UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ___________________ to _____________________
Commission file Number 33-29985-NY
THE FREIGHT CONNECTION, INC.
(Exact name of registrant as specified in its charter)
Delaware 8980 11-2994672
(State orjurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Identification
organization) Classification No.)
Code Number)
12900 Dupont Circle, Tampa, Florida 33626
(Address of principal executive offices)
Registrant's telephone number, including area code: (813) 854-1500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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, and (2) has been subject
to filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of deliquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
As of March 27, 1998, the aggregate market value of the voting
stock held by non-affiliates of the Registrant was approximately $ 785,400
As of March 27, 1998, the number of shares of Common Stock outstanding was
4,825,630
THE FREIGHT CONNECTION,INC.
REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant;
Compliance with Section 16(a) of the Exchange Act
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
Signatures
Item 1. Business
The Company: Organization and Changes of Control
The Company was organized under the laws of the State of Delaware on
December 16, 1987, under the name Taylor Equities, Inc. ("Taylor"). The Company
was formed as a "blank check" company, with its sole purpose being to offer its
stock to the public in a public offering and thereafter use the proceeds to find
an acquisition or merger candidate. On December 23, 1991, Taylor entered into
an Agreement and Plan of Merger (the "Merger Agreement") with The Freight
Connection, Inc., ("FCI") a Florida corporation organized in October 1983
("FCI") by Michael Jackson, former President of the Company, under the name
"Expert Freight of Tampa, Inc." FCI was organized as an intermodal marketing
company and carried on that business until its combination with Taylor, when
FCI was dissolved. The Company's name was changed from Taylor Equities, Inc.,
to The Freight Connection, Inc., and the officers and directors of FCI became
the officers and directors of the Company. As part of the initial public
offering, Taylor issued Class A and Class B warrants which expired on
February 12, 1997.
On July 14, 1993, Vitran, a corporation organized under the laws of the
Province of Ontario and having a principal place of business at 70 University
Avenue, Suite 350, Toronto, Canada, M5J 2M4, acquired 3,218,030 shares of the
Company's Common Stock, and a warrant to purchase an additional 1,536,970 shares
of the Company's Common Stock. Vitran is a North American multi-divisional
operating company providing services to the freight and environmental industries
with over 1,500 employees at seventy-five locations in Canada and the United
States. Vitran's Freight Services Group, of which the Company is a part,
provides a complete range of services for the movement of freight throughout the
continent, utilizing both highway and rail modes. Services include less than
truckload, full load, dedicated contract carriage, warehousing and inventory
management. Vitran solicits business between the United States and Canada as an
agent for the Company through a Vitran sales office in Toronto. Vitran and the
Company have an agreement that all intermodal trans-border rail shipments shall
be written by the Company, with Vitran's receiving an agency commission from the
Company for such business. Trans-border over-the-road shipments may be made by
the Company or other Vitran subsidiaries, depending on the type of service
required by the shipper of such freight. Each shipper has unique requirements
for the movement of its freight, including time, shipment size and volume, and
the shipper's inventory carrying costs. Vitran's common stock is traded on the
Toronto Stock Exchange under the symbol VTN.A and on NASDAQ under the symbol
VTNAF. See Item 13 of this Report.
Vitran acquired its shares of Common Stock pursuant to a subscription
agreement with the Company, which agreement required the Company to issue to
Vitran a warrant for the purchase of 1,536,970 shares of Common Stock at a price
of $.650631 per share exercisable through July 31, 1997. In exchange for said
3,218,030 shares and stock purchase warrant, Vitran paid the Company $1,000,000,
of which $698,093.15 was paid in cash and $301,906.85 was paid by the repayment
to Vitran of a $300,000 principal amount note, together with interest of
$1,906.85, due Vitran by the Company. The Company incurred that note obligation
to Vitran on June 15, 1993, as a bridge loan made pending Vitran's equity
investment consummated July 14, 1993. The stock purchase warrant expired on
July 31, 1997 as scheduled.
During 1997, Vitran purchased an additional 700,000 shares of the Company's
common stock, changing its ownership to 3,918,030 shares, or 81.19% of the
Company's outstanding common stock.
The Intermodal Industry
The Company provides intermodal transportation services and operates as
an intermodal marketing company. ("IMC"). Intermodal transportation involves
the movement of freight by more than one mode of transportation, principally
by truck or a combination of truck and rail.
For freight moving in excess of 500 miles, intermodal shipping often
represents a cost- effective alternative to over-the-road trucking. The Company
includes as its target market, freight which is currently being shipped via
intermodal transportation as well as freight moving in excess of 500 miles via
for-hire trucking companies and private trucking fleets. According to
statistics reported by the Intermodal Association of North America, ("IANA")
intermodal and truck revenue rose from $4.13 billion in 1996 to 4.76 billion, or
a growth of 14.5%. Of this, truck revenues grew by 34.8% and intermodal
revenue growth was 5.9%. (1)
Intermodal freight is divided equally into shipments generated
domestically and those generated by the import/export market, with international
movements slightly exceeding domestic traffic. Traditionally, the domestic
shipments have been long-haul truck movements, principally truckload.
Intermodal has primarily attracted long-haul freight of 700 miles to 1,000
miles or more; in some corridors, intermodal can be cost effective for
distances as short as 500 miles.
During the 1980's and 1990's, the United States rail industry
experienced substantial consolidation through the merger of several railroads.
The larger railroads disposed of less profitable short lines, allowing the
railroads to invest heavily to upgrade roadbeds, increase tunnel clearances,
build larger intermodal terminal facilities and improve their equipment and
technologies. These improvements helped to reduce transit times and improve
service, reduced freight and equipment damage, and allowed for greater
efficiencies through the cross-country movement on double stack container
trains. Intermodal became even more competitive over this same period due to
higher operating costs for the long-haul for-hire trucking companies,
particularly for shipments travelling long distances. During the latter part of
1997, there were several service issues surrounding the railroads which made
highway brokerage a viable alternative in order to ensure on-time delivery to
customers.
Due to the service issues surrounding the railroads, highway brokerage
has been gaining increased market share as mentioned above. According to IANA,
for the first time since reporting data, truck brokerage represented more than
50% of the total shipments generated by IMC's. (1) As a result of these
statistics and to remain competitive, the Company has made an effort to expand
its truck brokerage division.
- ------------------
(1) IANA IMC Market Activity Report, Intermodal Association of
North America, February 1998.
- ------------------
In January 1998, a seasoned truck brokerage manager was hired to
oversee the highway brokerage division which is based in the Atlanta, Georgia
office. This broker brought with him an established base of quality
carriers. As a result, the Company is able to provide cost effective
alternatives to intermodal transportation.
IMCs have created additional opportunities for intermodal shipping by
providing a full door-to-door service to their clients at a price and service
level that would not be available to the shipper on its own. IMCs assist the
railroads in balancing freight originating in or destined to specific geographic
regions, resulting in improved asset utilization. IMCs provide value to
shippers by passing on certain economies of scale by being volume purchasers
of rail and drayage service, providing access to a large equipment pool,
consolidating each carrier's invoice into one single invoice and handling the
logistics of an intermodal move.
Historically, establishing an IMC was easy because of the low capital
cost required to enter the carrier business. However, in the last few
years the railroads have restricted the number of IMCs with which they will
enter into wholesale contracts. They increasingly deal only with those that
can deliver certain volumes, and have in most cases required the posting of
financial guarantees before they will extend credit. In addition, market
conditions require that an IMC be able to demonstrate to carriers and shippers
its ability to interface with customers and carriers electronically. These
requirements limit the ability of start-up IMCs to enter the market and may
force small IMCs out of the market if they are unable to continue to meet these
requirements. The Company believes that this trend will be advantageous to the
Company. The Company believes that its financial resources, staff, and computer
hardware and software are sufficient to offer substantially the same or better
services than any of its competitors, and that the Company is able to compete
effectively with any other company engaged in its business.
Operations
The Company's services include the tracking of its customers' freight
in- transit, the daily reporting through electronic means of each load's status,
expediting each shipment to ensure it meets its schedule, and the consolidation
of all freight bills within a movement into a single door-to-door invoice,
regardless of how many carriers are utilized. The Company contracts with all
major U.S. railroads along with drayage carriers and independent stack train
operators. These contracts provide for volume discounts, the ability to
negotiate special commodity pricing and in some instances early payment
incentives in the form of rebates.
The Company believes that a primary component of its business strategy
is the continued improvement of its software and other technology to enhance its
information processing for its intermodal transportation services. The Company
believes that a significant portion of its future growth will depend on its
information technology and accordingly it continues to concentrate in this
area. The Company has several customers online with full electronic data
interchange of information from a shipment's original loading through
delivery at destination.
The Company is primarily a provider of intermodal transportation
services, yet it continues to expand its service capabilities as customers
increasingly outsource their transportation needs. The Company now performs
logistics functions for a small number of its clients and intends to expand
its logistics capabilities and offer new or additional services to meet or
exceed customer demands. These logistics functions include a more comprehensive
transportation management program, third party warehousing, arranging for
delivery to multiple locations over several states and other customized
logistics services.
The Company's Carrier Vendors
An important element of the Company's strategy is to
continue to build and strengthen its close working relationship with each of the
major intermodal railroads in the United States, Canada and Mexico. The Company
has contracts with each of the following Class 1 railroads;
Santa Fe/BN
Illinois Central
Norfolk Southern
Union Pacific/Southern Pacific
APL Stacktrain Service
Conrail
CSX Transportation
These contracts govern the terms of transportation with
each railroad, which include payment terms and the various services to be
provided by each rail. The Company negotiates with each railroad in an effort
to provide the best quality service at a favorable price to its client base.
These contracts usually have staggered renewal dates at which time the Company
revisits its volume with that rail and seeks to establish even more favorable
contracts for the continuing years, including rebates for volume shipments. The
Company is also able to negotiate special commodity pricing which provides price
discounts on certain commodities based on competitive factors. The special
pricing quotations are designed, in part, by the railroads to attract new
business that the railroads have not previously handled. In addition, certain
of these railroads offer rebates for fast payment of their invoices.
The Company also sees its local cartage ("drayage") and
over-the-road carrier base as an integral part of its operations, since the
Company's ability to perform on-time pick up and delivery of product is
partially based on the level of service provided by these carriers.
Accordingly, the Company has quality programs in place which monitor the
performance of each of its carriers. Service reports are generated monthly
and forwarded to each carrier, at which time, if service failures have
occurred, a corrective action is taken by both the Company and the carrier to
improve service levels. The Company's data base of carriers is maintained
and updated regularly to ensure that only approved carriers with adequate
insurance are available for use. The Company continues to seek out quality
carriers throughout North America to enhance its ability to provide faster
service and facilitate the Company's expansion.
The Company's Customers
The Company performs credit checks on all potential customers to ensure
that they are credit worthy and are able to meet the payment terms established
by the Company.
