of the Company for an aggregate purchase price of
$3.5 million. In connection with this purchase, the Company issued to T. Wayne
Davis 400,000 additional shares of the Company's Series B preferred stock as a
placement fee for no additional consideration. The amount of this placement fee
was determined by negotiation between the Company and T. Wayne Davis. The other
investors who also purchased shares in the offering (other than through the
conversion of debt or accrued dividends) received a pro rata placement fee.
GE Capital Equity Investments, Inc. purchased 400,000 shares of the Series B
preferred stock of the Company for an aggregate purchase price of $2.0 million.
In connection with this purchase, the Company issued to GE Capital Equity
Investments, Inc. 228,571 additional shares of its Series B preferred stock as a
placement fee for no additional consideration. Additionally, GE Capital Equity
Investments, Inc. ("GE Capital") has been granted the right to nominate two
members to the Company's Board of Directors and a third member in the event the
Company defaults on its obligations to GE Capital. In addition, the Company
granted GE Capital certain approval rights regarding management changes within
the Company, including the right to approve the selection and removal of key
executive officers.
Certain members of the Company's management, including Philip A. Belyew, its
Chief Executive Officer, and several board members purchased approximately
300,000 shares of the Series B preferred stock of the Company for an aggregate
purchase price of approximately $1.5 million.
Debt Conversion
In connection with the Reorganization, the Company converted approximately
$250,000 that it owed to Philip A. Belyew its Chief Executive Officer into
50,000 shares of its Series B preferred stock and converted approximately
$225,000 that the Company owed to the former owners of MDR Cartage, Inc. into
45,000 shares of its Series B preferred stock. No shares were issued as
placement fees in connection with the conversion of indebtedness.
4. Redeemable Preferred Stock
In May 1999, the Company issued five million shares of its 9% Series A
redeemable preferred stock for $5.00 per share to GE Capital. The Series A
preferred stock agreement contained certain anti-dilutive provisions which
required the issuance of additional shares of the Series A preferred stock if
the Company issued preferred stock at a price less than $5.00 per share. The
Company did not make the preferred stock dividend payments in the aggregate
amount of approximately $1.875 million from June 2000 through January 31, 2001.
In connection with the Reorganization, the Company and GE Capital agreed to
convert currently payable dividends accrued from June 2000 through January 31,
2001 in an aggregate amount of approximately $1.875 million into 375,000 shares
of the Company's Series B preferred stock. All dividends accruing after January
31, 2001 will accrue and will be paid in cash at such time as declared by the
Board of Directors. The holders of Series B preferred stock will be entitled to
receive dividends equal to 10.5% per annum. The dividend accrues and is payable
in cash, at such time as declared by the Company's Board of Directors. Each
holder of Series B preferred stock has the option to convert accrued dividends
into additional shares of Series B preferred stock at $5.00 per share. However,
the loan agreements entered into by the Company with certain of its lenders in
connection with the Reorganization prohibit the payment of any dividend until
such lenders are repaid in full. Therefore, the Company does not expect to
declare or pay any dividends in the foreseeable future.
8
Notes to Consolidated Financial Statements, Continued
4. Redeemable Preferred Stock, Continued
Both the Series A preferred stock held by GE Capital and the Series B preferred
stock issued in the Reorganization are redeemable at the option of the holder.
The holders of each series of preferred stock will be entitled to require the
Company to redeem their shares of preferred stock, at a redemption price equal
to the purchase price plus all accrued and unpaid dividends per share, in an
amount of up to one-third of the number of shares of preferred stock originally
issued, on or after October 19, 2005, up to two-thirds of such amount on or
after October 19, 2006, and up to all such shares on or after October 19, 2007.
In the case of Series A preferred stock, these redemption rights will expire
after October 19, 2010, and, in the case of Series B preferred stock, such
redemption rights shall expire October 19, 2008. In addition, at any time upon
the occurrence of certain mergers, sales of assets or change of control of the
Company, the Company will redeem all of the outstanding shares of Series B
preferred stock. However, loan agreements entered into by the Company with
certain of its lenders in connection with the Reorganization prohibit the
redemption of any stock of the Company until such lenders are repaid in full.
Therefore, the Company does not expect to redeem any of the Series A or Series B
preferred stock in the foreseeable future.
5. Redemption Rights
In connection with certain 1997 acquisitions, the Company granted the selling
shareholders the right to require the Company to redeem a portion of the shares
received in exchange for selling their businesses to the Company.
On May 24, 2000, the holders of redemption rights for $3.6 million or 865,608
shares of our common stock (the "Holders") exercised their redemption rights.
The Holders' redemption rights obligate the Company and the Chairman, jointly,
to purchase 865,608 shares of common stock from the Holders at a price of $3.60
per share. The purchase price of $3.6 million was reduced to reflect the return
of 138,999 shares by one of the Holders, Carroll A. (Tony) Fulmer, to the
Company in consideration of the forgiveness of all principal and interest
accrued under his promissory note to the Company in the original principal
amount of $500,000. The remaining $3.1 million will be paid in twenty-nine
monthly installments of $100,000 each and one final payment of $83,481. Each
payment shall be allocated among the Holders and bear interest at 10.5%. The
obligations of the Chairman to purchase the stock from the Holders, to the
extent the Company does not do so over such period, has been limited to $1.8
million and shall be further reduced by the principal amount of each installment
payment by the Company after such payments have reduced the purchase price to
$1.8 million. Therefore, as of the date hereof, the Chairman's stock purchase
obligation has been reduced to $1.8 million, and will be further reduced as each
installment, or any prepayment, is paid by the Company after such installments
or prepayments have reduced the purchase price to $1.8 million.
In connection with the restructuring of this repurchase obligation, the Company
issued to the Holders a total of 300,000 shares of its Series B preferred stock
as a deferral fee for no additional consideration. The amount of this deferral
fee was determined by negotiation between the Company, the Chairman and the
Holders. Further, the Company has agreed not to place, nor permit its
subsidiaries to place, any additional mortgages other than those currently
outstanding or refinanced on the real property owned by Transit Group
Transportation, LLC in Groveland, Florida which was acquired by the Company in
connection with the merger with the Carroll Fulmer Group, Inc.
In the event that the Company fails to make its monthly payment in connection
with this stock purchase or if the Company defaults on certain other payments or
commitments made pursuant to the restructuring of such stock purchase, the
entire amount owed to the Holders will be accelerated and become immediately due
and payable.
6. Impairment of Goodwill and Fixed Assets
The Company reviews its goodwill and other intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
these assets may not be recoverable. The Company's policy is to assess the
recoverability of goodwill using estimated undiscounted cash flows. Those cash
flows include an estimated terminal value based on a hypothetical sale of an
acquisition at the end of the related goodwill amortization period. The Company
has recently incurred significant operating losses and failed to generate
9
Notes to Consolidated Financial Statements, Continued
6. Impairment of Goodwill and Fixed Assets, Continued
sufficient cash from operations. The Company has been faced with a variety of
operating challenges, including, among others, escalating fuel costs, reduced
shipper demand given present domestic economic conditions, and a declining used
trucking equipment market. These factors have and are significantly impacting
the Company's liquidity. The decline in operations, cash flows and market
conditions have affected the analysis used to assess the recoverability of
goodwill. As a result, management has recorded an impairment charge in the
quarter ended September 30, 2000, in the amount of $111.4 million to write-off
all remaining goodwill.
The Company evaluates the carrying value of long-lived assets for impairment
losses by analyzing the operating performance and future cash flows for those
assets. The Company adjusts the net book value of the underlying assets if the
sum of expected cash flows is less than book value. The market values for used
trucking equipment are in a depressed state and the trucking industry has an
over supply of used trucking equipment available to the marketplace because of
the high failure rate of trucking companies and the low demand for truckload
capacity during the current economic slowdown. The decline in market values for
used trucking equipment has affected the analysis used to assess the
recoverability of these assets. As a result, management has recorded a charge of
$29.2 million to reflect fair market values of certain revenue equipment and a
charge of $3.8 million to reflect fair market values of certain other assets in
the quarter ended September 30, 2000.
