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| AUTO.OB > SEC Filings for AUTO.OB > Form 10-K on 27-Mar-2008 | All Recent SEC Filings |
27-Mar-2008
Annual Report
Cautionary statement identifying important factors that could cause our actual results to differ from those projected in forward looking statements.
Readers of this report are advised that this document contains both statements of historical facts and forward looking statements. Forward looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those indicated by the forward looking statements. Examples of forward looking statements include, but are not limited to (i) projections of revenues, income or loss, earnings per share, capital expenditures, dividends, capital structure and other financial items, (ii) statements of our plans and objectives with respect to business transactions and enhancement of stockholder value, (iii) statements of future economic performance, and (iv) statements of assumptions underlying other statements and statements about our business prospects.
This report also identifies important factors, which could cause actual results to differ materially from those indicated by the forward looking statements. These risks and uncertainties include the factors discussed under the heading "Risk Factors" beginning at page 6 of this report.
The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements and the notes thereto appearing elsewhere in this report.
Overview
Through our wholly-owned subsidiary, Sunteck Transport Co., Inc. (Sunteck), we are a non-asset based transportation services company, providing transportation capacity and related transportation services to shippers throughout the United States, and to a lesser extent, Canada. As a non-asset based provider of brokerage and contract carrier transportation services, we do not own any equipment and our services are provided through our strategic alliances with less than truckload, truckload, air, rail, ocean common carriers and independent owner-operators to service our customers' needs. Our services include ground transportation coast to coast, local pick up and delivery, air freight and ocean freight. Our business services emphasize safety, information coordination and customer service and are delivered through a network of independent commissioned sales agents and third party capacity providers coordinated by us. The independent commissioned sales agents typically enter into exclusive contractual arrangements with us and are responsible for locating freight and coordinating the transportation of the freight with customers and capacity providers. The third party capacity providers consist of independent contractors who provide truck capacity to us, including owner-operators who operate under our contract carrier license, air cargo carriers and railroads. Through this network of agents and capacity providers, we operate a transportation services business with revenue, net revenue and net income of approximately $110.3 million, $21.3 million and $1.6 million, respectively, during our most recently completed fiscal year.
Our brokerage services are provided though a network of independent sales agents throughout the United States and Canada. Our services include arranging for the transport of customers' freight from the shippers location to the designated destination. We do not own any trucking equipment and rely on independent carriers for the movement of customers' freight. We seek to establish long-term relationships with our customers and provide a variety of logistics services and solutions to eliminate inefficiencies in our customers' supply chain management.
Our contract carrier services are also provided through a network of independent sales agents and independent owner-operators throughout the United States. We do no own any trucking equipment; our independent owner-operators lease onto our operating authority and transport freight under the Sunteck name.
The most significant factors in our growth during the past two years have been internal growth experienced by our existing agents and the expansion of our brokerage services agent, contract carrier services agent and owner-operator networks. This growth is readily measured by the number of transactions we have processed, which increased from 60,000 in 2006 to 85,000 in 2007, an increase of 42%. The average revenue dollar per load decreased by 7% in 2007 as compared to 2006. The decrease in revenue dollars per load is the result of revenue mix and the competitive environment during the period.
During the next twelve months, we plan to continue to offer our brokerage and contract carrier transportation services and expand our agent network. We are presently profitable and have adequate available lines of credit to satisfy our working capital requirements during the next twelve months.
Results of operations
Comparison of 2007 vs 2006
During the year ended December 31, 2007, we continued to implement our strategic growth business plan consisting primarily of the expansion of client services, the opening of regional operations centers in key geographical markets and the addition of independent sales agents providing brokerage and contract carrier services. Our net revenues (gross revenues less cost of transportation) are the primary indicator of our ability to source, add value and resell services that are provided by third parties and are considered to be the primary measurement of growth. Therefore, the discussion of the results of operations below focuses on the changes in our net revenues. The increases in net revenues and all related cost and expense categories are the direct result of our business expansion.
The following table represents certain statement of operation data as a percentage of net revenues:
2007 2006
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Net revenues 100.0 % 100.0 %
----- -----
Commissions 63.3 % 62.3 %
Operating expenses 22.9 % 21.6 %
Interest expense 1.3 % .6 %
Income taxes (benefit) 5.0 % (5.0 )%
----- -----
Net income 7.5 % 20.5 %
----- -----
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Revenues
Gross revenues, consisting of freight fees and other related services revenue, totaled $110,332,000 for the year ended December 31, 2007, as compared with $84,111,000 in the prior year, an increase of 31%. Net revenues were $21,309,000 for the year ended December 31, 2007, as compared with $17,743,000 in the prior year, an increase of 20%. This increase is the direct result of the continued expansion of our agent network and customer base which resulted in a 42% increase in the number of transactions processed. The increase in net revenues of 20% as compared to the increase in gross revenues of 31% is the result of revenue mix and increased direct freight costs relating to competition and the availability of equipment.
