-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DGxXwivySj/D7sNU5x7LlxwZG6CjRGAPidamIiU6IbdxkXbe7FlAZcUZBdbQZAAT u/9aRJSdlm1nMd/BZlk1CQ== 0000853270-98-000001.txt : 19980410 0000853270-98-000001.hdr.sgml : 19980410 ACCESSION NUMBER: 0000853270-98-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980409 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FREIGHT CONNECTION INC CENTRAL INDEX KEY: 0000853270 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 112994672 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 033-29985 FILM NUMBER: 98590766 BUSINESS ADDRESS: STREET 1: 12900 DUPONT CIRCLE CITY: TAMPA STATE: FL ZIP: 33626 BUSINESS PHONE: 8138541500 MAIL ADDRESS: STREET 1: 12900 DUPONT CIRCLE CITY: TAMPA STATE: FL ZIP: 33626 FORMER COMPANY: FORMER CONFORMED NAME: TAYLOR EQUITIES INC DATE OF NAME CHANGE: 19920129 10-K 1 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 $700 per month. OPTION GRANTS The purpose of the following table is to report grants of stock options to the named officers during the years ended December 31, 1995, 1996 and 1997. Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Individual Grants Option Term % of Total Options Granted Options to Exercise Expiration Name Granted Employees Price Date 5% ($) 10% ($) 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
- --------------------------- (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 EX-10 2 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 EX-27 3
5 YEAR YEAR DEC-31-1997 DEC-31-1996 DEC-31-1997 DEC-31-1996 1285929 173911 0 0 3025938 3233861 0 0 0 0 4393679 3465257 353649 319179 146201 88381 4657310 3758758 2494363 2060482 0 0 0 0 0 0 4826 4826 2158121 1693450 4657310 3758758 26333344 22172939 26333344 22172939 23947680 20184096 23947680 20184096 1741498 1547976 0 0 8349 11607 664415 450962 199744 180000 464671 270962 0 0 0 0 0 0 464671 270962 .10 .06 .10 .06
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