Considerable management judgment is necessary to estimate fair value.
Accordingly, actual results could vary significantly from management's
estimates.
7. Business Combinations
In January 1999, the Company acquired Olive Branch, Mississippi - based Priority
Transportation, Inc. in exchange for a cash payment of $1.5 million and 890,000
shares of the Company's common stock.
In March 1999, the Company made two acquisitions. First, the Company acquired
Massengill Trucking Services, Inc. in a forward triangular merger. Based in
Hickory Flat, Mississippi, the Company issued 1,069,518 shares of the Company's
common stock and paid $2.2 million in cash for all of the issued and outstanding
shares of Massengill. Next the Company acquired KAT, Inc., headquartered in
Chesterton, Indiana for a cash payment of $.75 million and the issuance of
811,500 shares of the Company's common stock.
In July 1999, the Company acquired three more companies. Based in Gretna,
Nebraska, the Company acquired R&M Transportation, Inc., and its affiliate
Williams Brothers Trucking for cash of $1.4 million and the issuance of
1,215,000 shares of the Company's common stock. Headquartered in Jeffersonville,
Indiana, Bestway Trucking, Inc. and its affiliates DLS and Connection One were
acquired for 1,542,501 shares of the Company's common stock and a cash payment
of $6.8 million. The Company's third July acquisition was MDR Cartage, Inc.,
headquartered in Jonesboro, Arkansas. In exchange for all of the issued and
outstanding shares of MDR, the Company issued 2,450,000 shares of its common
stock and paid $1.8 million in cash.
In September 1999, the Company acquired Green Bay, Wisconsin based Fox Midwest,
Inc. and its affiliate SDS Distributors in exchange for a cash payment of $1.875
million and the issuance of 510,204 shares of its common stock.
In November 1999, the Company completed the acquisition of Atlanta, Georgia
based - Land Transportation, LLC. The Company issued 100,000 shares of its
common stock and paid $18 million (including a $6 million note) for the accounts
receivables and container operations of Land Transportation, the inter-model
marketing arm of Land Transportation and the related brokerage operation.
In connection with companies acquired the Company determined certain
administrative positions were redundant and accrued $4.2 million for severance
related to the elimination of those positions. The liability recorded was
charged to the goodwill of the companies acquired. During 1999, $1.0 million was
paid in cash and an adjustment of $0.2 million was recorded to reduce the
liability with a corresponding reduction in goodwill. The remaining balance will
be paid through 2003 in accordance with certain employment contracts.
10
Notes to Consolidated Financial Statements, Continued
7. Business Combinations, Continued
The business combinations of the 19 transportation companies acquired are
accounted for under the purchase method of accounting. Accordingly, the
operating results of the acquired companies have been included in our
consolidated financial statements since their respective dates of acquisition.
Assets acquired and liabilities assumed were recorded at fair market value.
8. Income Taxes
SFAS 109, "Accounting for Income Taxes", requires that deferred tax assets be
reduced by a valuation allowance if it is more likely than not that some portion
or all of the deferred tax asset will not be realized. During third quarter of
2000, the Company determined the valuation allowance against the net deferred
tax asset should be increased by $12.8 million.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Quarterly Report contains certain forward-looking statements, as defined in
the Private Securities Litigation Reform Act of 1995, including or related to
the Company's future results including certain projections and business trends.
These and other statements, which are not historical facts, are based largely on
current expectations and assumptions of management and are subject to a number
of risks and uncertainties that could cause actual results to differ materially
from those contemplated by such forward-looking statements. Risks related to
forward-looking statements include the Company's recent history of operating
losses and its significant amount of indebtedness, the operating and financial
restrictions contained in the Company's new credit agreements, a growth strategy
that relied on the completion of acquisitions of companies in the trucking
industry and the risk factors set forth on page 18 herein. Assumptions related
to forward-looking statements include that competitive conditions within the
Company's markets will not change materially or adversely, that fuel prices will
not significantly increase, that the demand for the Company's services will
remain strong, and that the Company will retain key managers, drivers and other
personnel.
Assumptions relating to forward-looking statements involve judgments with
respect to, among other things, future economic, competitive and market
conditions, and future business decisions, all of which are difficult or
impossible to predict accurately and many which are beyond the Company's
control. When used in this Quarterly Report, the words "estimate," "project,"
"intend," and "expect" and similar expressions are intended to identify
forward-looking statements. Although the Company believes that assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could prove inaccurate and, therefore, there can be no assurance that the
results contemplated in the forward-looking information will be realized.
Management decisions are subjective in many respects and susceptible to
interpretations and periodic revisions based on actual experience and business
developments, the impact of which may cause the Company to alter its business
strategy, which may in turn, affect the Company's results of operations. In
light of the significant uncertainties inherent in the forward-looking
information included herein, the inclusion of such information should not be
regarded as the Company's representation that any strategy, objectives, or other
plans will be achieved. The forward-looking statements contained in this
Quarterly Report speak only as of the date of this Quarterly Report, and the
Company does not have any obligation to publicly update or revise any of these
forward-looking statements.
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and notes for the year ended
December 31, 1999 and quarter ended September 30, 2000.
11
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Continued
The following tables summarize certain financial information on a percentage of
revenue basis and selected operating data for the three and nine months ended
September 30, 2000 and 1999:
Three Months Ended Nine Months Ended
2000 1999 Variance 2000 1999 Variance
---------- --------- ------------- --------- --------- -------------
Percentage of Revenue Basis:
Operating revenues 100.0 100.0 - 100.0 100.0 -
---------- --------- ------------- --------- --------- -------------
Operating expenses:
Purchased transportation 42.8 34.2 8.6 42.9 36.1 6.8
Salaries, wages and fringe benefits 22.9 26.5 (3.6) 23.8 25.5 (1.7)
Operating supplies and expenses 16.0 10.6 5.4 12.6 10.5 2.1
Fuel 9.4 9.3 0.1 9.9 8.5 1.4
Rental expense 5.2 6.0 (0.8) 5.1 6.1 (1.0)
Depreciation and amortization 5.1 4.3 0.8 4.4 3.9 0.5
General and administrative expense 5.6 2.5 3.1 4.0 2.7 1.3
Insurance 1.4 1.6 (0.2) 1.7 1.4 0.3
Loss (gain) on disposition of assets 4.1 - 4.1 1.3 (0.1) 1.4
Loss on impairment of goodwill 90.2 - 90.2 28.7 - 28.7
Loss on impairment of fixed assets 26.7 - 26.7 8.5 - 8.5
---------- --------- ------------- --------- --------- -------------
Total operating expenses 229.4 95.0 134.4 142.9 94.6 48.3
---------- --------- ------------- --------- --------- -------------
Operating (loss) income (129.4) 5.0 (134.4) (42.9) 5.4 (48.3)
---------- --------- ------------- --------- --------- -------------
Results of Operations - Three months ended September 30, 2000 compared with the
three months ended September 30, 1999
Operating revenues increased from $93.3 million in 1999 to $123.5 million, or
32.4%, for 2000. The increase is due primarily to the acquisition of two
companies since September 1999. This increase was offset by the fact that
comparable revenues for the 17 companies acquired prior to September 1999
(excluding Rainbow Trucking whose operations were absorbed by Bestway) decreased
by 1.6% for the three month period ended September 30, 2000 compared to this
same period in the prior year. For the quarter ended September 30, 2000, the
Company has realized a pre-tax loss of $163.8 million as compared to pre-tax
income of $2.9 million for the same period a year ago.
Purchased transportation as a percentage of operating revenues increased from
34.2% in 1999 to 42.8% in 2000 due to changes in the fleet mix from Company
owned trucks to a higher proportion of brokerage agents and owner-operators.
Salaries, wages, and benefits as a percentage of operating revenues decreased
from 26.5% in 1999 to 22.9% in 2000. The decrease as a percentage of operating
revenues is attributed to the change in revenue mix discussed in the preceding
paragraphs and higher wages paid to drivers in a competitive labor market.