The Company has transportation agreements with various companies to
perform substantial portions of their transportation needs on agreed-upon
pricing terms for specified routes. Many of these agreements are verbal and
non-binding. Others are binding and in written form, but are cancelable on short
notice. All of the Company's agreements are based upon the Company's price
quotes as accepted by its customers. The quotation document sets forth all of
the terms of the agreement between the parties and includes a liability
disclaimer (see "Liability Issues," below). Quotation documents establish
pricing and delivery terms of freight, and are often used by shippers on a
continuous basis. All agreements based on the Company's written quotations
can be cancelled by either party at any time prior to shipment without penalty.
Intermodal transportation tends to be most beneficial for customers
shipping full truckloads longer than 500 miles. Many of the Company's customers
in the automotive, scrap metal, and spirit industries operate within a multi-
divisional environment. The Company does business with more than one division
of several of its principal customers, and is dependent on the various divisions
of such companies for a substantial portion of its business. As its agreements
with those customers are made on a divisional rather than a corporate basis,
management believes it is not likely that the Company would lose all of the
business of any of its principal customers if it were to lose the business of
any one of their divisions.
During the year ended December 31, 1997, the Company had sales to
various divisions of one major customer, an automobile manufacturer, which
amounted to 61% of total sales. The Company conducts its business with
this customer on a multi-divisional basis and the percentage provided in the
preceding sentence is for the aggregate of all divisions of this customer. The
Company has separate agreements with each division and the percentage of
business represented by each division is substantially less than the
corporate aggregate. The maximum percentage of sales by any one division is
approximately 9% of the Company's total sales.
Sales and Marketing
The Company believes that developing long-term relationships with its
client base is crucial to its continued growth. By developing these long-term
relationships, the Company is able to better understand its customers' needs and
is then able to customize its services to each client. The Company has an
extensive data base of existing and potential new clients to which it
continually markets its services.
The Company undertakes a variety of marketing initiatives, including
the use of direct surveys on a client-by-client basis to determine new or
additional customer needs and meet the demand. An approach to a new client
generally involves the assessment of that customer's transportation
requirements. In making its analysis, the Company reviews the customer's
business patterns and determines if the customer is maximizing its
transportation dollar. The Company also seeks to integrate itself into the
customer's environment to determine if there are additional logistic services
the Company can provide. The objective of the Company's analysis is to
market the Company's services by presenting to the customer a program of
reducing the customer's overall costs while offering the customer a superior
level of transportation service.
The Company regularly surveys its customers in order to continually
receive evaluations of the Company's performance, keep abreast of customer
needs, and develop leads for new business.
In an effort to further the Company's national exposure, the Company
opened sales offices in Atlanta, Georgia, and Los Angeles, California during
1996, and San Francisco, California in February 1998. In addition, the Company
utilizes a combination of outside commissioned sales agents and internal
marketing staff to support its sales efforts. Currently the Company has
commissioned agents in Melbourne, Florida, Atlanta, Georgia, Boston,
Massachusetts, Portland Oregon, and Salt Lake City, Utah. A unit of Vitran
based in Concord, Ontario, Canada represents the Company as its Canadian
agent. Each outside sales person receives a commission based on a percentage of
the fee generated on each movement. The Company is currently developing several
commission sales agreements in all major markets within North America.
In November 1996, the Company obtained its ISO-9000 certification,
which the Company believes will assist its national and international sales
efforts. ISO-9000 is a series of international standards for quality
management systems. The Company intends to obtain national exposure through
the use of advertising, periodic press releases and promotional mailings.
Computer Systems
The Company has invested in the purchase and development of computer
programs that provide pertinent tracking information to its customers on a daily
basis. The Company has also helped develop for its own use a program which
allows for the integration of scheduling, pricing and quotations, routing,
dispatch, tracing, billing and accounting systems for its internal operations.
With the Company's computer systems capability described in the
preceding paragraph, the Company can advise its customers on an hourly basis
of the exact location of any shipment. Every customer receives a daily shipment
tracking report which provides the location of each shipment in transit within
the United States, Mexico and Canada. This technology permits the Company to
solve problems with customers' shipments in many instances before they cause any
delay to the shipper.
All of the Company's offices are networked into the system so that
up-to-date information is always available for the customers of each location.
Liability Issues
Brokers such as the Company do not generally assume liability for loss
or damage to freight. Since the Company operates as a transportation broker
(that is, a company that finds a carrier to haul a shipper's freight) of
property and a shipper's agent, it does not take possession of the freight and
is therefore not liable for the carrier's failure to perform or the carrier's
negligent performance. The Company has a liability disclaimer as a part of
each freight agreement signed with its customers. This liability disclaimer
sets forth the Company's legal responsibilities and states that since the
Company is acting as a transportation intermediary and not a carrier, it will
not be liable for loss or damage resulting from the transportation of freight.
Although as a broker it is not responsible for loss of or
damage to freight, the Company will assist the shipper as its agent in the
claim collection process. The Federal Highway Administration does not require
a broker to carry cargo insurance, but it does require a broker's surety bond of
$10,000, the purpose of which is to show financial responsibility and provide
surety for arrangements with carriers and shippers.
Competition
The transportation services industry is highly competitive. The
Company competes against other IMCs, as well as brokers of freight, logistic
service companies and with railroads that attempt to market their own intermodal
services. The Company also completes with over the road carriers who have
entered the intermodal market by converting their long-haul traffic to
intermodal. Competition is based primarily on freight rates, quality of
service, reliability and transit times.
The Company competes with several other IMCs, such as The Hub Group,
Mark VII Transportation, AP Distribution, Alliance Shippers and GST Corporation,
and numerous small regional and local firms. Many of these firms have larger
gross revenues than the Company, however the Company believes that it is
an established IMC able to meet the requirements of railway carriers and
shippers and that it is competitive with the largest IMCs. With the trend
towards further consolidation in the industry, the Company believes that its
financial stability and its continual investment in information systems will
uniquely position the Company for continued growth both through external
sales development and the possible acquisition of other IMCs.
Employees
As of the date of this Report, the Company has twenty-six full-time
employees engaged in performing executive, administrative, marketing and
clerical duties. These employees are located in Tampa, Florida, Atlanta,
Georgia, and San Francisco, California. The Company has seven people
performing sales and administrative services in Los Angeles, California.
These people are paid through an outside agency. Management intends to add
employees throughout the coming year, as it deems necessary, in order to
provide continuous quality service.
Executive Officers of the Registrant
As of the date hereof, there are two executive officers of the
Company. Richard E. Gaetz serves as the President and Chief Executive
Officer of the Company. Mr. Gaetz has served in those capacities since October
11, 1996 at which time he replaced Michael Jackson. Geoff Duncan is the
Executive Vice President and Chief Operating Officer. He has served in those
capacities since November 15, 1996. Prior to that date, Mr. Duncan's positions
did not exist at the Company. For information as to Mr. Gaetz and Mr. Duncan's
prior business experience, see Item 10 of this Report.
Environmental Matters
The Company does not believe that compliance with federal, state and
local laws and regulations which have been enacted or adopted regulating
the discharge of materials into the environment will have any material adverse
impact upon the capital expenditures, earnings, or competitive position of the
Company.
Item 2. Properties
The Company's corporate headquarters are located in Tampa, Florida.
The Company leased approximately 5,000 square feet at 12900 Dupont Circle,
Tampa, Florida for the year ended December 31, 1997; 2,808 square feet was
useable office space and the remainder was warehouse space which could be
renovated upon expansion. The annual rent was $41,047 for the year ended
December 31, 1997. Upon expiration of the lease on January 31, 1998, the
Company signed a new lease for a period of two years. This lease is also for
5,000 square feet, and included the conversion of 1,392 square feet of
warehouse space into office space. Management feels that the resulting 4,200
square feet of useable office space is sufficient to meet the expansion goals
of the Company in the next two years. At the expiration of this lease in the
year 2000, the Company will re-evaluate its space needs and determine whether to
move to a larger facility or renew its existing lease arrangement.
The Company entered into a three year lease with a Vitran subsidiary
for office space in Atlanta, Georgia on May 10, 1997. Rent expense incurred
under this lease for the year ended December 31, 1997 was $8,000. Due to the
expansion of the truck brokerage division in Atlanta, Georgia, the Company will
require additional office space during 1998.
The Company entered into a one year lease on August 25, 1997 for an
executive suite in Los Angeles, California. Prior to the lease, the Company
rented a smaller space on a monthly basis in the same building. This lease will
be reviewed at the end of its term to determine if additional space is
required. Rent expense under this lease for the year ended December 31, 1997
was $10,800.
In February 1998, the Company signed a two year lease in San Francisco,
California for its new sales office.
The Company's offices in Atlanta, Georgia, Los Angeles, California and
San Francisco, California are sales offices with operations support. The
executive offices and the accounting offices are located in the Tampa, Florida
facility.
Item 3. Legal Proceedings
On June 14, 1993, the Company entered into an agreement with a
stockholder and his wife to liquidate their investment in the Company. As
part of the agreement, the former President personally guaranteed that the
stockholder would receive no less than $360,000 from the sale of their shares in
the Company. The Company agreed to issue up to an additional 35,000 shares to
the stockholder in the event that the proceeds were less than $360,000.
In November 1996, the Company, its former President, and
its directors were sued by the above mentioned shareholder for civil damages
which the plaintiff alleges arose from breach of the June 14, 1993 agreement.
The suit was filed in Hillsborough County, Florida, Circuit Court, in a case
captioned Robert Johnston v. The Freight Connection, Inc., Michael Jackson,
Richard E. Gaetz, Albert Gnat, and Richard D. McGraw (Case No. 96-07867). On
July 7, 1997, the plaintiff filed a voluntary notice of dismissal with prejudice
against all of the defendants, including the Company. Prior to the dismissal,
on July 3, 1997, the Company and Michael Jackson entered into a settlement
agreement pursuant to which (i) the Company and Mr. Jackson agreed to exchange
mutual general releases; (ii) Mr. Jackson agreed that he would not, for a period
of approximately one year, solicit customers of the Company or employees of the
Company or its parent company, Vitran Corporation Inc.; (iii) Mr. Jackson agreed
that the exercise period of his options as to 80,000 shares of the Company's
common stock expire August 22, 1999; (iv) Mr. Jackson agreed to repay a $14,000
loan to the Company; and (v) Vitran Corporation Inc. agreed to purchase from Mr.
Jackson 600,000 shares of the common stock of the Company for consideration of
$450,000. As a condition of the settlement agreement, Mr. Jackson was required
to settle the captioned litigation as to all defendants, including the Company,
which was accomplished on July 7, 1997.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fiscal
year covered by this Report.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
The Company's Common Stock is quoted on the NASD electronic
bulletin board and in the "pink sheets" under the symbol FTCN. There has
never been an active trading market for the Company's Common Stock, nor does
one now exist.