Costs and expenses
Commissions totaled $13,492,000 for the year ended December 31, 2007, as compared with $11,044,000 in the prior year, an increase of 22%. This increase is the direct result of the increase in revenues resulting from the continued expansion of our agent network and customer base. As a percentage of net revenues, commissions were 63.3% for the year ended December 31, 2007 as compared with 62.3% in the prior year. This increase is the direct result of the expansion of our agent network at higher commission rates, additional bonuses earned based upon the achievement of certain monthly benchmarks, stock based compensation expense, and cost associated with the addition of new agents.
Operating expenses totaled $4,870,000 for the year ended December 31, 2007, as compared with $3,840,000 in the prior year. As a percentage of net revenues, operating expenses were 22.9% for the year ended December 31, 2007 as compared with 21.6% in the prior year. This increase is the direct result of the increase in selling, general and administrative expenses in connection with our business expansion. We presently have adequate facilities and management to handle our present and anticipated transaction volume in 2008 without a significant increase in overhead.
Interest expense was $277,000 for the year ended December 31, 2007 as compared with $113,000 in the prior year. This increase is primarily the result of increased average borrowings to support the working capital needs generated primarily by the increase in revenues.
Income tax
Income tax expense was $1,066,000 for the year ended December 31, 2007 as compared to a net income tax benefit of $882,000 in the prior year. The 2007 income tax expense reflects an effective federal and state tax rate of 39.9% and is comprised of a deferred tax expense of $910,000 related to the utilization of our federal tax loss carryforward and a current state tax expense of $156,000. In 2006, based upon available objective evidence, including our post-merger history of profitability, we concluded that it was more likely than not that forecasted taxable income would be sufficient to utilize all of our net operating loss carryforwards before their expiration in 2014. Accordingly, in 2006 the remaining valuation allowance was reversed and a deferred tax benefit of $1,965,000 was recorded.
Comparison of 2006 vs 2005
During the year ended December 31, 2006, we continued to implement our strategic growth business plan consisting primarily of the expansion of client services, the opening of regional operations centers in key geographical markets and the addition of independent sales agents providing brokerage and contract carrier services. Our net revenues (gross revenues less cost of transportation) are the primary indicator of our ability to source, add value and resell services that are provided by third parties and are considered to be the primary measurement of growth. Therefore, the discussion of the results of operations below focuses on the changes in our net revenues. The increases in net revenues and all related cost and expense categories are the direct result of our business expansion.
The following table represents certain statement of operation data as a percentage of net revenues:
2006 2005
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Net revenues 100.0 % 100.0 %
- ----- - -----
Commissions 62.3 % 61.6 %
Operating expenses 21.6 % 22.2 %
Interest expense .6 % .4 %
Income taxes (benefit) (5.0 )% (10.8 )%
- ----- - -----
Net income 20.5 % 26.6 %
- ----- - -----
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Revenues
Gross revenues, consisting of freight fees and other related services revenue, totaled $84,111,000 for the year ended December 31, 2006, as compared with $68,040,000 in the prior year, an increase of 24%. Net revenues were $17,743,000 for the year ended December 31, 2006, as compared with $13,554,000 in the prior year, an increase of 31%.
Gross revenues from brokerage services increased to $73,036,000 from $58,150,000 and net revenues increased to $15,997,000 from $11,887,000 in the prior year. This increase is the direct result of the continued expansion of our agent network and customer base which resulted in a 17% increase in the number of transactions processed and a 8% increase in the average dollar amount per load.
Gross revenues from contract carrier services increased to $11,075,000 from $9,890,000 and net revenues increased to $1,746,000 from $1,667,000 in the prior year. Gross revenues increased approximately 12% for the year. However, there were fluctuations during the year in the number of agents and owner-operators due to the termination of agents and the addition of new agents. As a result of these fluctuations, gross revenues during the first quarter of 2006 increased by 94% over the corresponding 2005 period and decreased 9%, 17% and 6% for the second, third and fourth quarters, respectively, as compared to the corresponding quarters of 2005. In the fourth quarter of 2006, we upgraded our driver safety and compliance standards under the direction of a new safety director as part of our effort to improve safety ratings and the quality of our owner operator network. These changes resulted in a short-term reduction in the number of owner operators and corresponding number of transactions in the fourth quarter of 2006 and the first and second quarters of 2007, but did not have any long-term adverse effect.