Should labor costs continue to increase, there can be no assurance that they can
be passed along to the Company's customers through higher freight rates.
Operating supplies and expenses as a percentage of operating revenues increased
from 10.6% in 1999 to 16.0% in 2000. The increase as a percentage of total
operating revenue is attributed to the change in fleet mix of company and
contractor equipment.
Fuel as a percentage of operating revenues increased from 9.3% in 1999 to 9.4%
in 2000 due to higher cost per gallon. Should fuel costs continue to increase,
there can be no assurance that these costs can be passed along to the Company's
customers.
12
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Continued
Results of Operations - Three months ended September 30, 2000 compared with the
three months ended September 30, 1999, Continued
Rental expense, expressed as a percent of operating revenues, decreased from
6.0% in 1999 to 5.2% in 2000. This decrease is related to higher revenue levels
and the change in fleet mix discussed above.
Depreciation and amortization expense as a percent of operating revenues
increased from 4.3% in 1999 to 5.1%, due to the acquisitions during 1999 and the
full year effect of the depreciation expense in 2000.
General and administrative expense as a percentage of operating revenues
increased from 2.5% in 1999 to 5.6% in 2000 as a result of incremental costs
incurred in connection with the ongoing consolidation of the back office at the
Groveland Service Center. This increase is expected to last through the
remainder of fiscal 2000 until all duplicative back office functions are
eliminated from field operations.
Insurance expense as a percentage of operating revenues decreased to 1.4% in
2000 from 1.6% in 1999.
The Company determines the provision for income taxes using the best estimate of
the effective tax rate expected to be applicable for the full fiscal year. As a
result of continued operating losses and the Company's inability to generate
sufficient cash to meet its obligations, the Company has fully reserved for any
future tax benefits associated with current year losses. During third quarter of
2000, the Company determined the valuation allowance against the net deferred
tax asset should be increased by $12.8 million.
Despite higher revenues, continued cost pressures (fuel, driver wages, general
and administrative expenses, and interest) have severely impacted the Company's
operating results. In addition, the Company has continued to experience
significant negative operating results at certain of the companies acquired in
1999. The decline in operations, cash flows and market conditions have affected
the analysis used to assess the recoverability of goodwill. As a result,
management has recorded an impairment charge in the quarter ended September 30,
2000, in the amount of $111.4 million to write-off all remaining goodwill.
Furthermore, the decline in market values for used trucking equipment has
affected the analysis used to assess the recoverability of these assets. As a
result, management has recorded a charge of $29.2 million to reflect fair market
values of certain revenue equipment and a charge of $3.8 million to reflect fair
market values of certain other assets in the quarter ended September 30, 2000.
Results of Operations - Nine months ended September 30, 2000 compared with the
nine months ended September 30, 1999
Operating revenues increased from $233.4 million in 1999 to $388.9 million, or
66.6%, for 2000. The increase is due primarily to the acquisition of eight
companies from January 1999 through November 1999. Comparable revenues for the
11 companies acquired prior to January 1999 (excluding Rainbow Trucking whose
operations were absorbed by Bestway) increased 29.3% for the nine month period
ended September 30, 2000 compared to the same period a year ago. The Company
continues to concentrate its growth efforts on non-asset based revenue such as
owner-operators brokerage, agency, and logistics revenue. Revenue from Company
equipment has declined from approximately 55.1% of revenue in the nine month
period ended September 30, 1999 to approximately 45.3% in 2000. For the nine
months ended September 30, 2000, the Company has realized a pre-tax loss of
$176.5 million as compared to pre-tax income of $8.2 million for the same period
a year ago.
Purchased transportation as a percentage of operating revenues increased from
36.1% in 1999 to 42.9% in 2000 due to changes in the fleet mix from Company
owned trucks to a higher proportion of brokerage agents and owner-operators.
Salaries, wages, and benefits as a percentage of operating revenues decreased
from 25.5% in 1999 to 23.8% in 2000. The decrease as a percentage of operating
revenues is attributed to the change in revenue mix discussed in the preceding
paragraph and higher wages paid to drivers in a competitive labor market. Should
13
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Continued
Results of Operations - Nine months ended September 30, 2000 compared with the
nine months ended September 30, 1999, Continued
labor costs continue to increase there can be no assurance that they can be
passed along to the Company's customers through higher freight rates.
Operating supplies and expenses as a percentage of operating revenues increased
from 10.5% in 1999 to 12.6% in 2000. The increase as a percentage of total
operating revenue is attributed to the change in fleet mix of Company and
contractor equipment.
Fuel as a percentage of operating revenues increased from 8.5% in 1999 to 9.9%
in 2000 due to an increase in fuel costs per gallon. Should fuel costs continue
to increase, there can be no assurance that these costs can be passed along to
the Company's customers.
Rental expense, expressed as a percent of operating revenues, decreased from
6.1% in 1999 to 5.1% in 2000 due to higher revenue levels and the change in
fleet mix discussed above.
Depreciation and amortization expense as a percent of operating revenues
increased from 3.9% in 1999 to 4.4%, due to the acquisitions during 1999 and the
full year effect of the depreciation expense in 2000.
General and administrative expense as a percentage of operating revenues
increased from 2.7% in 1999 to 4.0% in 2000 as a result of incremental costs
incurred in connection with the back office functions at the Groveland Service
Center. This increase is expected to continue through the remainder of fiscal
2000 until all duplicative back office functions in the field are eliminated.
Insurance expense as a percentage of total operating revenue increased from 1.4%
in 1999 to 1.7% in 2000. The increase as a percentage of total operating revenue
is due to the higher cost of insurance and an increase in cargo related
insurance claims.
The Company determines the provision for income taxes using the best estimate of
the effective tax rate expected to be applicable for the full fiscal year. As a
result of continued operating losses and the Company's inability to generate
sufficient cash to meet its obligations, the Company has fully reserved for any
future tax benefits associated with current year losses. During third quarter of
2000, the Company determined the valuation allowance against the net deferred
tax asset should be increased by $12.8 million.
Liquidity and Capital Resources
For the nine months ended September 30, 2000, the Company incurred an operating
loss of approximately $166.1 million. This loss is primarily attributable to the
impairment of all of the Company's goodwill and other intangible assets, an
impairment in the Company's fleet, reduced shipper demand, difficulties in
efficiently integrating the Company's acquisitions and rising fuel prices, among
other factors. Late in the third quarter of 2000 and continuing into the third
quarter of 2001, the Company experienced severe cash flow difficulties, which
combined with the factors noted above, resulted in violations of the debt
covenants under all of the Company's credit facilities and many of its lease
agreements. In April 2001, the Company restructured all of its debt, as more
fully described in Note 3 of the notes to consolidated financial statements. As
of November 14, 2001, the Company was not in compliance with its new credit
facilities; accordingly, the lenders are entitled to require immediate repayment
of all outstanding amounts.
In response to these problems, the Company has developed an action plan which
contemplates, among other actions, certain new senior management, reduction in
the size of the Company's fleet and number of terminals, effective and efficient
integration of the Company's acquisitions and reductions in the amount of fixed
costs. The Company faces several significant challenges, including declining
economic conditions, competition from larger and financially stronger trucking
firms, and uncertainties with respect to the availability of credit. There can
be no assurance that management will be able to successfully implement the
action plan, nor that those actions will be
14
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Continued
sufficient. In the event additional corrective actions are required, the Company
will consider further reductions in its fleet, terminals, and sales of its
businesses.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
For the nine months ended September 30, 2000 and 1999, net cash provided by
operating activities was $2.6 million in 2000 as compared to $4.6 million cash
used in operating activities in 1999. The increase is primarily attributable to
an increase in accounts payable, a reduction in accounts receivable, and an
increase in depreciation and amortization. The net loss of $160.6 million was
primarily attributable to non-cash charges for impairments of goodwill and fixed
assets that amounted to $144.4 million.
For the nine months ended September 30, 2000 and 1999, net cash used in
investing activities was $1.7 million in 2000 as compared to $4.6 million cash
provided by investing activities in 1999. The decrease is primarily due to a
reduction in disposition proceeds.