The National Quotation Bureau, Inc., has advised the Company that the
following bid quotations have been reported:
Bid Prices
Period High Low
January 1 - March 31, 1996 1.00 .06
April 1 - June 30, 1996 1.00 1.00
July 1 - September 30, 1996 1.00 .75
October 1 - December 31, 1996 .88 .38
January 1 - March 31, 1997 .75 .63
April 1 - June 30, 1997 1.38 .50
July 1 - September 30, 1997 .88 .75
October 1 - December 31, 1997 .75 .63
Such quotations reflect inter-dealer prices, without retail mark-up,
mark- down or commission. Such quotes are not necessarily representative of
actual transactions, or of the value of the Company's securities, and are
in all likelihood not based upon any recognized criteria of securities
valuation as used in the investment banking community.
The Company has been advised that three member firms of the NASD are
currently acting as market makers for the Common Stock. However, there are no
meaningful trading transactions currently for the Company's stock, nor have
there ever been any such transactions.
The Company believes that the absence of
such transactions is due in substantial part to its shares of Common Stock
being held by few individuals. There is no assurance that an active trading
market will develop which will provide liquidity for the Company's existing
shareholders.
Neither the Company's certificate of incorporation, its by-laws, nor
any agreement to which it is a party restricts the payment of dividends.
However, a loan agreement established between Republic Bank, St. Petersburg,
Florida and the Company contains certain covenants concerning the Company's net
worth and ratio of debt to net worth. Payment of dividends could be restricted
if such payment would cause the Company to violate either of these covenants.
The Company has not paid any dividends on its Common Stock.
As of March 18, 1998, there were twenty-seven holders of record of the
Company's Common Stock. Certain of the shares of Common Stock are held in
"street" name and may, therefore, be held by several beneficial owners.
Item 6. Selected Financial Data
The following data illustrates the results of operations for the years
ended December 31, 1995, 1996 and 1997, respectively. The data has been derived
from and should be read in conjunction with, the Company's Financial Statements
and related notes included elsewhere in this Report. All data has been derived
from the Company's audited financial statements.
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
(000's omitted) 1995 1996 1997
Freight income $20,014 $22,173 $26,333
Freight expense 18,044 20,184 23,947
Gross profit 1,970 1,989 2,386
Selling, general
and administrative
expenses 1,142 1,486 1,673
Depreciation and
amortization 99 62 69
Income from
operations 729 441 644
Other income
(expenses) 4 10 21
Income before
taxes 733 451 665
Income tax
expense 285 180 200
Net income $ 448 $ 271 $ 465
Net income per share $ .09 $ .06 $ .10
Financial Position
Working capital $ 1,233 $ 1,405 $ 1,899
Total Assets $ 3,295 $ 3,759 $ 4,657
Stockholders'
Equity $ 1,444 $ 1,698 $ 2,163
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction
with the Financial Statements appearing elsewhere in this Report. The
information which follows includes results of the years ended December 31,
1995, 1996 and 1997, respectively.
Liquidity and Capital Resources
The Company has increased its working capital from $1,404,775 at
December 31, 1996 to $1,899,316 at December 31, 1997, an increase of 35.2%. The
increase is primarily due to the net income generated by the Company. The
Company intends to use this working capital to expand its operations by
opening sales offices in various geographic locations.
The cash position of the Company at December 31, 1997 was $1,285,929
compared to $173,911 at December 31, 1996. The rise in cash can be attributed
to the efforts made by the credit department to collect monies owed the
Company on a timely basis. In addition, at December 31, 1996, one of the
Company's customers had a substantial amount of past-due balances, the
majority of which was collected during 1997.
Concurrent with the rise in cash was a decrease in accounts
receivable. The accounts receivable balance at December 31, 1997 and 1996, was
$3,025,938 and $3,233,861, respectively, a decrease of 6.4%. This is in
contrast to the rise in the accounts payable balance from $2,018,059 to
$2,425,517 between December 31, 1996 and 1997, respectively, an increase of
20.2%. Generally, as revenues increase, accounts receivable and accounts payable
will also increase. Due to the significant collection of past due balances
during 1997, even though revenues increased by 18.8%, the accounts receivable
balance decreased.
The Company had a net increase in cash from operations of $1,163,423
and $164,687 for the years ended December 31, 1997 and 1995, respectively.
For the year ended December 31, 1996, the Company had a net reduction in cash
from operations of $600,179. The net increase in cash from operations for
the year ended December 31, 1997 was primarily due to the net income of
$464,671 for the year, combined with the decrease in the accounts receivable
balance and the increase in the accounts payable balance. The net reduction
in cash from operations at December 31, 1996 was primarily due to the
significant increase in the accounts receivable balance from December 31,
1995, partially offset by the rise in accounts payable and the net income
produced during the year. The net increase in cash from operations for the
year ended December 31, 1995, was due primarily to the net income generated,
combined with the rise in income taxes payable and offset by the rise in
accounts receivable.
The Company continues to purchase assets as it deems necessary. For
the year ended December 31, 1997, the Company purchased $51,405 in fixed
assets, the majority of which was computer software and equipment. For the
year ended December 31, 1996, the Company expended $165,712 on fixed assets,
including $81,995 for the purchase of an IBM AS200.
Stockholders' equity was $2,162,947 at December 31, 1997, up
$464,671,or 27.4% from December 31, 1996. Earnings per share at December 31,
1997 were $.10, compared to $.06 and $.09, at December 31, 1996 and 1995,
respectively.
In compliance with provisions in the Company's contracts with certain
railroads, the Company has obtained an unsecured surety bond in the amount of
$150,000. In addition the Federal Highway Administration requires the Company
to maintain a surety bond in the amount of $10,000, which is secured by a
certificate of deposit.
On August 18, 1997, the Company renewed its revolving line of credit
with Republic Bank, St. Petersburg, Florida, in the amount of $2,000,000.
This line is secured by the Company's accounts receivable. The Company
intends to use the line to provide cash required by the Company's acceptance
of new business and for the possible opening of new sales offices. The
Company does not have any outstanding bank debt as of the date of this
Report, nor did it have any bank debt at December 31, 1997.
At December 31, 1997 and 1996, the Company did not have any capital
lease obligations.
Results of Operations
Revenues for the year ended December 31, 1997 were $26,333,344, up
18.8%, or $4,160,405, from the year ended December 31, 1996 and up $6,319,369 or
31.6% from the year ended December 31, 1995. Revenues for the year ended
December 31, 1996 were up 10.8% from December 31, 1995. The Company is
increasing revenues by (i) obtaining additional business from existing
customers (ii) targeting new customers through marketing efforts and (iii)
opening additional sales offices as opportunities arise. The Atlanta, Georgia
office and the Los Angeles office
contributed to revenues for the entire year in
1997, as compared to 1996 when each office produced revenues for only a
portion of the year. Revenues for the years ended December 31, 1997, 1996 and
1995 included accounts receivable credit balances in excess of 12 months less
certain allowances resulting in a net increase to revenues ("additional income")
of $113,356, $78,000 and $283,000, respectively.
The gross profit margin was 8.7%, 8.6%, and 8.6% (before additional
income), for the years ended December 31, 1997, 1996 and 1995, respectively.
The industry is extremely competitive, resulting in only marginal growth in the
gross profit margin. Additionally, more of the Company's business was obtained
through commissioned agents, resulting in less margin for the Company. The
Company is continuing to expand its highway brokerage division, which should
improve the gross profit margin as these moves generally offer higher profit
margins.
The Company's selling, general and administrative expenses ("SG&A")
were $1,672,807, or 6.4% of revenues for the year ended December 31, 1997,
compared to $1,486,167, or 6.7% of revenues for the year ended December 31, 1996
and $1,142,621, or 5.7% of revenues for the year ended December 31, 1995. In
1996, the Company incurred various start-up expenses associated with the
opening of new sales offices. This resulted in a higher SG&A percentage.
The Company's goals are to continue to improve administrative efficiencies
within its various offices.
The pre-tax income of the Company was $664,415, or 2.5% of revenues
for the year ended December 31, 1997, compared to $450,962, or 2.0% of revenues,
and $733,367, or 3.7% of revenues, for the years ended December 31, 1996 and
1995, respectively. The pre-tax income in 1996 was impacted by the net
start-up losses of $147,346 for the new sales offices. The large pre-tax
income in 1995 was primarily due to the $283,000 of additional income.
Income tax expense for the years ended December 31, 1997, 1996, and
1995, was $199,744, $180,000, and $285,000, respectively. The tax expense
for the year ended December 31, 1997 was reduced by the Company's booking of
a deferred tax asset in the amount of $58,256.
Net income for the years ended December 31, 1997, 1996, and 1995, was
$464,671, $270,962, and $448,367, respectively. The Company had been
profitable during these years due to its efforts to increase volume, maintain
margins and control SG&A expenses.
The Company will continue to market its services and promote its
ISO 9002 registration. In addition it will strive to open sales offices and
obtain sales representation in the major geographic areas. As part of this
commitment to growth, the Company opened a sales office in San Francisco,
California in 1998 and obtained sales representation in Portland, Oregon and
Salt Lake City, Utah.
Item 8. Financial Statements and Supplementary Data
Independent Auditors' Report
To the Shareholders and Board of Directors
The Freight Connection, Inc.
We have audited the accompanying balance sheets of The Freight Connection, Inc.
as of December 31, 1997 and 1996, the related statements of income,
stockholders' equity and cash flows for the years ended December 31, 1997,
1996 and 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statements presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Freight Connection, Inc.
as of December 31, 1997 and 1996, the results of its income and its cash
flows for the years ended December 31, 1997, 1996 and 1995, in conformity
with generally accepted accounting principles.
/s/ Margolies, Fink and Wichrowski
February 4, 1998
Pompano Beach, Florida
THE FREIGHT CONNECTION, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
Current assets: 1997 1996
Cash and cash equivalents (Note 1) $1,285,929 $ 173,911
Accounts receivable -trade, net of
allowance for uncollectible accounts
of $201,053 and $133,540, respectively
(Notes 8 and 10) 3,025,938 3,233,861
Deferred Tax Asset (Note 7) 58,256
Prepaid expenses and other receivables 23,556 57,485
Total Current Assets 4,393,679 3,465,257
Property and equipment (net of accumulated
(depreciation) (Notes 1 and 2) 207,448 230,798
Deposits and other assets 56,183 62,703
$4,657,310 $3,758,758
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses
(Note 3) $2,425,517 $2,018,059
Income taxes payable 68,846 42,423
Total Current Liabilities 2,494,363 2,060,482
Stockholders' Equity (Note 5)
Common stock, $.001 par value;
authorized 20,000,000 shares;
4,825,630 shares issued and
outstanding 4,826 4,826
Additional paid-in capital 918,982 918,982
Retained earnings 1,239,139 774,468
Total Stockholders' equity 2,162,947 1,698,276
$4,657,310 $3,758,758
The accompanying notes are an
integral part of these financial statements.
THE FREIGHT CONNECTION, INC.