Costs and expenses
Commissions totaled $11,044,000 for the year ended December 31, 2006, as compared with $8,348,000 in the prior year, an increase of 32%. This increase is the direct result of the continued expansion of our agent network and customer base. As a percentage of net revenues, commissions were 62.3% for the year ended December 31, 2006 as compared with 61.6% in the prior year. This increase is the direct result of the expansion of our agent network at higher commission rates, additional bonuses earned after certain monthly benchmarks are achieved, stock based compensation expense, and cost associated with the new agent additions.
Operating expenses totaled $3,840,000 for the year ended December 31, 2006, as compared with $3,005,000 in the prior year. As a percentage of net revenues, operating expenses were 21.6% for the year
ended December 31, 2006 as compared with 22.2% in the prior year. This decrease is the direct result of our ability to leverage selling, general and administrative expenses in connection with business expansion. We have increased administrative staff commensurate with the increase in transaction volume. In February 2005, we moved our headquarters increasing our space to 5,300 square feet.
Interest expense was $113,000 for the year ended December 31, 2006 as compared with $56,000 in the prior year. This increase is primarily the result of increased average borrowings and the increase in the prime lending rate from 5.25% at the beginning of 2005 to 8.25% by July 2006. As of September 2006, our line of credit facility is at a interest rate of LIBOR plus 2%, or approximately 7.3% for the period from September through December 2006.
Income tax
The income tax benefit of $882,000 for the year ended December 31, 2006 consisted of a benefit of $1,965,000 resulting from the anticipated future utilization of an available federal tax loss carryforward, net of the utilization of the deferred tax benefit of $925,000 and state income taxes of $158,000. The income tax benefit of $1,463,000 for the year ended December 31, 2005 consisted of a benefit of $2,304,000 resulting from the anticipated future utilization of an available federal tax loss carryforward, net of the utilization of the deferred tax benefit of $718,000 and state income taxes of $123,000. Based upon available objective evidence, including our post-merger history of profitability, we believe that it is more likely than not that forecasted taxable income will be sufficient to utilize all of the net operating loss carryforward before its expiration in 2014. Accordingly, in 2006 the valuation allowance was reduced by $1,965,000.
Trends and uncertainties
The transportation industry is highly competitive and highly fragmented. In our brokerage services, our primary competitors are other non-asset based as well as asset based third party logistics companies, freight brokers, carriers offering logistics services and freight forwarders. In our contract carrier services, our competitors are other contract carriers and common carriers. We also compete with customers' and shippers' internal traffic and transportation departments as well as carriers' internal sales and marketing departments directly seeking shippers' freight. We anticipate that competition for our services will continue to increase. Many of our competitors have substantially greater capital resources, sales and marketing resources and experience. We cannot assure you that we will be able to effectively compete with our competitors in effecting our business expansion plans. The most significant trend contributing to our growth during the past two years has been the expansion of our brokerage services agent network and contract carrier agent and owner operator network. Sales agents are independent contractors and, as such, there are no assurances that we can either maintain our existing agent network or continue to expand this network.
For the year ended December 31, 2007, we increased gross revenues from $84.1 million to $110.3 million. As of December 31, 2007, we had an accumulated deficit of $5.9 million compared to $7.5 million at December 31, 2006. Factors that could adversely affect our operating results include:
• the success of Sunteck in expanding its business operations; and
• changes in general economic conditions.
Depending on our ability to generate revenues, we may require additional funds to expand our business operations and for working capital and general corporate purposes. Any additional equity financing may be dilutive to stockholders, and debt financings may involve restrictive covenants that further limit our ability to make decisions that we believe will be in our best interests. In the event we cannot obtain additional financing
on terms acceptable to us when required, our ability to expand our operations may be materially adversely affected.
Liquidity and capital resources
During the past two years, our sources for cash have been cash flow generated from operations and available borrowings under our line of credit.
At December 31, 2007, we had a balance outstanding of $8,790,000 under our $10,500,000 line of credit. The line of credit is subject to the maintenance of certain financial covenants, is secured by accounts receivable and other operating assets, and matures in June 2009. We believe that we have sufficient working capital to meet our short-term operating needs and that we will be able to increase, extend or replace the line of credit on terms acceptable to us.