For the nine months ended September 30, 2000 and 1999, net cash provided by
financing activities was $2.7 million in 2000 as compared to $1.3 million in
1999. The increase is primarily due to a reduction from the issuance of
preferred stock and an increase in the issuance of long term debt.
Annual fees for tags, plates, and permits required significant cash payments
during the first quarter of 2000. In addition, the Company's internal growth and
an increase in days sales outstanding resulting from the attempted back office
consolidation has required the Company to finance a significant increase in
accounts receivable. Further, turnover in key management positions and
difficulty experienced in the integration of recent acquisitions have placed a
significant strain on the Company's administrative, operational and financial
resources. These factors have combined to negatively impact cash flow. The
Company continues to concentrate on the collection of accounts receivable to
improve cash flows. However, there can be no assurance that the Company can
continue to finance its business strategy through operations or that the amounts
will be available to the Company under its new credit facility with Congress.
In 1999, the Company entered into a $150 million credit facility which replaced
the existing $35 million revolving credit and term facility. The Company was not
in compliance with certain payment and other covenants and provisions of this
$150 million facility from December 31, 1999 through April 19, 2001 when the
Reorganization was completed. In accordance with the requirements of generally
accepted accounting principles this debt was classified as a current liability.
The amortization of those costs incurred in connection with the credit facility
was accelerated and was recorded entirely in December of 2000.
New Credit Agreements and Leases
In connection with the Reorganization, on April 19, 2001, the Company entered
into a new credit facility with Congress and the Company received aggregate
revolving loans of up to $30 million based on certain lending formulas and
bearing interest at 1.0% above the prime rate. Congress will make an additional
$29 million available under this credit facility if the Company meets certain
performance criteria. The new credit facility has an initial term of two years
with automatic annual renewals thereafter. The Company is required to pay a fee
upon early termination of the new credit facility. Under its new credit
facility, the Company will make monthly payments of interest only, the exact
amount of which will depend on the outstanding loan amount and the Company's
financial performance. All of the Company's revenues are deposited in a cash
management account, which amounts are applied to the revolving loan. The
Company's additional requirements are drawn against such account to the extent
funds are available under the terms of the new credit facility. The amounts
loaned under the Company's new credit facility are collateralized by a security
interest in all of the Company's present and future assets. The Company has
violated substantially all of the debt covenants in its credit agreement with
Congress.
15
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Continued
Liquidity and Capital Resources, Continued
On July 13, 2001, the Company received notice from Congress that the Company is
in default under the credit agreement because the Company failed to maintain a
tangible net worth of not less than $63 million and the Company failed to
furnish Congress with complete monthly financial statements within 30 days of
May 31, 2001. Because of these defaults, Congress has increased the interest
rate payable by the Company on the outstanding principal amount of the credit
facility by 2% per annum in excess of the interest rate otherwise in effect
under the credit facility and may demand immediate repayment of all amounts
outstanding on the facility.
On April 19, 2001, the Company also entered into an amended and restated credit
agreement with the bank group led by Bank One, N.A. ("Bank One"), the Company's
primary lenders prior to the new credit facility with Congress. The Company used
approximately $26.5 million of the proceeds from its new credit facility to
repay amounts owed under the Company's original credit facility with Bank One.
After the $26.5 million payment, approximately $74.5 million remained
outstanding under the Bank One original credit facility. The amended and
restated credit agreement with Bank One provides for two term loans. The first
term loan shall be in the amount of $49.5 million bearing interest at 10.5% and
shall mature on September 30, 2005. Interest only payments will be due for the
first six months, with principal and interest payments due thereafter through
maturity. The second loan shall be in the amount of $25 million bearing interest
at 10.5% and shall mature on September 30, 2005. Interest is payable monthly and
the principal will be reduced by mandatory and voluntary payments. Mandatory
payments will include (i) 100% of the proceeds from the sale of certain assets
and collections under certain insurance policies, and (ii) 50% of excess cash
flow. The amounts loaned under both term loans are collateralized by a first and
second security interest in certain of the Company's assets. As consideration
for restructuring the Company's credit facility with Bank One, the Company
issued options to Bank One to purchase a total of 5% of the Company's common
stock on a fully diluted basis with an exercise price of $.05 per share and
warrants to purchase an additional 5% of the Company's common stock on a fully
diluted basis with an exercise price of $3.00 per share. As of November 14,
2001, the Company is in violation of certain covenants contained in its credit
agreement with Bank One. As a result, Bank One may demand immediate repayment of
all amounts outstanding under the credit agreement.
In connection with the Reorganization, the Company also modified or
significantly changed the terms of virtually all of its capital leases,
equipment notes and operating leases (the "Equipment Obligations") which
approximated $120 million on April 19, 2001. As a result of the Company's
continued operating losses, the Company had not made payments on the Equipment
Obligations from September 2000 through March 2001. Accordingly, virtually all
of the Equipment Obligations were in default until the Reorganization. The
Company had classified all of these obligations as current as of September 30,
2000.
Preferred Stock Modification and Issuance
In May 1999, the Company issued five million shares of its 9% Series A
redeemable preferred stock for $5.00 per share to GE Capital Equity Investments,
Inc. ("GE Capital"). The Series A preferred stock agreement contained certain
anti-dilutive provisions which required the issuance of additional shares of the
Series A preferred stock if the Company issued stock at a price less than $5.00
per share. The Company did not make the preferred stock dividend payments in the
aggregate amount of approximately $1.875 million from June 2000 through January
31, 2001.
In connection with the Reorganization, the Company and GE Capital agreed to
convert currently payable dividends accrued from June 2000 through January 31,
2001 in an aggregate amount of approximately $1.875 million into 375,000 shares
of the Company's Series B preferred stock. All dividends accruing after January
31, 2001 will accrue and will be paid in cash at such time as declared by the
Board of Directors. However, the credit agreements entered by the Company with
certain of its lenders in connection with the Reorganization prohibit the
payment of any dividend until such lenders are repaid in full. Therefore, the
Company does not expect to declare or pay any dividends in the foreseeable
future.
Both the Series A preferred stock held by GE and the Series B preferred stock
issued in the Reorganization are redeemable at the option of the holder. The
holders of each series of preferred stock will be entitled to require the
Company to redeem their shares of preferred stock, at a redemption price equal
to the purchase price plus
16
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Continued
Liquidity and Capital Resources, Continued
all accrued and unpaid dividends per share, in an amount of up to one-third of
the number of shares of preferred stock originally issued, on or after October
19, 2005, up to two-thirds of such amount on or after October 19, 2006, and up
to all such shares on or after October 19, 2007. In the case of Series A
preferred stock, such redemption rights shall expire before October 19, 2010,
and, in the case of Series B preferred stock, such redemption rights shall
expire after October 19, 2008. In addition, at any time upon the occurrence of
certain mergers, sales of assets or change of control of the Company, the
Company will redeem all of the outstanding shares of Series B preferred stock.
However, loan agreements entered into by the Company with certain of its lenders
in connection with the restructuring prohibit the redemption of any stock of the
Company until such lenders are repaid in full. Therefore, the Company does not
expect to redeem any of the Series A or Series B preferred stock in the
foreseeable future.
Redemption Rights for Selling Shareholders in Acquisitions
In connection with certain 1997 acquisitions, the Company granted the selling
shareholders the right to require the Company to redeem a portion of the shares
received in exchange for selling their businesses to the Company. The dollar
amount of stock subject to mandatory redemption aggregated approximately $8.1
million upon acquisition for those companies.
On May 24, 2000, the holders of redemption rights for $3.6 million or 865,608
shares of our common stock (the "Holders") exercised their redemption rights.