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
Freight Income $26,333,344 $22,172,939 $20,013,975
(Note 7)
Freight expense 23,947,680 20,184,096 18,043,660
Gross profit 2,385,664 1,988,843 1,970,315
Selling, general
and administrative
expenses 1,672,807 1,486,167 1,142,621
Depreciation and
amortization 68,691 61,809 98,927
Income from
operations 644,166 440,867 728,767
Other income(expenses):
Interest and
dividend income 28,598 21,227 16,805
Interest expense ( 8,349) (11,607) (11,775)
Other - 475 (430)
Total other income
(expenses) 20,249 10,095 4,600
Income before income
taxes 664,415 450,962 733,367
Income tax expense
(Notes 1 & 7) 199,744 180,000 285,000
Net income $ 464,671 $ 270,962 $448,367
Net income per
share(Note 1) $ .10 $ .06 $ .09
Weighted average
shares outstanding 4,825,630 4,825,630 4,825,630
The accompanying notes are an
integral part of these financial statements.
THE FREIGHT CONNECTION, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Common Stock Additional
Number of Par paid-in Retained
Shares Value capital earnings Total
Balance,
January 1, 1995 4,815,430 $ 4,815 $910,443 $55,139 $970,397
Issuance of
common stock 10,200 11 25,489 25,500
Net income year
ended December
31, 1995 - - - 448,367 448,367
Balance
December 31, 1995 4,825,630 4,826 935,932 503,506 1,444,264
Refund of a portion
of the proceeds from
the issuance of common
stock (16,950) (16,950)
Net income year
ended December
31, 1996 - - - 270,962 270,962
Balance
December 31, 1996 4,825,630 4,826 918,982 774,468 1,698,276
Net income year
ended December
31, 1997 - - - 464,671 464,671
Balance
December 31, 1997 4,825,630 $ 4,826 $918,982 $1,239,139 $2,162,947
The accompanying notes are an
integral part of these financial statements.
THE FREIGHT CONNECTION, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
Cash flows from operating
activities:
Net Income $464,671 $270,962 $448,367
Adjustments to reconcile
net income to net cash
provided by(used in)
operating activities:
Depreciation and
amortization 68,691 61,809 98,927
Deferred tax asset(net) (58,256)
Loss on disposal of
fixed assets 6,064
Changes in assets and
liabilities:
Accounts receivable 207,923 (1,218,672) (386,196)
Prepaid expenses and
other receivables 33,929 34,955 ( 49,067)
Deposits and other
assets 6,520 21,853 ( 7,292)
Accounts payable and
accrued expenses 407,458 323,578 ( 77,139)
Income taxes payable 26,423 ( 94,664) 137,087
Total adjustments 698,752 ( 871,141) (283,680)
Net cash provided by
(used in)operations 1,163,423 ( 600,179) 164,687
Net cash used in
investing activities:
Purchase of fixed assets (51,405) ( 165,712) (98,939)
Cash flows(used in)
provided by financing
activities:
Return of capital to
warrant holders ( 16,950)
Issuance of common stock 25,500
Long-term capital
lease obligations - ( 18,797) (46,031)
Net cash used in
financing activities - ( 35,747) (20,531)
Net increase(decrease)
in cash and cash
equivalents 1,112,018 ( 801,638) 45,217
Cash and cash
equivalents, beginning
of period 173,911 975,549 930,332
Cash and cash
equivalents, end of
period $ 1,285,929 $ 173,911 $ 975,549
Supplemental
disclosure:
Cash paid for interest $ 8,349 $ 9,814 $ 11,775
Cash paid for income
taxes $ 229,800 $ 274,664 $146,500
The accompanying notes are an
integral part of these financial statements.
THE FREIGHT CONNECTION, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and basis of presentation
The Company operates as a transportation freight broker and coordinates both
truck and rail shipments from point of origin to delivery at destination for its
clients' freight shipments. The Company is responsible for paying carriers for
hauling the freight and extends credit to its clients for the shipment. The
Company's primary office facilities are located in Tampa, Florida with
additional sales offices located in Atlanta, Georgia, Los Angeles,
California, and Toronto, Ontario.
Cash equivalents
Cash equivalents are short-term, highly liquid investments readily convertible
to known amounts of cash and so near their maturity that they present
insignificant risk of changes in value because of changes in interest rates.
Property and equipment
Property and equipment are carried at cost. The Company provides depreciation
for financial purposes over the estimated useful lives of fixed assets using the
straight-line method. Upon retirement or sale of fixed assets, their net book
value is removed from the accounts and the difference between such net book
value and proceeds received is recorded in income. Expenditures for
maintenance repairs are charged to expense; renewals and improvements are
capitalized.
Revenue recognition
The Company recognizes freight revenue, freight charges, and expenses when the
shipment leaves its point of origin. Revenues are recorded net of allowances.
Accounts receivable credit balances are taken into revenue after twelve months.
Quick-pay rebates are recognized in the month earned, and volume rebates are
recorded monthly or annually per the individual contract agreement.
Fair value of financial instruments
The fair value of the Corporation's financial instruments such as accounts
receivable and accounts payable, approximate their carrying value.
Accounting estimates
The Management of the Corporation occasionally uses accounting estimates in
determining certain revenues and expenses. Estimates are based on subjective as
well as objective factors and, as a result, judgement is required to estimate
certain amounts at the date of the financial statements.
Income taxes
The Company has adopted Statement of Financial Accounting Standard No. 109
"Accounting for Income Taxes" which requires an asset and liability approach to
financial accounting for income taxes. Deferred income tax assets and
liabilities are computed annually for the difference between the financial
statement and tax bases of assets and liabilities that will result in taxable or
deductible amounts in the future, based on enacted tax laws and rates applicable
to the periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the tax
payable or refundable for the period, plus or minus the change during the
period in deferred tax assets and liabilities.
Net income per share
Net income per share is computed by dividing net income by the average number of
common shares outstanding, increased by common stock equivalents determined
using the treasury stock method. For the years ended December 31, 1996 and 1995
outstanding warrants have not been reflected in the computation of earnings per
share because the market price of the common stock outstanding has not been in
excess of the warrant exercise price. At December 31, 1997 all warrants have
expired.
2. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996 consist of the following:
1997 1996
Computer software $ 67,050 $ 43,050
Leasehold improvements 4,726
Office furniture and equipment 286,599 271,403
353,649 319,179
Less accumulated depreciation 146,201 88,381
$207,448 $230,798
Depreciation and amortization expense for the years ended December 31, 1997,
1996 and 1995, were $68,691, $61,809, and $98,927, respectively.
3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 1997 and 1996 consist of
the following:
1997 1996
Accounts payable trade $2,130,646 $1,528,968
Accounts receivable credit balances 221,098 409,740
Accrued expenses 73,773 79,351
$2,425,517 $2,018,059
4. LEASES
The Company leases various office facilites under non-cancelable operating
leases which expire between the years 1998 and 2000. The Company also leases
office equipment under non-cancelable operating leases which expire over the
next five years. Rent expense incurred under these leases was $69,620,
$57,768, and $57,647, for the years ended December 31, 1997, 1996 and 1995,
respectively.
Future minimum lease payments for operating leases with initial terms in excess
of one year as of December 31, 1997 are as follows: 1998 - $99,108, 1999 -
$76,053, 2000 - $16,798, 2001 - $2,337, 2002 - $195.
5. STOCKHOLDERS' EQUITY AND WARRANTS
The Company issued 400,000 Class A, and 400,000 Class B warrants with an
exercise price of $2.50 and $5.00, respectively in conjunction with its
initial public offering.
During December 1994, 12,400 Class A warrants were exercised at $2.50 per share
and converted into 12,400 shares of common stock. During the year ended
December 31, 1995 an additional 10,200 Class A warrants were exercised at
$2.50 per share and converted into 10,200 shares of common stock.
On December 7, 1995, the Board of Directors voted to extend the exercise date
of both the Class A and Class B warrants until February 12, 1997. At the same
time, the exercise price of the Class A warrants was reduced to $1.75 and the
exercise price of the Class B warrants was reduced to $2.50 per share of common
stock.
In April 1996, the Company refunded $16,950 of the proceeds received from the
exercise of these warrants due to the reduction in exercise price.
6. FREIGHT INCOME
Freight income includes rebate income, late charge income, and accounts
receivable credit balances in excess of twelve months. These items totaled
$504,513, $197,757, and $423,269, for the years ended December 31, 1997, 1996,
and 1995, respectively.
7. INCOME TAXES
The provision for income taxes consisted of the following:
December 31,
1997 1996 1995
Current:
Federal $219,800 $153,300 $249,500
State 38,200 26,700 35,500
Deferred:
Federal ( 49,600)
State ( 8,656)
$199,744 $180,000 $285,000
Reconciliation of the Company's provision for income taxes to the federal
statutory rate is as follows:
Year ended Year Ended Year ended
December 31, December 31, December 31,
1997 1996 1995
Statutory rate
applied to income
before income
taxes $225,900 34.0% $153,300 34.0% $249,500 34.0%
State income tax
net of federal
benefit 35,300 5.3% 16,200 3.6% 26,400 3.6%
Utilization of
net operating loss ( 6,500) (.7)%
Recognition of
deferred tax asset (58,256) (8.8)%
Other ( 3,200) 0.5% 10,500 2.3% 15,600 2.0%
$199,744 31.0% $180,000 39.9% $285,000 38.9%
The components of deferred tax assets and liabilities were as follows:
December 31
1997 1996
Deferred tax asset:
Accounts receivable reserve $80,220 $52,214
Deferred tax liability:
Depreciation (21,964) (4,879)
58,256 47,335
Valuation allowance - (47,335)
Total deferred tax asset $58,256 $ -
SFAS No. 109 requires a valuation allowance to be recorded when it is more
likely than not that some or all of the deferred tax asset will not be
realized. At December 31, 1996 a valuation allowance for the amount of the
net deferred tax asset was recorded because of uncertainties as to the amount of
taxable income that would be generated in future years. As a result of the
Company's likelihood for future continuing profitability, management has
determined that more likely than not, future taxable income will be
sufficient to enable the Company to realize all of its deferred tax assets.
Accordingly, current period tax expense has been reduced by the reduction of
the prior years deferred tax asset, and no valuation allowance has been
recorded at December 31, 1997.
8. RELATED PARTY TRANSACTIONS
The Company transacts business with various subsidiaries of its parent Company,
Vitran Corporation Inc. Billings to these companies approximated $123,000,
$52,000, and $26,000, for the years ended December 31, 1997, 1996 and 1995,
respectively. Billings from these companies approximated $75,000, $52,000, and
$70,000, for the years ended December 31, 1997, 1996 and 1995, respectively. At
December 31, 1997 and 1996 accounts receivable from these companies approximated
$15,000 and $20,950, respectively, and accounts payable to these companies
approximated $9,200 and $870, respectively. Included in billings from
companies are rent charges for a facility leased from a related party.