At December 31, 2007, we had liquid assets of approximately $270,000. Available cash is used to reduce borrowings on our line of credit.
The total amount of debt outstanding at December 31, 2007 and 2006 was $8,790,000 and $3,451,000, respectively. The following table presents our debt instruments and their weighted average interest rates at December 31, 2007 and 2006, respectively:
Weighted Weighted
Average Average
Balance Rate Balance Rate
----------- - ---------- - ----------- - ----------
2007 2006
- --------- - -- ------- - - --------- - -- -------
Line of Credit $ 8,790,000 5.9% $ 3,451,000 7.3%
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Inflation and changing prices had no material impact on our revenues or the results of operations for the year ended December 31, 2007.
Critical Accounting Policies
Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Note 1 of the Notes to Financial Statements includes a summary of the significant accounting policies and methods used in the preparation of our financial statements. The most significant areas involving our estimates and assumptions are described below. Actual results could differ materially from our estimates under different assumptions or conditions.
Revenue Recognition
As a third party transportation logistics provider, we act as the shippers' agent and arrange for a carrier to handle the freight. Gross revenues consist of the total dollar value of services purchased by shippers. Revenue is recognized upon the delivery of freight, at which time the related transportation cost, including commission, is also recognized. At that time, our obligations are completed and collection of receivables is reasonably assured.
Emerging Issues Task Force No. 99-19, "Reporting Revenues Gross as a Principal Versus Net as an Agent" (EITF 99-19), establishes criteria for recognizing revenues on a gross or net basis. We are the primary obligor in our transactions, have all credit risk, maintain substantially all risk and rewards, have discretion in selecting the supplier, and latitude in pricing decisions. Accordingly, we record all transactions at the gross amount, consistent with the provisions of EITF 99-19.
Income Taxes
The deferred tax asset represents expected future tax savings resulting from our net operating loss carryforward. As of December 31, 2007, we had a net operating loss carryforward of approximately $8.9 million for federal income tax purposes which expire through 2014. Utilization of this benefit is primarily subject to the extent of our future earnings, and may be limited by, among other things, stockholder changes, including the possible issuance of additional shares in one or more financing or acquisition transactions. As of December, 2006, we eliminated any valuation allowance for the future tax savings as management believes it is more likely than not that they will be realized by the end of the carryforward period.
Provision For Doubtful Accounts
We continuously monitor the creditworthiness of our customers and have established an allowance for amounts that may become uncollectible in the future based on current economic trends, our historical payment and bad debt write-off experience, and any specific customer related collection issues.
Recently Issued Accounting Standards
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109" (FIN 48), which clarifies the accounting for uncertainty in tax positions. FIN 48 requires the recognition of a tax position when it is more likely than not that the tax position will be sustained upon examination by taxing authorities, based upon the technical merits of the position. We adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not have a material impact on our financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, "Fair Value Measurements" (SFAS 157), which provides guidance for using fair value to measure assets and liabilities. SFAS 157 defines fair value and establishes a framework for measuring fair value; however, SFAS 157 does not expand the use of fair value in any new circumstances. The provisions of SFAS 157 are effective for us as of January 1, 2008. We do not expect the adoption of SFAS 157 to have a material impact on our financial statements.
In February 2007, FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" (SFAS 159), which permits entities to choose to measure many financial assets and liabilities at fair value. The fair value option may be applied, subject to certain exceptions, on an instrument by instrument basis; is irrevocable; and is applied only to entire instruments and not to portions of instruments. The provisions of SFAS 159 are effective for us as of January 1, 2008. We do not expect the adoption of SFAS 159 to have a material impact on our financial statements.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" (SFAS 141(R)), which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The Statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for us as of
January 1, 2009. The provisions of SFAS 141(R) will impact us only if we are party to a business combination after SFAS 141(R) has been adopted.
Off-balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Contractual Obligations
The following table summarizes our contractual obligations as of December
31, 2007:
Payments due by period
-------------------------------------------------------------------------
Less than 1 More than 5
Contractual Obligations Total year 1-3 years 3-5 years years
---------------------------- - ----------- - ------------- - ----------- - ----------- - ---------------
Operating Lease Obligations $ 159,000 $ 65,000 $ 94,000 - -
Line of Credit 8,790,000 - $ 8,790,000 - -
Total $ 8,949,000 $ 65,000 $ 8,884,000 - -
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