The Holders' redemption rights obligate the Company and the Chairman, jointly,
to purchase 865,608 shares of common stock from the Holders at a price of $3.60
per share. The purchase price of $3.6 million was reduced to reflect the return
of 138,999 shares by one of the Holders, Carroll A. (Tony) Fulmer, to the
Company in consideration of the forgiveness of all principal and interest
accrued under his promissory note to the Company in the original principal
amount of $500,000. The remaining $3.1 million, together with interest accrued
thereon at a rate of 10.5% per annum, will be paid in twenty-nine monthly
installments of $100,000 each and one final payment of $83,481. Each payment
shall be allocated among the Holders and bear interest at 10.5%. The obligations
of the Chairman to purchase the stock from the Holders, to the extent the
Company does not do so over such period, has been limited to $1.8 million and
shall be further reduced by the principal amount of each installment payment by
the Company after such payments have reduced the purchase price to $1.8 million.
Therefore, as of the date of this report, the Chairman's stock purchase
obligation has been reduced to $1.8 million, and will be further reduced as each
installment is paid by the Company after such installments or prepayments have
reduced the purchase price to $1.8 million.
In connection with the Reorganization, the Company issued to the Holders a total
of 300,000 shares of its Series B preferred stock as a deferral fee for no
additional consideration. Further, the Company has agreed not to place, nor
permit its subsidiaries to place, any additional mortgages other than those
currently outstanding or refinanced on the real property owned by Transit Group
Transportation, LLC in Groveland, Florida which was acquired by the Company in
connection with the merger with the Carroll Fulmer Group, Inc.
In the event that the Company fails to make its monthly payment in connection
with this stock purchase or if the Company defaults on certain other payments or
commitments made pursuant to the restructuring of such stock purchase, the
entire amount owed to the Holders will be accelerated and become immediately due
and payable.
Seasonality
The Company's operations are subject to seasonal trends common to the trucking
industry. Results of operations for the quarters ending in December and March
are significantly lower than the quarters ending in June and September due to
reduced shipments and higher operating costs as a percentage of revenues in the
winter months.
17
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Continued
Inflation and Fuel Costs
Most of the Company's operating expenses are inflation-sensitive, with inflation
generally producing increased costs of operations. During the past three years,
the most significant effects of inflation have been on revenue equipment prices
and the compensation paid to the drivers. Innovations in equipment technology
and comfort have resulted in higher tractor prices, and there has been an
industry-wide increase in wages paid to attract and retain qualified drivers.
The Company attempts to limit the effects of inflation through increases in
freight rates and certain cost control efforts.
In addition to inflation, fluctuations in fuel prices can affect profitability.
Most of the Company's contracts with customers contain fuel surcharge
provisions. Although the Company historically has been able to pass through most
long-term increases in fuel prices and taxes to customers in the form of
surcharges and higher rates, increases usually are not fully recovered. At the
end of the third quarter of 2000, the national average price of diesel fuel as
provided by the U.S. Department of Energy was $1.657 as compared to $1.226 per
gallon at the end of the third quarter of 1999. This has increased the Company's
cost of operating.
Risk Factors
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.
As discussed in Note 2 of the notes to the consolidated financial statements,
the Company has suffered a substantial operating loss, has negative working
capital, and is not in compliance with its credit facilities. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
The Company is in default or in violation of certain covenants contained in its
credit agreements with Congress and Bank One.
On July 13, 2001, the Company received notice from Congress that the Company is
in default under its credit agreement with Congress because the Company failed
to furnish Congress with complete monthly financial statements within 30 days of
May 31, 2001 and failed to maintain a tangible net worth of not less than
$63,000,000. Because of these defaults, Congress has increased the interest rate
payable by the Company on the outstanding principal amount of the credit
facility by 2% per annum in excess of the interest rate otherwise in effect
under the credit facility and may demand immediate repayment of all amounts
outstanding on the facility. Also, the Company is in violation of certain
covenants contained in its credit agreement with Bank One. As a result, Bank One
may demand immediate repayment of all amounts outstanding under the credit
agreement.
The Company has a significant amount of indebtedness.
As of November 14, 2001, the Company had total indebtedness in excess of $156
million. While the Company has restructured its indebtedness, it continues to
have a significant amount of indebtedness. This substantial indebtedness has
important consequences to the Company. For example, it:
. requires the Company to dedicate a substantial portion of its cash flow
from operations to payments on this indebtedness, thereby reducing the
availability of cash flow to fund operations;
. increases the Company's vulnerability to general adverse economic and
industry conditions;
. limits flexibility in planning for, or reacting to, changes in the
Company's business and the transportation industry generally;
. places the Company at a competitive disadvantage with competitors that
have less debt; and
18
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Continued
Risk Factors, Continued
. limits the Company's ability to borrow additional funds to fund growth
and provide for capital expenditures.
The Company's business may not generate sufficient cash flow from operations in
an amount sufficient to enable the Company to pay its indebtedness or to fund
its other liquidity needs. If the Company cannot service its indebtedness, it
will be forced to take actions such as delaying or reducing the implementation
of its business strategy or capital expenditures, selling assets, restructuring
or refinancing indebtedness, seeking additional equity capital or filing for
bankruptcy protection. The Company may be unable to effect any of these remedies
on commercially reasonable terms if at all.
The Company has been negatively impacted by the ongoing attempts to restructure
its finances.
Due to the uncertainty of the Company's financial position, several significant
customers have declined to continue relationships with the Company. Other
customers have decreased load volumes with the Company as a result of the
uncertainty surrounding the Company's financial condition. In connection with
the Company's default under various equipment leases, some lessors have
repossessed certain tractors and trailers. Such repossessions have impacted
several of the Company's existing customers and further eroded the stability of
the Company's customer base. The Company's tenuous financial condition has made
the recruitment and retention of contractors and drivers very difficult. Under
these circumstances, it has been difficult to attract new business. Further, the
scope and complexity of the Company's Reorganization finalized in April 2001 has
demanded significant management time which would otherwise be spent generating
such new business and improving operations.
The Company is not current in its required filings with the Securities and
Exchange Commission.
The Company did not file this report on Form 10-Q that was due to be filed on
November 14, 2000, timely and has not filed the required Form 10-K, that was due
to be filed on April 2, 2001 or the Form 10-Qs that were due to be filed on May
15, 2001, August 14, 2001 and November 14, 2001. As a result, the Company's
shareholders may not currently sell their stock under Rule 144 of the Securities
Act of 1933. Since the Company is not current in its filing requirements the
Securities and Exchange Commission may take such action against the Company that
it deems appropriate. In addition, the Company may be subject to shareholder
litigation as a result of its failure to remain current in its filings with the
Securities and Exchange Commission.
The market price of the Company's common stock has been highly volatile.
There is currently no public market for the Company's common stock. The Company
had previously listed its shares on the NASDAQ SmallCap Market but it was
delisted on October 25, 2000 and its shares are now quoted on the "pink sheets"
published by Pink Sheets, LLC. There is very little trading volume in the
Company's stock. The market price of the Company's common stock declined
substantially in 2000 and remains highly volatile. Changes in market valuations
of other companies in the motor carrier industry and general market and economic
conditions could further affect the market price of the Company's common stock.
Trading in securities quoted in the pink sheets is more sporadic than trading in
securities listed on an exchange or on the Nasdaq National Market System. The
Company believes it is unlikely that the Company will ever relist its common
stock with the NASDAQ National Market or the NASDAQ SmallCap Market.
The Company's common stock is a "penny stock," because it is not listed on an
exchange and trades at less than $5.00 per share. Broker-dealers who sell penny
stocks must provide purchasers of these stocks with a standardized
risk-disclosure document prepared by the Securities and Exchange Commission.
This document provides information about penny stocks and the nature and level
of risks involved in investing in the penny-stock market. A broker must also
give a purchaser, orally or in writing, bid and offer quotations and information
regarding broker and salesperson compensation, make a written determination that
the penny stock is a suitable investment for the purchaser, and obtain the
purchaser's written agreement to the purchase. Consequently, the
19
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Continued
Risk Factors, Continued
penny stock rules may make it difficult for the Company's shareholders to sell
their shares of the Company's common stock.
The Company does not expect to declare or pay future dividends without the
consent of its lenders.
The loan agreements entered into by the Company with certain of its lenders in
connection with the Reorganization prohibit the payment of any dividend until
such lenders are repaid in full. Therefore, the Company does not expect to
declare or pay any dividends in the foreseeable future.