9. ECONOMIC DEPENDENCY
During the years ended December 31, 1997, 1996 and 1995, sales to two major
customers exceeded 10% of the Company's total sales. One of the customers, an
automobile manufacturer, accounted for 61%, 72% and 65% of total sales, and the
other, a distributor of wines and spirits, accounted for 4%, 11%, and 10% of the
total sales for the years ended December 31, 1997, 1996 and 1995,
respectively. In addition, the Company is dependent upon its continuing
business relationship with its freight carriers, particularly the railroads.
10. CONCENTRATION OF CREDIT RISK
The Company's financial instruments subject to credit risk are primarily trade
accounts receivable. The Company does not require collateral or other security
to support customer receivables. The Company's clients generally pay in thirty
days or less; however, occasionally payments are not received until invoices age
to 60 days. Other concentrations of credit risk with respect to trade
receivables are limited due to the dispersion of the majority of the Company's
customers across different industries throughout North America. The rail
carriers generally draft the Company's bank accounts for payment. The carrier
is responsible to the client for lost or damaged merchandise, therefore, the
Company does not assume liability for such loss, if any. During the year, the
Company has maintained cash balances in excess of the Federally insured limits.
The funds are with a major money center bank. Consequently, the Company does
not believe that there is a significant risk in having these balances in one
financial institution.
11. STOCK OPTIONS
During May 1996, the Company adopted a Stock Option Plan (the "Plan") whereby
employees of the Company may be granted incentive or non-qualified options to
purchase shares of the Company's common stock. The Board of Directors has
direct responsibility for the
administration of the Plan. The exercise price of
the incentive options to employees must be equal to at least 100% of the fair
market value of the common stock at the date of grant. The exercise price of
incentive options to officers, or affiliated persons, must be at least 110%
of the fair market value as of the date of the grant. At December 31, 1997,
the Company has granted 261,000 stock options at an exercise price ranging
from $.75 to $1.25; of this total, 187,000 incentive stock options were
vested but not exercised. The stock options vest at various rates over
periods up to five years.
12. COMMITMENTS AND CONTINGENCIES
On August 18, 1997, the Company renewed a line of credit agreement with a
commercial bank for $2,000,000, which expires on September 1, 1998. Interest is
at the lower of the London Interbank Offer Rate plus 250 basis points or the
bank's base rate. Any outstanding principal balance plus unpaid interest is due
on demand. The line is secured by the Company's accounts receivable and fixed
assets. As of December 31, 1997, no amounts are outstanding on this credit
line.
THE FREIGHT CONNECTION, INC.
SCHEDULE II - Amounts receivable from related parties and underwriters,
promoters and employees other than related parties.
Years Ended December 31, 1997, 1996 and 1995
Balance
Balance at Deductions At End
Beginning Amounts Amounts of Period
Name of Debtor of Year Additions Collected Written off Noncurrent
Year Ended
December 31, 1995
James Ingram $45,936 --- --- --- $45,936
Year Ended
December 31, 1996
James Ingram $45,936 --- --- --- $45,936
Year Ended
December 31, 1997
James Ingram $45,936 --- --- $45,936 $ 0
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Effective August 1, 1997, Mark V. Wichrowski left Sweeney and Company,
P.A., where he was audit engagement partner for the Company, to join the
accounting firm of Margolies, Fink, and Wichrowski. On December 1, 1997, the
Company dismissed the firm of Sweeney and Company, P.A. as its independent
accountant, replacing them with Margolies, Fink and Wichrowski, Certified Public
Accountants.
The report of Sweeney and Company, P.A. on the financial statements
of the Company for the past two fiscal years contained no adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty,
audit scope, or accounting principles.
The Company's Board of Directors participated in and approved the
decision to change independent accountants.
In connection with the audits for the years ended December 31, 1996 and
1995, and through December 1, 1997, there have been no disagreements with the
former accountants on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of the former accountants,
would have caused them to make references to the subject matter of the
disagreement in their report on the financial statements for such year.
During the year ended December 31, 1996, and through December 1, 1997,
there were no reportable events (as defined in Regulation S-K, Item 304 (a) (1)
(v)) with Sweeney and Company, P.A.
Sweeney and Company's letter agreeing to the above statements is
filed as an exhibit to this Report.
PART III
Item 10. Directors and Executive Officers of the Registrant;
Compliance with Section 16 (a) of the Exchange Act.
The Directors and Executive Officers of the Company are as
follows:
Name Age Position
Richard E. Gaetz 40 Officer, Director
Geoff Duncan 49 Officer
Albert Gnat 59 Director
Richard D. McGraw 54 Director
Richard E. Gaetz has been the President of Freight Services Group of
Vitran since August 1989. From October 1987 to August 1989, he was
Vice-President, Clarke Transport Canada. Effective October 11, 1996, Mr.
Gaetz began serving as the Company's President and Chief Executive Officer.
Geoff Duncan has been Executive Vice-President since November 1996.
From May 1996 through November 1996, he was Vice President of Sales and
Marketing. Prior to joining the Company, he was Vice-President of Sales and
Marketing at APL.
Albert Gnat has been Vice-Chairman of the Board and a director of
Vitran since 1983. He is a partner in the law firm of Lang Michener,
Toronto, Ontario, Canada.
Richard D. McGraw has been the President, Chief Executive Officer
and a director of Vitran since 1983.
Messrs. Gaetz, Gnat and McGraw were elected directors of the Company on
December 1, 1993, pursuant to the July 1993 shareholders agreement between Mr.
Jackson and Vitran. Vitran may be deemed a "parent" of the Company under
Securities Act Rule 405. See Item 13 of this Report.
Directors are elected to serve for one (1) year or until the next
annual meeting of shareholders and until their successors have been elected
and have qualified. Executive officers are elected to serve at the
discretion of the directors for one (1) year or until the first meeting of
the Board of Directors following the next annual meeting of shareholders and
until their successors have been elected and have qualified.
No compensation is paid to any director, as such, for his or her
services, but, by resolution of the Board of Directors, a fixed sum or
expense for actual attendance at each regular or special meeting by the Board
may be authorized.
Compliance with Section 16(a) of the Exchange Act
The Company does not have a class of equity security which is
registered pursuant to Section 12 of the Securities Exchange Act of 1934.
Accordingly, no compliance with Section 16(a) of the Exchange Act is required of
any officer, director, or principal shareholder.
Item 11. Executive Compensation
The following table sets forth, for the fiscal years ended December 31,
1995, 1996 and 1997, all compensation of the Company's Chief Executive Officer
and Chief Operating Officer. No other executive officer or director of the
Company received total annual salary and bonus exceeding $100,000 in any of such
fiscal years. The information provided should be read in conjunction with the
Company's Financial Statements and related notes thereto.
SUMMARY COMPENSATION TABLE
Name and Fiscal All Other
Principal Position Year Salary Bonus Compensation
Michael Jackson,
former President
and Chief Executive 1996 $124,038(1) $12,870(2)
Officer 1995 $150,000 $15,270(2)
Geoff Duncan,
Executive Vice
President and
Chief Operating 1997 $114,400 $11,000 $ 8,400(4)
Officer 1996 $ 67,692(3) $ 5,600(4)
_____________________
(1) Mr. Jackson was employed at an annual salary of $150,000 until
his termination on October 11, 1996.
(2) Automobile expense of $1200 monthly, and life insurance payment
of $870 annually.
(3) Mr. Duncan began employment with the Company in May 1996 at an
annual salary of $110,000
(4) Automobile allowance of $700 per month.
OPTION GRANTS
The purpose of the following table is to report grants of stock
options to the named officers during the years ended December 31, 1995, 1996
and 1997.
<TABLE>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term
% of Total
Options
Granted
Options to Exercise Expiration
Name Granted Employees Price Date 5% ($) 10% ($)
<S> <C> <C> <C> <C> <C> <C>
Michael Jackson 50,000 19.16% $ .75 8/22/99(1) $ 2,004 $10,083
Michael Jackson 30,000 11.49% $1.25 8/22/99(1) $ 0(3) $ 0(3)
Geoff Duncan 50,000 19.16% $1.25 4/29/02-06 (2) $ 0(3) $18,617
Geoff Duncan 25,000 9.58% $1.25 11/15/02-06 (2) $ 0(3) $ 9,308
</TABLE>
- ---------------------------
(1) As part of the settlement agreement described in Item 3 of this Report, Mr.
Jackson's options did not expire upon his termination from the Company and will
remain exercisable until August 22, 1999.
(2) Mr. Duncan's options vest over a 5 year period (20% per year) and expire 5
years from the date that the options are vested. At December 31, 1997, Mr.
Duncan had 15,000 vested options.
(3) The potential realizable value, assuming annual stock appreciation rates of
5% and 10%, is less than the price of the stock upon exercise of the options.
- ----------------------------
During May 1996, the Company adopted a Stock Option Plan (the "Plan")
whereby employees of the Company may be granted incentive or non-qualified
options to purchase shares of the Company's common stock. The Board of
Directors has direct responsibility for the administration of the Plan. The
exercise price of the incentive options to employees must be equal to at least
100% of the fair market value of the common stock at the date of grant. The
exercise price of incentive options
to officers or affiliated persons must be at
least 110% of the fair market value as of the date of the grant. The fair
market value of options granted was determined using the exercise price of
the Vitran stock purchase warrant as well as other criteria that the Board
deemed relevant. This value may not relate to the trading value on the NASD
Bulletin Board as there is not an active market for the Company's stock and
trades are sporadic. Upon termination of employment, all options held by the
grantee shall immediately terminate. The Board may waive any conditions or
rights under, or amend, alter, suspend, discontinue, or terminate any Option
theretofore granted and any Stock Option Agreements relating thereto; provided,
however, that without the consent of an affected grantee, no such action may
materially impair the rights of such grantee under such option.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information with respect to (i) any person
or "group" known to the Company to be the beneficial owner, as of March 18,
1998, of more than five percent of the Common Stock and (ii) all Directors and
Executive officers of the Company, individually and as a group. Each
beneficial owner has advised the Company that he, she or it has sole voting
and investment power as to the shares of the Common Stock.
Amount and
Nature of Percentage of
beneficial Class
Name of beneficial owner ownership (1)
Michael J. Jackson 643,400 13.33%
Clearwater, FL 34615
Vitran Corporation Inc. 3,918,030 81.19%
70 University Avenue
Suite 350
Toronto, Canada M5J2M4
Richard E. Gaetz None ----
70 University Avenue
Suite 350
Toronto, Canada M5J2M4 (2)
Geoff Duncan 10,000 .21%
12900 Dupont Circle
Tampa, FL 33626 (2)
Albert Gnat None ----
70 University Avenue
Suite 350
Toronto, Canada M5J2M4 (2)
Richard D. McGraw None ----
70 University Avenue
Suite 350
Toronto, Canada M5J2M4 (2)
All Directors and Executive
Officers as a Group
(4 persons) (2) 10,000 .21%
- ---------------------
(1) The percentages in this column are computed on the basis of 4,825,630
shares of Common Stock outstanding, as of the date of this Report.