The agreements governing the Company's new credit facility imposes operating and
financial restrictions on the Company that may prevent the Company from
capitalizing on business opportunities.
The agreements governing the Company's new credit facility with Congress and the
restated credit agreement with the Company's prior lender as well as the
purchase agreement the Company entered into in connection with the sale of the
Series A preferred stock and Series B preferred stock impose significant
operating and financial restrictions on the Company. The terms of any other
financings the Company may obtain may do so as well. These restrictions
substantially limit or prohibit the Company from taking various actions,
including incurring additional debt, making investments, paying dividends to the
Company's shareholders, creating liens, selling assets, engaging in mergers and
consolidations, repurchasing or redeeming capital stock and capitalizing on
business opportunities. At November 14, 2001, the Company was in violation of
several of the covenants and restrictions in the Company financing agreements
and the Company is in default under such agreements.
The Company may need additional financing to meet its future capital
requirements.
The Company's financial resources are limited and the amount of funding that the
Company may require in the future is uncertain. The Company may be unable to
secure adequate funds on satisfactory terms, if at all. The Company may seek
financing through the issuance of equity securities. The proceeds of any such
offering however, will be used by the Company to purchase shares of common stock
at $3.60 per share in accordance with certain contractual redemption rights
applicable to the Company. If adequate funds are not available or are not
available on acceptable terms, the Company may be unable to retain personnel,
fund its operations, or respond to competitive pressures. Any of these could
have a material and adverse effect on the Company's business as well as severely
impact near term operations and the Company's financial condition.
The Company may incur costs and liabilities related to pending and potential
litigation.
The Company is involved in material litigation that may subject the Company to
significant costs and liabilities. See Part II, Item I "Legal Proceedings."
The Company faces significant competition from trucking companies in the markets
the Company serves.
The motor carrier industry is highly competitive and subject to pressures from
major business cycles. The Company believes that competition in the motor
carrier industry is based primarily on service and efficiency. The Company
competes with many companies located in the market areas it serves. The Company
believes that there is no dominant competitor in the motor carrier industry that
it competes directly with.
The shipping requirements of "just-in-time" inventory systems demand
geographically diverse companies with well-developed tracking and dispatching
information systems. The Company anticipates that the motor carrier industry
will continue to consolidate and remain extremely competitive for both customers
and qualified personnel and that the Company's current size and anticipated
growth will allow it to participate in the consolidating motor carrier industry.
However, there is significant disparity in the Company's revenues and
20
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Continued
Risk Factors, Continued
financial resources and those of the largest trucking companies. The Company
may be unable to maintain its growth.
The Company is subject to potential liability associated with trucking accidents
that may exceed its insurance coverage.
Potential liability associated with accidents in the motor carrier industry is
severe and occurrences are unpredictable. The industry is also subject to
substantial workers' compensation expense. A material increase in the frequency
or severity of accidents, workers' compensation claims, or an unfavorable
development of existing claims can be expected to adversely affect the Company's
operating income.
The Company carries insurance to cover liability and workers' compensation
claims. However, the Company's insurance may be inadequate to cover all of its
liabilities. To the extent the Company were to experience a material increase in
the frequency or severity of accidents, cargo claims or workers' compensation
claims, or in the unfavorable resolution of existing claims, the Company may be
required to incur substantial costs to cover these claims. In addition, the
Company's results of operations would be adversely affected if the premiums for
the Company's liability, workers' compensation and casualty claims were to
increase substantially.
The Company's growth through acquisitions has placed a significant strain on its
administrative, operational and financial resources.
The Company acquired 19 operating companies from June 30, 1997, through November
4, 1999. The growth of its business through acquisitions and the expansion of
its operations have placed a significant strain on the Company's administrative,
operational and financial resources. The Company's acquisition growth has also
resulted in a substantial increase in the scope of its operations. The Company's
inability to assimilate these acquired operations and support the growth of its
business has had a material adverse effect on the Company's financial condition
and results of operations.
The Company's difficulty in hiring drivers may have a material and adverse
effect on its business.
The long-haul motor carrier industry has experienced problems in hiring
qualified, experienced drivers. The availability of drivers is an important
factor in the Company's ability to serve its customers. Commercial driver
license and drug testing requirements have contributed to a nationwide driver
shortage and competition for drivers is intense. The Company has periodically
experienced driver shortages in certain geographical areas. The Company may be
unable to employ a sufficient number of drivers from time to time to meet
customer shipment demands, resulting in loss of revenue. Any shortage of
qualified drivers would have an adverse effect on the Company business,
financial condition and results of operations.
The Company may not be able to pay off the debt on certain of its assets in the
event of liquidation due to the depressed current market value of such assets.
There is currently an oversupply of used tractors and trailers available for
sale in the long-haul motor carrier industry. As a result, the current market
value of such equipment is low and the Company may be unable to sell these
assets for amounts sufficient to pay its equipment related debt, if at all.
The Company depends on key personnel.
The loss of any of our executive officers, including our Chief Executive
Officer, Philip A. Belyew, the Company's Chief Operating Officer, James G.
Overley, or other key financial and strategic personnel could have a material
adverse effect upon the Company's business, operating results and financial
condition. The Company's success depends largely on the efforts and abilities of
the Company's key personnel.
21
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Continued
Risk Factors, Continued
The Company's operating results are subject to cyclical and seasonal
fluctuations.
The Company's operations are subject to seasonal trends common in the motor
carrier industry. Operating results in the first and fourth quarters are
normally lower due to reduced shipments during the winter months. Harsh winter
weather can also adversely impact the Company's performance by reducing demand
and increasing operating expenses.
The Company's failure to comply with, or the costs of complying with, government
regulation could negatively affect the Company's results of operations.
The Company's operations are subject to a number of complex and stringent
transportation, labor, employment and other laws and regulations. These laws and
regulations generally require the Company to maintain and comply with a wide
variety of certificates, permits, licenses and other approvals. If the Company
fails to maintain required certificates, permits or licenses, or to comply with
applicable laws, ordinances or regulations, the Company could be subject to
substantial fines or the possible revocation of the Company's authority to
conduct its operations.
Existing laws or regulations may be revised and new laws or regulations may be
enacted that could adversely impact the Company's operations. The Company may be
unable to recover any or all increased costs of compliance from its customers
and the Company's business and financial condition may be materially and
adversely affected by future changes in applicable laws and regulations.
Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivatives and hedging. It requires that all
derivatives are recognized as either assets or liabilities at fair value and
establishes specific criteria for the use of hedge accounting. The Company's
required adoption date is January 1, 2001. SFAS 133 is not to be applied
retroactively to financial statements of prior periods. The Company expects no
material effect on consolidated results of operations, financial position, cash
flows or stockholders' equity upon adoption of SFAS 133.
In July 2001 the Financial Accounting Standards Board (FASB) issued SFAS No.
141"Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets." SFAS No. 141 requires business combinations initiated after June 30,
2001 to be accounted for using the purchase method of accounting, and broadens
the criteria for recording intangible assets separate from goodwill. Recorded
goodwill and intangibles will be evaluated against this new criteria and may
result in certain intangibles being subsumed into goodwill, or alternatively,
amounts initially recorded as goodwill may be separately identified and
recognized apart from goodwill. SFAS No. 142 requires the use of a
non-amortization approach to account for purchased goodwill and certain
intangibles. Under a non-amortization approach, goodwill and certain intangibles
will not be amortized into results of operations, but instead would be reviewed
for impairment and written down and charged to results of operations only in the
periods in which the recorded value of goodwill and certain intangibles is more
than its fair value. The provisions of each statement which apply to goodwill
and intangible assets acquired prior to June 30, 2001 will be adopted by the
Company on January 1, 2002. During the year ended December 31, 2000, the Company
determined that goodwill relating to previous acquisitions was impaired and
recorded a charge of $111.4 million to write-off all remaining goodwill. The
Company expects no material adverse effect on consolidated results of
operations, financial position, cash flows or stockholders' deficit upon
adoption of SFAS No. 142.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS 143 requires that obligations associated with the retirement
of tangible long-term assets be recorded as a liability when the obligations are
incurred. The statement is effective for fiscal years beginning after June 15,
2002, with earlier adoption encouraged. The Company does not expect any material
impact on the results of operations upon implementations of SFAS 143.
22
Accounting Pronouncements, Continued
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement establishes a single accounting
model for long-lived assets to be disposed of by sale based on the framework
established by SFAS 121. The statement is effective for fiscal years beginning
after December 15, 2001. The Company is currently assessing the new standard.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
The Company is exposed to market risk from changes in interest rates and fuel
prices. The Company manages its exposure to these market risks through its
regular operating and financing activities and may utilize fuel forward purchase
commitments, though no agreements were in place during the nine months ended
September 30, 2000.
Interest Rate Risk
The fair value of the Company's cash and cash equivalents at September 30, 2000
approximated carrying value due to its short-term duration. Market risk was
estimated as the potential decrease in fair value resulting from a hypothetical
10% increase in interest rates for the issues contained in the investment
portfolio and was not materially different from the year-end carrying value.
The Company has no material future earnings or cash flow exposures from changes
in interest rates related to the Company's equipment obligations, as these
long-term debt obligations have fixed rates. The fair value of the Company's
long-term debt, including current maturities, approximated carrying value at
September 30, 2000. A hypothetical 10% increase in the interest rates on the
Company's credit facility for a duration of one year would have an impact on
interest expense and cash flows of approximately $0.9 million.
Commodity Price Risk
The Company may use forward purchase commitments to reduce the exposure to
fluctuations in fuel prices by entering into short-term fuel price agreements
for the actual delivery of fuel. These forward purchase commitments have the
effect of locking in for specified periods the price the Company will receive
for the fuel volumes to which the forward purchase commitment relates. As a
result, while these forward purchase commitments are structured to reduce the
Company's exposure to increases in the price of fuel, they also limit the
benefit the Company might otherwise have received from any price decreases
associated with the fuel volumes. At September 30, 2000, the Company did not
have any outstanding forward purchase commitments.
23
PART II. - OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is subject to litigation incidental to its business including the
following:
On November 8, 2000, Philip J. Moore ("Moore") filed an action in the Circuit
Court of the Ninth Judicial Circuit in and for Orange County, Florida (Case No.:
CIO-00-8130) against the Company. Moore subsequently amended the Complaint to
add claims against Philip A. Belyew, President and Chief Executive Officer, and
T. Wayne Davis, Chairman, as individual defendants. Moore seeks damages for
breach of contract, breach of employment agreement, and fraud alleged in
connection with the acquisition of Fox Midwest Transport Group, Inc. ("Fox
Midwest"). The Company has asserted counterclaims against Moore based on the
failure to disclose material liabilities related to the acquisition of Fox
Midwest.
On November 16, 2000, Annemarie L. Warren and Paula E. Delawter, Trustees of
Transit Trust One ("Transit Trust One"), filed an action in the Superior Court
of the Commonwealth of Massachusetts (Civil Action No. 00-5099 A) against the
Company and Transit Group Transportation, LLC. This case was removed to the
United States District Court for the District of Massachusetts on November 27,
2000 (Case No. 00-CV-12427-PBS). Transit Trust One is seeking damages for breach
of contract, redelivery/replevin, and injunctive relief relating to certain
leased equipment including trailers and tractors. On February 5, 2001, the Court
entered a Settlement Order of Dismissal providing either party with the right to
reopen within ninety days if a settlement was not consummated. Thereafter,
Transit Trust One filed a motion to reopen the case. Subsequently, the parties
entered into a settlement agreement and Transit Trust One withdres its motion to
reopen the case. On November 13, 2001, Transit Trust One filed an action in the
Superior Court of the Commonwealth of Massachusetts against the Company, Transit
Group Transportation, LLC, and Carroll Fulmer & Co., Inc., alleging a default
under certain promissory notes owed to Transit Trust One in the aggregate amount
of $4,098,523, together with their attorneys fees and other costs.
On November 30, 2000, David L. Summitt ("Summitt") filed an action in Clark
Circuit Court, Clark County, Indiana (Cause No. 10-C01-0011-CP-636) against
Bestway Trucking, Inc., a company purchased by the Company. This case was
removed on December 21, 2000, to the United States District Court for the
Southern District of Indiana, New Albany Division (NA 00-251-C H/S). Summitt
filed this complaint for damages arising from the termination of a real estate
lease contract, for environmental clean-up costs allegedly arising from the
occupancy of the leased premises and for declaratory relief relating to the
enforceability of a non-competition and non-solicitation agreement executed by
Summitt for the benefit of the Company. The Company has vacated the leased
premises, answered the Amended Complaint and asserted a counterclaim for
interference with the use and possession of the leased property.
On December 14, 2000, Patricia H. Johnson, Kent L. Johnson, Kenneth F.
Johnson, Kimberly J. Riccio, Kevin L. Johnson, James W. Lake, Douglas P. Hadden,
Dana L. Quackenbush and James B. Stalker (former shareholders of KJ
Transportation, Inc.) filed an action in the Superior Court of Cobb County,
Georgia (Civil Action No.00-1-9879) against the Company, Philip A. Belyew and T.
Wayne Davis. The Plaintiffs seek damages from an alleged breach of the Agreement
and Plan of Reorganization pursuant to which the Company acquired KJ
Transportation, injunctive relief permitting them to compete with the Company,
and injunctive relief prohibiting the Company from indemnifying or defending
individual defendants Davis or Belyew. The Company has moved to dismiss the
action and to stay all discovery until that motion is resolved.
On August 7, 2001, Larry E. Wray filed an action in the Circuit Court of Gibson
County, Tennessee against Bestway Trucking, Inc. The Plaintiff alleges reverse
racial discrimination under Tennessee's Human Rights Act and infliction of
emotional distress in connection with the separation of his employment with the
Company. The prayer for relief requests $1 million in compensatory damages and
$10 million in punitive damages.
24
ITEM 2. Changes in Securities and Use of Proceeds
Modification and Issuance of Senior Securities
In connection with the Reorganization, the Company modified its Series A
convertible preferred stock to include certain limitations on dividend payments
and to extend the redemption periods.
In connection with the Reorganization, the Company also issued 2,969,750 shares
of Series B redeemable and convertible preferred stock. The Company's common
stock does not contain the rights, preferences and protections of the Company's
preferred stock. The issuance of the Series B preferred stock and the additional
shares of Series A preferred stock as a result of certain antidilution
provisions resulted in substantial dilution to the Company's common
stockholders. The dividend and redemption provisions of the preferred stock are
not attenant to the Company's common stock.
Private Placements
On April 19, 2001, the Company issued the following securities that were not
registered under the Securities Act of 1933:
. 2,194,570 shares of Series B preferred stock for $7.0 million in cash,
and payment of a placement fee;
. 95,000 shares of Series B preferred stock in satisfaction of an
aggregate $475,000 payable by the Company to its Chief Executive Officer
and to the former owners of a company that the Company acquired;
. 375,000 shares of Series B preferred stock in satisfaction of
approximately $1.875 million in dividends payable to the owner of the
Series A preferred stock;
. 300,000 shares of Series B preferred stock as a deferral fee to certain
holders of redemption rights;
. Presently exercisable warrants to purchase an aggregate of 17,601,276
shares of common stock at an exercise price of $3.00 per share;
. Presently exercisable options to purchase an aggregate of 17,601,276
shares of common stock at an exercise price of $.05 per share;
There were no underwriters involved in the issuance of the securities listed
above. The securities listed above were not offered or sold to the public. The
Company relied on the exemption contained in 4(2) of the Securities Act of 1933
and Regulation D promulgated thereunder.
Limitations on Payment of Dividends
The agreement governing the Company's new credit facility with Congress and the
restated credit agreement with the Company's prior lender as well as the
purchase agreement the Company entered into in connection with the sale of its
Series A preferred stock impose significant operating and financial restrictions
on the Company. The terms of any other financings the Company may obtain may do
so as well. These restrictions substantially limit or prohibit the Company from
taking various actions, including paying any dividends until such lenders are
paid in full.