(2) Three persons who are officers or directors of Vitran are directors of the
Company. See Item 10 of this Report.
- ---------------------
Item 13. Certain Relationships and Related Transactions
For information as to changes in control of the Company see Item 1 of
this Report.
Vitran is a North American multi-divisional operating company
headquartered in Toronto, Ontario, Canada. Vitran provides services to the
freight and environmental industries and has over 1500 employees at seventy-five
locations across Canada and the United States. Vitran's Freight Services
Group, of which the Company is a part, provides a complete range of services
for the movement of freight throughout the continent, utilizing both highway and
rail modes. Services include less than truckload, full load, intermodal,
dedicated contract carriage, warehousing and inventory management. The members
of the Vitran Freight Services Group are Transwestern Express, a less than
truckload ("LTL") company concentrating on central and western markets of
Canada, as well as the Northwest United States; G&W Freightways, which has
six facilities in Quebec and Ontario, Canada, and specializes in next -day
delivery in all of its service corridors; CAN-AM LTL, which offers cross-border
LTL service between the United States and Canada and has facilities in Toronto
and Chicago; CAN-AM Logistics, which provides logistic services to its
customers; the Overland Group, which consists of various companies performing
LTL, full load, short haul and customized truckload services; and the Company.
Vitran solicits business between the United States and Canada as an
agent for the Company through a Vitran sales office in Toronto. Vitran and the
Company have an agreement that all intermodal trans-border rail shipments
shall be written by the Company, with Vitran's receiving an agency commission
from the Company for such business. Trans-border over-the-road shipments may be
made by the Company or other Vitran subsidiaries, including the Overland Group,
depending on the type of service required by the shipper of such freight. The
Company does not believe that, given the different businesses of the Company and
the other Vitran subsidiaries, the Company will compete for any freight
business with another Vitran subsidiary, nor does the Company anticipate that
the Company and any other Vitran subsidiary will bid the same trans-border over-
the-road business. However, in the event that any such unanticipated conflict
does occur, the Company and Vitran intend to resolve any such conflict on a
case-by-case basis, with resolution depending solely on which entity can best
serve the needs of potential customers. For information concerning the
Company's relationship with Vitran and the other members of Vitran's Freight
Services Group, see Item 1 of this Report.
Concurrently with Vitran's acquisition of a majority of the Company's
outstanding Common Stock on July 14, 1993, Vitran executed a shareholders'
agreement with Michael Jackson, the Company's former President. Pursuant to
that agreement, Vitran and Mr. Jackson agreed that they would vote their shares
to elect not less than five nor more than six directors, two of whom shall be
nominees of Mr. Jackson and the balance of whom shall be nominees of Vitran.
This agreement which deemed Vitran and Mr. Jackson as a group as defined in
Rule 13d-5 of the Exchange Act, was terminated on July 7, 1997, as part of a
settlement agreement between Mr. Jackson and Vitran. See Item 3 of this Report.
During July 1997, Vitran purchased 600,000 shares of stock as part of the
settlement described in Item 3 of this Report. In addition, Vitran purchased
100,000 shares from Mr. Jackson in September 1997. This increased Vitran's
ownership to 3,918,030 shares, or 81.19% of the Company's outstanding shares of
common stock.
For information with respect to the relationship between the Company's
directors and Vitran, see Item 10 of this Report.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
a) Exhibits and Financial Statement Schedules
Number Description
2.1 Agreement and Plan of Merger dated December 1, 1991 (2)
3.1 Certificate of Incorporation (1)
3.2 By-Laws (1)
3.2.1 Amended and Restated By-Laws (1)
3.3 Articles of Merger - Florida (1)
3.4 Certificate of Merger - Delaware (1)
4.1 Specimen Certificate of Common Stock (1)
4.2 Specimen Certificate of Class A Warrant (1)
4.2(a) Specimen Certificate of Class B Warrant (1)
4.3 Form of Four Year Common Stock Purchase Warrant (1)
4.4 (Intentionally left blank)
4.5 Form of Warrant Agency Agreement (1)
4.5(a) Amendment dated June 1, 1994, to Warrant Agency Agreement
(1)
4.5(b) Amendment dated September 1, 1994, to Warrant Agency
Agreement (1)
4.5(c) Amendment dated December 7, 1995, to Warrant Agency
Agreement (1)
4.6 Warrant for the purchase of Common Stock issued to Vitran
Corporation Inc. and dated July 14, 1993 (3)
10.1 Subscription Agreement between Vitran Corporation Inc. and
The Freight Connection, Inc., dated July 14, 1993 (3)
10.2 Employment Agreement between The Freight Connection, Inc.,
and Michael J. Jackson dated July 14, 1993 (1)
10.3 Form of Lockup Agreement (1)
10.4 Agreement with Robert and Patricia Johnston dated June 14,
1993 (1)
10.5 Shareholders' Agreement between Vitran Corporation Inc. and
Michael J. Jackson (1)
10.6 Extended Lease Agreement dated February 4, 1997 (4)
10.7 Loan Agreement between Republic Bank, St. Petersburg,
Florida, and The Freight Connection, Inc., dated August
19, 1995 (1)
10.8 Renewed Loan Agreement between Republic Bank, St.
Petersburg, Florida and The Freight Connection, Inc. dated
August 18, 1997 (6)
10.9 Sweeney and Company, P.A. 's letter to the Securities and
Exchange Commission regarding change in certifying public
accountant (5)
(1) Incorporated by reference to post-effective amendments to the Company's
Registration Statement on Form SB-2.
(2) Incorporated by reference to Report on Form 8-K filed January 27, 1992.
(3) Incorporated by reference to Report on Form 8-K filed July 21, 1993.
(4) Incorporated by reference to Report on Form 10-K filed March 26, 1997.
(5) Incorporated by reference to Report on Form 8-K filed December 1, 1997.
(6) Included herewith.
b) Reports on Form 8-K
During the year ended December 31, 1997, the Company filed a Form 8-K regarding
Item #4 - Changes in Registrant's certifying accountant. See Item 9 of this
Report for further information.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report and any
subsequent amendments thereto to be signed on its behalf by the undersigned,
thereunto duly authorized.
THE FREIGHT CONNECTION, INC.
a Delaware corporation
Dated: March 27, 1998 By: /s/ Richard E. Gaetz
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons in their respective
capacities with the Registrant and on the dates indicated.
Signatures Title Date
/s/ Richard E. Gaetz President and March 27, 1998
Director
/s/ Geoff Duncan Executive Vice March 26, 1998
President
/s/ Albert Gnat Director March 27, 1998
/s/ Richard D. McGraw Director March 27, 1998
Exhibit 10.8
RENEWAL REVOLVING
LINE OF CREDIT PROMISSORY NOTE
$2,000,000.00
St. Petersburg, Florida
Effective Date: August 18, 1997
Loan No. 4000010415
FOR VALUE RECEIVED, the undersigned borrower, THE FREIGHT CONNECTION,
INC., a Delaware corporation (hereinafter called "Borrower") promises to pay
to the order of REPUBLIC BANK, a Florida banking corporation (hereinafter and
together with any holder hereof called "Bank"), at 111 2nd Avenue N.E., Suite
703, St. Petersburg, Florida 33701, or at such other place as Bank may from
time to time designate in writing, without grace, the principal sum not to
exceed TWO MILLION DOLLARS($2,000,000.00), or so much thereof as has been
advanced hereunder, together with interest on the unpaid balance of the
principal (the "Loan") from time to time outstanding from the date of each
advance of principal at the rate for each day equal to the lesser of: (1) the
"Base Rate" of Citibank, N.A., New York, N.Y. ("Citibank"), adjusted daily;
or, (2) the 90 day LIBOR (London Inter-Bank Offer Rate) as published in the
Wall Street Journal, plus 250 basis points, (the "Current Rate"). This
Current Rate shall be fixed for 90 day periods commencing on the Effective
Date and will be applied to the daily outstanding balance on the Loan, and
will be adjusted on the first day of each subsequent 90 day period to the
then Current Rate as of such date. In no event, however, shall the interest
rate be greater than the maximum rate of interest allowed to be contracted
for by applicable law. This Note renews in its entirety that certain
Revolving Line of Credit Promissory Note dated August 18, 1995, as previously
renewed effective August 19, 1996.
Principal and interest shall be due and payable as follows:
(a) To the extent accrued, interest only, as stated above, shall be
payable monthly commencing September 1, 1997, and continuing on the same day of
each month thereafter until September 1, 1998 (the "Maturity Date"), at which
time all outstanding indebtedness, whether principal, accrued interest or
otherwise, shall be due and payable in full.
(b) The principal amount evidenced hereby may be borrowed (and to the
extent any principal amount advanced hereunder is repaid by Borrower, such sum
may be borrowed again) until the Maturity Date. At no time, however, shall the
principal balance outstanding hereunder exceed TWO MILLION DOLLARS
($2,000,000.00).
Interest owing under this Note shall be computed on the basis of a 360-day
year for actual days lapsed.
As used herein, "Base Rate"shall refer to the rate of interest per annum
which is announced by Citibank as being its base rate as such rate changes from
time to time. Changes in the Base Rate shall be effective on the effective date
announced by Citibank. The Base Rate is a reference rate for the information
and use of the Bank in establishing the actual rates to be charged its
borrowers.
Borrower may repay all or part of the principal balance at any time
without penalty. Such prepayment shall be accompanied by payment of any
unpaid interest accrued to the time of such prepayment. All payments made
hereunder shall at Bank's option first be applied to late charges, then to
accrued interest, then to principal. Permitted partial prepayments shall
not affect or vary the duty of Borrower to pay all obligations when due, and
they shall not affect or impair the right of Bank to pursue all remedies
available to it hereunder, under the security instruments securing this
indebtedness, or under any other loan documents or guaranty executed in
connection herewith.
In the event Bank has made a demand for repayment of the indebtedness
evidenced by this Note, due to any default by Borrower, Bank, at its option, may
notify Borrower that its commitment to lend under this line of credit is
terminated and Bank shall be relieved of all obligations to lend any further
sums thereafter to Borrower.
This Note has been executed and delivered in the State of Florida, and its
terms and provisions are to be governed by and construed under the laws of the
State of Florida and of the United States of America, and the rules and
regulations promulgated under the authority thereof. It is the intent of this
Note that such laws shall be interpreted in such a manner that in the event of
default the maximum rate of interest (hereinafter called the "Maximum Rate")
allowed to be contracted for by applicable law as changed from time to time
shall be applied to this Note.
In the event that any payment of principal or interest is not made within
ten (10) days of when due hereunder, it is hereby agreed that Bank shall have
the option of collecting a late charge equivalent to five percent (5%) of the
amount of each such delinquent payment. Said late charge and/or interest
shall be immediately due and payable in full on demand by the Bank.