ITEM 3. Defaults Upon Senior Securities
In 1999, the Company entered into a $150 million credit facility, which replaced
the existing $35 million revolving credit and term facility. This facility
contained customary financial covenants that include limitations on dividends,
indebtedness, mergers, sale of assets, and the repurchase of common stock.
Requirements also existed to maintain minimum levels of coverage for fixed
charges, assets, and consolidated net worth. The Company was not in compliance
with certain of the payment terms, covenants and provisions of this facility
from December 31, 1999 to April 19, 2001. As of September 30, 2000, the amount
of default was $105.6 million. The Company was also in default under the terms
of virtually all of its capital leases, equipment notes and operating leases
(the "Equipment Obligations") as of September 30, 2000, and the Company
classified all of these obligations as current.
25
Defaults Upon Senior Securities, Continued
In connection with the Reorganization, on April 19, 2001, the Company entered
into a new credit facility with Congress Financial Corporation ("Congress") and
the Company obtained an aggregate revolving credit facility of up to $30 million
based on certain lending formulas and bearing interest at 1.0% above the prime
rate. Congress will make an additional $29 million available under this credit
facility if the Company meets certain performance criteria. The new credit
facility has an initial term of two years with automatic annual renewals
thereafter. The Company is required to pay a fee upon early termination of the
new credit facility. Under its new credit facility, the Company will make
monthly payments of interest only, the exact amount of which will depend on the
outstanding loan amount and the Company's financial performance. All of the
Company's revenues are deposited in a cash management account, which amounts are
applied to the revolving loan. The Company's additional cash requirements are
drawn against such account to the extent funds are available under the terms of
the new credit facility. The amounts loaned under the Company's new credit
facility are collateralized by a security interest in all of the Company's
present and future assets.
On July 13, 2001, the Company received notice from Congress that the Company is
in default under the credit agreement because the Company failed to maintain a
tangible net worth of not less than $63 million and the Company failed to
furnish Congress with complete monthly financial statements within 30 days of
May 31, 2001. Because of these defaults, Congress has increased the interest
rate payable by the Company on the outstanding principal amount of the credit
facility by 2% per annum in excess of the interest rate otherwise in effect
under the credit facility and may demand immediate repayment of all amounts
outstanding on the facility.
On April 19, 2001, the Company also entered into an amended and restated credit
agreement with the bank group led by Bank One, N.A. ("Bank One"), the Company's
primary lenders prior to the new credit facility with Congress. The Company used
approximately $26.5 million of the proceeds from its new credit facility to
repay amounts owed under the Company's original credit facility with Bank One.
After the $26.5 million payment, approximately $74.5 million remained
outstanding under the Bank One original credit facility. The amended and
restated credit agreement with Bank One provides for two term loans. The first
term loan shall be in the amount of $49.5 million bearing interest at 10.5% and
will mature on September 30, 2005. Interest only payments will be due for the
first six months, with principal and interest payments due thereafter through
maturity. The second loan shall be in the amount of $25 million bearing interest
at 10.5% and shall mature on September 30, 2005. Interest is payable monthly and
the principal will be reduced by mandatory and voluntary payments. Mandatory
payments will include (i) 100% of the proceeds from the sale of certain assets
and collections under certain insurance policies, and (ii) 50% of excess cash
flow. The amounts loaned under both term loans are collateralized by a first and
second security interest in certain of the Company's assets. As consideration
for restructuring the Company's credit facility with Bank One, the Company
issued options to Bank One to purchase a total of 5% of the Company's common
stock on a fully diluted basis with an exercise price of $.05 per share and
warrants to purchase an additional 5% of the Company's common stock on a fully
diluted basis with an exercise price of $3.00 per share. As of November 14,
2001, the Company is in violation of certain covenants contained in its credit
agreement with Bank One. As a result, Bank One may demand immediate repayment of
all amounts outstanding under the credit agreement.
Due to restrictions under its credit facility, the Company did not make the
Series A preferred stock dividend payments in the aggregate amounts of
approximately $1.875 million from June 2000 through January 31, 2001. In
connection with the Reorganization, the Company and GE Capital Equity
Investments, Inc. agreed to convert these dividend payments into 375,000 shares
of the Company's Series B preferred stock. All dividends due on the Series A
preferred stock accruing after January 31, 2001 (approximately $1.3 million of
July 31, 2001) will accrue and will be paid in cash at such time as declared by
the Board of Directors. However, the credit agreements entered into by the
Company with certain of its lenders in connection with the Reorganization
prohibit the payment of any dividend until such lenders are repaid in full.
Therefore, the Company does not expect to declare or pay any dividends in the
foreseeable future.
The Company had approximately $1.1 million in preferred stock dividend payments
in arrearage at September 30, 2000, that relate to the period of June 2000
through September 30, 2000.
26
Item 4. Submission of Matters to a Vote of Security Holders
On June 8, 2001, the Company's shareholders acted by majority written consent
for the purpose of approving its Amended and Restated Articles of Incorporation,
which increased the Company's authorized common stock from 100,000,000 shares to
500,000,000 shares and increased the number of shares available for grant under
the Company's 1998 Stock Incentive Plan by 30,000,000. Holders of 17,062,950
shares, or 53.21% of the Company's outstanding common stock, voted for amending
and restating the Articles of Incorporation and increasing the number of shares
available for grant under the 1998 Stock Incentive Plan.
ITEM 5. Other Information
On October 23, 2000, the Company received a letter from The Nasdaq Stock Market
notifying the Company that its common stock had failed to maintain the minimum
bid price as required for continued listing on The Nasdaq Small Cap Market, and
its common stock was delisted at the opening of business on October 25, 2000.
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits Index
The following exhibits are filed as part of this report.
Exhibit
Number Description
3.1 Amended and Restated Articles of Incorporation
3.2 Amended and Restated Bylaws
4.1 Restructuring Agreement with General Electric Capital Corporation
4.2 Form of Option Agreement with Bank One N.A., AmSouth Bank, Branch
Banking and Trust, Bank of America, N.A., Compass Bank, National
Canada Finance LLC and Union Bank of California
4.3 Form of Warrant Agreement with Bank One N.A., AmSouth Bank,
Branch Banking and Trust, Bank of America, N.A., Compass Bank,
National Canada Finance LLC and Union Bank of California
10.1 (1) First Amendment to Purchase Agreement between Transit Group, Inc.
and GE Capital Equity Investments, Inc.
10.2 (1) Amendment and Joinder to Amended and Restated Registration Rights
Agreement
10.3 (1) Amendment to Stockholders Agreement
10.4 (1) Stock Purchase Agreement between Transit Group, Inc., Cynthia F.
Turner, Philip R. Fulmer, Timothy A. Fulmer, Barbara A. Fulmer,
Carroll A. Fulmer and T. Wayne Davis
10.5 (1) Amended and Restated Credit Agreement among Transit Group, Inc.,
Various Financial Institutions and Bank One, N.A., as agent
10.6 (1) Loan and Security Agreement by and among Congress Financial
Corporation (Southern), as Lender, and Transit Group, Inc.,
Transit Group Transportation, LLC, Carroll Fulmer and Company,
Inc., and Land Transportation, LLC, as Borrowers
10.7 (1) Agreement Between Transit Group, Inc., T. Wayne Davis and the ECD
Trust
10.8 Employment Agreement with James G. Overley
27
Exhibits and Reports on Form 8-K, Continued
10.9 Amendment to 1998 Stock Incentive Plan
11.1 Statement regarding computation of earnings per share
(1) Exhibits 10.1 through 10.7 are incorporated by reference to the
Current Report on Form 8-K filed on May 29, 2001.
B. Reports on Form 8-K
During the quarter covered by this report there were no reports on Form
8-K filed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: November 29, 2001 Transit Group, Inc.
By: /s/ Kenneth Ollwerther
----------------------
Kenneth Ollwerther, Chief Financial
Officer
28