In no event shall Bank have the right to charge or collect, nor shall
Borrower be required or obligated to pay, interest or payments in the nature of
interest, which would result in interest being charged or collected at a rate in
excess of the Maximum Rate. In the event that any payment which is interest or
in the nature of interest is made by Borrower or received by Bank which would
result in the rate of interest being charged or collected by Bank being in
excess of the Maximum Rate, then the portion of any such payment which causes
the rate of interest being charged or collected by Bank exceed the Maximum Rate
(hereinafter called the "excess sum") shall be credited as a payment of
principal. If Borrower notifies Bank in writing that Borrower elects to have
such excess sum returned to Borrower, such excess sum shall be returned to
Borrower. In the event that any such overcharge is discovered after this Note
has been paid in full, then the amount of such excess sum shall be returned to
Borrower together with interest therein from the date such excess sum was paid
or collected at the same rate as was due Bank during such period under the terms
of this Note. All excess sums credited to principal shall be credited as of the
date paid to Bank.
The "Default Interest Rate" shall be five percent (5%) per annum above the
contract interest rate set forth above, but in no event at a rate which is
higher than the Maximum Rate permitted by law.
In the event any payment of principal or interest is not made within
fifteen (15) days of when due hereunder, the entire unpaid principal balance
shall bear interest at the "Default Interest Rate". In addition to the rights
described in this paragraph, Bank shall have the right to exercise all other
rights or remedies provided by law or at equity and shall specifically have the
right to recover all damages resulting from such default including, without
limitation, the right to recover the payment of all amounts owing to Bank.
Exercise of any of these options shall be without notice to Borrower, notice of
such exercise being hereby expressly waived.
Time is of the essence hereunder. In the event that this Note is
collected by law or through attorneys at law, or under advice therefrom,
Borrower agrees to pay all costs of collection, including reasonable
attorneys' fees and costs (including charges for paralegals and others
working under the direction or supervision of Bank's attorneys) and all sales
or use taxes therein, whether or not suit is brought, and whether incurred in
connection with collection, trial, appeal, bankruptcy or other creditor's
proceedings or otherwise, and, if Bank's attorneys shall include employees of
Bank or of any person controlling, controlled by or under common control with
Bank, such reasonable attorney's fees shall include costs allocated by Bank's
or such person's internal legal department.
Borrower authorizes Bank, from time to time, to debit any account that
Borrower may have with Bank, for any payment of principal or interest past due
hereunder for the amount of such payment of principal or interest. Exercise of
this right shall be optional with Bank and the provisions of this paragraph
shall not be construed as releasing Borrower from the obligation to make
payments of principal or interest according to the terms hereof.
The remedies of Bank as provided herein shall be cumulative and
concurrent, and may be pursued singularly, successively, or together, at the
sole discretion of Bank. No act of omission or commission of Bank, including
specifically any failure to exercise any right, remedy or recourse, shall be
deemed to be a waiver or release of the same, such waiver or release to be
effected only through a written document executed by Bank and then only to
the extent specifically recited therein. A waiver or release with reference
to any one event shall not be construed as continuing, as a bar to, or as a
waiver or release of, any subsequent right, remedy or recourse as to a
subsequent event.
All persons (including corporations) now or at any time liable, whether
primarily or secondarily, for the payment of the indebtedness hereby evidenced,
for themselves, their heirs, legal representatives, successors and assigns,
respectively, hereby: (a) expressly waive any presentment, demand for payment,
notice of dishonor, protest, notice of nonpayment or protest, all other forms of
notice whatsoever, and diligence in collection; (b) consent that Bank may, from
time to time, and without notice to them or demand: (i) extend, rearrange, renew
or postpone any or all payments and/or (ii) release, exchange, add to or
substitute all or any part of the collateral for this Note, without in any way
modifying, altering, releasing, affecting or limiting their respective liability
or the lien of any security instrument; (c) agree that Bank, in order to enforce
payment of this Note against them shall not be required first to institute any
suit or to exhaust any of its remedies against any Borrower or any other person
or party or to attempt to realize on the collateral for this Note.
BORROWER AND ANY OTHER PERSON LIABLE FOR PAYMENT HEREOF, BY EXECUTING THIS
NOTE OR ANY OTHER DOCUMENT CREATING SUCH LIABILITY, WAIVE THEIR RIGHTS TO A
TRIAL BY JURY IN ANY ACTION WHETHER ARISING IN CONTRACT OR TORT, BY STATUTE OR
OTHERWISE, IN ANY WAY RELATED TO THIS NOTE. THIS PROVISION IS A MATERIAL
INDUCEMENT FOR BANK'S EXTENDING CREDIT TO BORROWER AND NO WAIVER OR LIMITATION
OF BANK'S RIGHTS HEREUNDER SHALL BE EFFECTIVE UNLESS IN WRITING AND MANUALLY
SIGNED ON BANK'S BEHALF.
Borrower acknowledges that the above paragraph has been expressly
bargained for by Bank as part of the loan evidenced hereby and that, but for
Borrower's agreement and the agreement of any other person liable for payment
hereof thereto, Bank would not have extended the loan for the term and with
the interest rate provided herein.
If more than one party shall execute this Note, the term "Borrower", as
used herein, shall mean all parties signing this Note and each of them, who
shall be jointly and severally obligated hereunder. In this Note, whenever
the context so requires, the neuter gender includes the feminine and/or
masculine, as the case may be, and the singular number includes the plural.
IN WITNESS WHEREOF, Borrower has caused this Note to be executed in its
name on the day and year first above written.
THE UNDERSIGNED ACKNOWLEDGES THAT THE LOAN EVIDENCED HEREBY IS FOR
COMMERCIAL PURPOSES ONLY AND NOT FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES.
THE FREIGHT CONNECTION, INC.,
a Delaware corporation
/s/ Geoff Duncan
Chief Operating Officer
(CORPORATE SEAL)
Documentary stamps in the amount of $7,000.00 were paid on the original Note
dated August 18, 1995, and are not payable on this Renewal Note under Florida
law.
SECOND
ADDENDUM TO LOAN AGREEMENT
This Second Addendum to Loan Agreement (the "Addendum") dated this 18th
day of September, 1997, effective as of the 18th day of August, 1997, amends and
modifies that certain Loan Agreement dated August 18, 1995 as previously amended
by Addendum to Loan Agreement dated effective August 18, 1996 (collectively the
"Loan Agreement") by and among REPUBLIC BANK, a Florida banking corporation (the
"Bank"), and THE FREIGHT CONNECTION, INC., a Delaware corporation
(the"Borrower"). All of the capitalized terms used herein shall have the same
identification and defined meanings as set forth in the Loan Agreement unless
otherwise specifically indicated or defined herein.
RECITALS:
A. Borrower has requested the Bank to extend and renew a Revolving Credit
Line Loan (the "Loan") in the amount of $2,000,000.00 under the terms of the
Loan Agreement and this Addendum.
B. The Bank has agreed to the renewal of the Loan pursuant to the terms of
this Addendum and the other loan documents herein referred.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the parties agree as follows:
1. Recitals. The above Recitals are true and correct and by this reference
are incorporated herein.
2. Renewal of Credit Line Loan. The Bank hereby renews the Loan effective
as of August 18, 1997, pursuant to the terms of a Renewal Revolving Line of
Credit Promissory Note of even date herewith (the "Renewal Note") which
provides for an extended maturity date of September 1, 1998.
3. Security. The Renewal Note shall continue to be secured by the Security
Interests as set forth in the Loan Agreement.
4. Covenants.
A. Net Worth. Section 7.02(j)(2) of the Loan Agreement is hereby
amended in its entirety to read as follows:
"(2) Net worth: Excluding affiliate or related receivables, net
worth shall not be less than $1,500,000.00 during the term of the Loan"
Vitran Corporation Inc. Acknowledgement: As majority owner of
Borrower, Vitran Corporation Inc. shall, by joinder to this Addendum,
acknowledge the change in the above covenant and agree that it shall not take
or cause any action that would adversely impact the Borrower's ability to
comply with this covenant.
B. Compliance Certificate. The Compliance Certificate as set forth
in the Loan Agreement is hereby amended in its entirety in conformance with the
revised Compliance Certificate set forth in Exhibit "A" attached hereto and by
this reference incorporated herein.
5. Warranties. Borrower hereby affirms and warrants that all of the
warranties made in the Loan Documents, and any other documents or instruments
recited herein or executed with respect thereto directly or indirectly, are true
and correct as of the date hereof and that Borrower is not in default of any of
the foregoing nor aware of any default with respect thereto, and that Borrower
has no defenses or rights of offset with respect to any indebtedness to the
Bank. Borrower hereby releases the Bank from any cause of action against it
existing as of the date of execution hereof. The rights and defenses being
waived and released hereunder include without limitation any claim or defense
based on the Bank having charged for collected interest at a rate greater
than that allowed to be contracted for by applicable law as changed from time
to time, provided, however, in no event shall such waiver and release be
deemed to change or modify the terms of the Loan Documents which provide that
sums paid or received in excess of the maximum rate of interest allowed to be
contracted for by applicable law, as changed from time to time, reduce the
principal sum due, said provision to be in full force and effect.
6. State Taxes. Borrower is liable for the full amount of any documentary
stamps, intangible tax, interest and penalties, if any, levied by the State of
Florida incident to the loan transactions and modifications described in this
Second Addendum. If the same be not promptly paid by Borrower when levied by
the State of Florida, the Bank may (without obligation to do so) pay the same.
7. Consent and Waiver. Borrower hereby consents to the foregoing and
agrees that the execution of this Second Addendum shall in no manner or way
whatsoever impair or otherwise adversely affect Borrower's liability to the
Bank under the Loan Documents or any other instrument set forth in the
Recitals or herein, all as modified by this Second Addendum.
8. Cross Document Default. Any default under the terms and conditions of
this Second Addendum or of any instrument set forth herein or contemplated by
this Second Addendum shall be and is a default under every other instrument
set forth herein or contemplated by this Second Addendum.
9. Ratification. Except as modified by this Second Addendum, Borrower
hereby ratifies and confirms the continued validity and viability of all terms,
conditions and obligations set forth in the Loan Documents and all other
instruments executed in connection with this Second Addendum.
10. Severability. Whenever possible, each provision of this Second
Addendum shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision hereof shall be prohibited or
invalid under applicable law, such provision shall be ineffective to the
extent of such prohibition or invalidity only, without invalidating the
remainder of such provision or of the remaining provisions of this Second
Addendum.
11. Florida Contract. This Second Addendum shall be deemed a Florida
contract and shall be construed according to the laws of the State of Florida,
regardless of whether this Second Addendum is executed by certain of the parties
hereto in other states.
12. Binding Effect. This Second Addendum shall bind the successors and
assigns to the parties hereto and constitutes the entire understanding of the
parties, which may not be modified except in writing.
13. Waiver of Jury Trial. The parties to this Second Addendum hereby
irrevocably waive their respective rights to trial by jury in any and all
actions arising out of the terms of this Second Addendum.
14. Conflict. As to any conflict between the terms of the Loan Agreement
or this Second Addendum, then the terms of this Second Addendum shall supersede
and control over such other terms.
15. Other Terms. Except as specifically amended, modified and
supplemented by this Second Addendum, all of the other terms, covenants and
conditions of the Loan Agreement remain in full force and effect.
WITNESSES:
As to Borrower
"BORROWER"
THE FREIGHT CONNECTION, INC.,
/s/ Milissa Sibson a Delaware corporation
By: /s/ Geoff Duncan
/s/ Wendy Cooper as its Chief Operating Officer
(CORPORATE SEAL)
WITNESSES:
As to Lender
"LENDER"
REPUBLIC BANK, a Florida
/s/ Milissa Sibson banking corporation
By: /s/ William Nye
/s/ Wendy Cooper as its Vice President
(CORPORATE SEAL)
STATE OF FLORIDA
COUNTY OF HILLSBOROUGH
The foregoing instrument was acknowledged before me this 18th day of
September, 1997 by, GEOFF DUNCAN, as Chief Operating Officer of THE FREIGHT
CONNECTION, INC., a Delaware corporation, on behalf of the corporation.
X Georgia Driver's License /s/ Victoria M. Costa
Notary Public
"Official Seal"
Victoria M. Costa
My commission expires
2/15/98
Commission #CC 348552
STATE OF FLORIDA
COUNTY OF PINELLAS
The foregoing instrument was acknowledged before me this 18th day of
September, 1997, by WILLIAM S. NYE, as Vice President of REPUBLIC BANK, a
Florida banking corporation, on behalf of the Bank.
X Florida Driver's License /s/ Victoria M. Costa
Notary Public
"Official Seal"
Victoria M. Costa
My commission expires
2/15/98
Commission #CC 348552
JOINDER
Vitran Corporation Inc., as majority shareholder of The Freight
Connection, Inc., hereby joins in this Addendum to acknowledge the
modification of financial covenants of Paragraph 7.02(j) and hereby covenants
and agrees not to take or cause any action that would adversely impact the
ability of The Freight Connection, Inc. to comply with the covenants under
Paragraph 7.02(j) of the foregoing Second Addendum or the Loan Agreement.
The undersigned corporate officer hereby confirms his corporate authority
and capacity in execution of this Joinder.
Witnesses: VITRAN CORPORATION INC., a
corporation formed under the
laws of the Province of Ontario
/s/ Edward A. Sellers By: /s/ Richard D. McGraw
Chairman
(CORPORATE SEAL)
DOMINION OF CANADA
PROVINCE OF ONTARIO
The foregoing instrument was acknowledged before me this 19th day of
September, 1997, by RICHARD D. MCGRAW, President of Vitran Corporation Inc., who
is personally known to me.
/s/ Edward Sellers
Notary
ATTACHMENTS:
Exhibit "A": Revised Compliance Certificate
AGREEMENT WAIVING RIGHT TO JURY TRIAL
THIS AGREEMENT WAIVING RIGHT TO JURY TRIAL (this "Agreement") is dated
this 18th day of September, 1997, effective as of the 18th day of August,
1997, by and among REPUBLIC BANK, a Florida banking corporation (the "Bank")
and THE FREIGHT CONNECTION, INC., a Delaware corporation ("Borrower").
RECITALS:
A. On or about of even date herewith, the Bank and Borrower have
entered into a renewal of those certain Loan Documents (herein called,
together with any and all amendments and modifications thereof, the "Loan
Documents"), pursuant to which the Bank has agreed to renew to the Borrower a
revolving line of credit in a principal amount not to exceed $2,000,000.00
(the "Loan"), subject to the terms and conditions set forth in the Loan
Documents.
B. In connection with renewal of the Loan, Borrower has executed and
delivered to the Bank that certain Renewal Line of Credit Note (the "Note") and
has executed and delivered and/or accepted certain other Loan Documents. The
capitalized terms set forth in the preceding sentence, and such other
capitalized terms in this Agreement, to the extent not otherwise expressly
defined herein, shall have the respective meanings ascribed thereto in the
Loan Documents.
C. The Bank and Borrower recognize that the Loan is a relatively
complex business transaction, that the Loan Documents are relatively lengthy and
technical in nature and may be susceptible to misinterpretation if isolated
provisions are the subject of review, and that in the event of any dispute as to
the rights and obligations of the parties under the Loan Documents and otherwise
with respect to the Loan, a judge, rather than a jury, would be the most
efficient and best qualified trier of fact. Accordingly, the Bank and Borrower
desire to waive their respective rights to jury trial with respect to any
litigation or other legal proceeding based on any Loan Document, or arising out
of, under or in connection with any Loan Document or the Loan.
AGREEMENTS:
NOW, THEREFORE, for and in consideration of the mutual covenants and
promises of the parties hereto, and in further consideration of the sum of Ten
Dollars ($10) and other good and valuable consideration in hand paid by each
party hereto to the other, the receipt and sufficiency of such consideration
being hereby mutually acknowledged, the Bank and Borrower hereby agree as
follows:
1. The foregoing recitals are true and correct and are hereby
incorporated into this Agreement.
2. The Bank and Borrower each knowingly, voluntarily, and intentionally
waives any right it may have to a trial by jury, with respect to any litigation
or legal proceedings based on, or arising out of the Note or other Loan
Documents, including any course of conduct, course of dealings, verbal or
written statements, or actions or omissions of any party which in any way
relates to the Loan. The parties hereto have specifically discussed and
negotiated this waiver and understand the legal consequences of signing this
Agreement.
3. This waiver by Borrower is a material inducement for the Bank's
renewal of the Loan, and the Bank's waiver is a material inducement for
Borrower's acceptance of the Loan and for Borrower's renewing the Note.
4. At a party's request, the other parties will join in asking the
court in which suit is pending to try the case and decide all issues,
including issues of fact, without a jury.
5. Notwithstanding the narrower definition ascribed to the term "Loan"
above, the term "Loan" as used in this Agreement will include, without
limitation, any future advances, modifications, renewals, extensions, and
refinancings of the Loan described in the recitals.
6. If for any reason the waivers set forth in paragraph 2 are declared
or found by a court of competent jurisdiction to be invalid, illegal or
unenforceable, and any litigation or other legal proceeding relating to or
arising in connection with the Loan is in fact conducted before an impaneled
jury, each party hereto agrees that it will not seek to have this Agreement or
the existence thereof admitted into evidence with respect to such litigation or
other legal proceeding. The parties hereto acknowledge that damages are an
inadequate remedy for any breach of the covenant set forth in the preceding
sentence, and therefore, such covenant shall be subject to enforcement by
injunctive relief without the need to demonstrate the inadequacy of monetary
damages.
7. If any one or more of the provisions contained in this Agreement is
declared or found by a court of competent jurisdiction to be invalid, illegal or
unenforceable, such provision or portion thereof shall be deemed stricken and
severed and the remaining provisions thereof shall continue in full force and
effect.
8. This Agreement shall be binding upon and shall inure to the benefit
of the parties hereto and their respective heirs, legal and personal
representatives, successors and assigns.
9. The validity, meaning and effect of this Agreement shall be
determined as provided by the law of the State of Florida applicable to
agreements made and to be performed in the State of Florida.
The parties hereto have executed this Agreement on or as of the date first
above written.
BANK BORROWER
REPUBLIC BANK, a Florida THE FREIGHT CONNECTION, INC.,
banking corporation a Delaware corporation
/s/ William S. Nye /s/ Geoff Duncan
Vice President Chief Operating Officer
(CORPORATE SEAL) (CORPORATE SEAL)
CERTIFICATE OF INCUMBENCY AND CORPORATE RESOLUTION
OF
THE FREIGHT CONNECTION, INC.
I HEREBY CERTIFY that I am the duly elected and qualified Secretary of THE
FREIGHT CONNECTION, INC., a Delaware corporation authorized to do business in
the State of Florida (the"Corporation") and the keeper of the records and
corporate seal of the Corporation.
I DO HEREBY FURTHER CERTIFY:
1. That the following is a list and specimen signatures of active
officers of the Corporation, all of whom are incumbent and have not resigned or
been removed from their duties:
Chief Operating Officer Geoff Duncan /s/Geoff Duncan
Secretary Milissa Sibson /s/ Milissa Sibson
2. Copies of the Articles of Incorporation and the Bylaws (and any and
all amendments thereto, if any) are attached hereto and incorporated herein as
Exhibit "A" and Exhibit "B", respectively, and are true and correct copies of
the documents they represent. The Articles of Incorporation and the Bylaws
and any amendments attached hereto are in full force and effect and have not
been further modified or amended in any manner.
3. THE FREIGHT CONNECTION, INC. is in good standing under its current
legal name, and has been continuously qualified to do business in the State of
Florida since May 25, 1993.
4. That the following is a true and correct copy of a resolution duly
adopted, ratified and confirmed at a meeting of the Board of Directors of the
Corporation, held in accordance with the Articles and Bylaws of the Corporation,
at the offices of the Corporation at Tampa, Florida, on the 8th day of
September, 1997.
BE IT RESOLVED, that the Board of Directors of the Corporation deems it
advisable and hereby approves renewal of a line of credit loan (the "Loan")
effective as of August 18, 1997, in an amount not to exceed $2,000,000.00 by
the Corporation from REPUBLIC BANK (the "Bank") as evidenced by a Renewal
Note (the "Note") and a Second Addendum to Loan Agreement (the "Addendum"),
and secured by security interests in accounts receivable, inventory, equipment
and other business assets owned by the Corporation.
BE IT FURTHER RESOLVED, Geoff Duncan, as the Chief Operating Officer of
the Corporation, is hereby authorized, empowered and directed, on behalf of the
Corporation, to execute any and all documents in connection with the Loan,
including but without limitation, the Note and the Addendum, and is further
authorized, empowered and directed, on behalf of the Corporation, to execute any
and all other documents in connection with the Loan.
BE IT FURTHER RESOLVED, that the aforesaid officer of the Corporation is
hereby authorized, empowered and directed to execute all other documents and to
take whatever other action is deemed necessary to carry out the intent of the
foregoing.
BE IT FURTHER RESOLVED, that the foregoing resolutions shall continue in
full force and effect, and the signature of the designated person of the
Corporation shall be conclusive evidence of his authority to act on behalf of
and in the name of the Corporation as provided herein, until express written
notice to the contrary is duly served upon and received by the Bank.
BE IT FURTHER RESOLVED, that the Bank shall be entitled to rely upon these
resolutions and all reliance by the Bank upon the actions of the Corporation and
the actions of its authorized signatories, shall be justified.
IN WITNESS WHEREOF, I have hereunto affixed my name as Secretary and have
caused the corporate seal of the Corporation to be hereunto affixed, this
18th day of September, 1997.
/s/ Milissa Sibson
Secretary
(CORPORATE SEAL)
ATTACHMENTS:
EXHIBIT "A" - Articles of Incorporation
EXHIBIT "B" - By-Laws
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