Prospectus Summary

Recent Developments

 

We are in the process of compiling our results for the first quarter of 2010, which includes the full quarter impact of our December 2009 Bullet acquisition described in this prospectus. We expect to report the following results:

 

		Quarter Ended March 31,
		2009 (1)				2010 (2)
		(in millions)
Revenues		$	104.4			$	127.2
Operating income			2.1				6.5
Net income (loss)			(0.6	)			1.7
Net income (loss) available to common stockholders			(1.1	)			1.2

(1)		Our results for the first quarter of 2009 do not reflect the impact of the December 2009 Bullet acquisition.
(2)		Our results for the first quarter of 2010 do not reflect the impact of this offering.

	n	Leading Non-Asset Based, Customized Less-than-Truckload Services.   Based on our research, we believe we are the largest non-asset based provider of customized less-than-truckload services in North America in terms of revenue. We believe our point-to-point less-than-truckload model allows us to offer faster transit times with lower incidence of damage, providing us with a distinct competitive advantage over asset-based less-than-truckload carriers employing the traditional hub and spoke model. In addition, we believe our variable cost structure and the utilization of our dedicated independent

		contractor base positions us to maintain consistent operating margins during periods of economic decline or tightening industry capacity.

	n	Leading Truckload Freight Brokerage Services.   We are a leading truckload brokerage operation in North America in terms of revenue, offering temperature-controlled, dry van, and flatbed services. While we serve a diverse customer base and provide a comprehensive truckload solution, we specialize in the transport of refrigerated foods, poultry, and beverages. Similar to our less-than-truckload services, we utilize our network of purchased power and dedicated independent contractor base in an effort to maintain consistent operating margins, even during periods of economic decline.
	n	Comprehensive Outsourced Transportation Management Solutions .  After giving effect to the GTS merger, we will offer third-party logistics and transportation management solutions, which include pricing, contract management, transportation mode and carrier selection, freight tracking, freight bill payment and audit, cost reporting and analysis, and dispatch, resulting in the control of the transportation of freight and related information through the most efficient means from pickup through delivery. With a flexible operating model, scalable technology system, and access to a dynamic multi-modal carrier network, we believe we can tailor our services to each customer’s individual needs and desired level of outsourcing.

	n	improve routing efficiency and lane density throughout our network;
	n	increase utilization of our flexible independent contractor base;
	n	reduce per-mile costs;
	n	reduce dock handling costs; and
	n	enhance our real-time metric reporting to further reduce operating expenses.

Risk Factors

 

There are a number of risks and uncertainties that may affect our financial and operating performance. You should carefully consider the risks discussed in “ Risk Factors ” beginning on page 9 of this prospectus before investing in our common stock, which include but are not limited to the following:

 

	n	the competitive nature of the transportation industry;
	n	our ability to maintain the level of service that we currently provide to our customers;
	n	the ability of our carriers to meet our needs and expectations, and those of our customers;
	n	our reliance on independent contractors to provide transportation services to our customers;
	n	general economic, political, and other risks that are out of our control, including any prolonged delay in a recovery of the U.S. over-the-road freight sector;
	n	the limited experience of our senior management in managing a public company; and
	n	seasonal fluctuations in our business.

 

Our Offices

 

We maintain our principal executive offices at 4900 S. Pennsylvania Ave., Cudahy, Wisconsin 53110. Our telephone number is (414) 615-1500. Our website is located at www.rrts.com. The information contained on our website or that can be accessed through our website does not constitute part of this prospectus.

By us		9,000,000 shares
By the selling stockholders		1,600,644 shares
Total common stock offered		10,600,644 shares
Common stock to be outstanding after this offering		29,535,460 shares
Use of proceeds		We estimate that our net proceeds from this offering will be $123.5 million, assuming an initial public offering price of $15.00 per share of common stock, the midpoint of the range set forth on the cover of this prospectus, and after deducting the underwriting discounts and estimated offering expenses. We intend to use all of such net proceeds to reduce outstanding indebtedness. See “ Use of Proceeds .” We will not receive any proceeds from sales by the selling stockholders in this offering.
New York Stock Exchange symbol		RRTS

	n	14,827,327 shares issuable upon conversion of our Class A common stock, 259,806 of which are shares of redeemable common stock;
	n	282,502 shares issuable upon conversion of our Class B common stock; and
	n	2,082,766 shares issuable upon conversion of our Series B preferred stock, 290,998 of which are attributable to the conversion of accrued but unpaid dividends as of December 31, 2009.

	n	3,230,324 shares of our common stock to be issued in connection with the GTS merger, which includes 138,809 shares that are attributable to an acquisition-related increase in outstanding GTS shares subsequent to December 31, 2009; and
	n	112,541 shares of our common stock to be issued upon the offering-related conversion of dividends that accrue on our Series B preferred stock from December 31, 2009 through an assumed offering date of May 10, 2010.

	n	1,542,264 shares of our common stock issuable upon the exercise of options with a weighted average exercise price of $11.37 per share;
	n	516,498 shares of our common stock issuable upon the exercise of GTS options with a weighted average exercise price of $9.79 per share, which will be converted into options to purchase shares of our common stock upon consummation of the GTS merger; and
	n	4,016,248 shares of our common stock issuable upon the exercise of warrants with a weighted average exercise price of $11.21 per share.

(In thousands, except share and per share data)		Years Ended December 31,
		2007				2008				2009
Consolidated Statement of Operations Data
Revenues		$	538,007			$	537,378			$	450,351
Operating income			17,934				7,280				13,202
Net income (loss)			935				(3,834	)			167
Net income (loss) available to common stockholders			935				(3,834	)			(1,783	)
Weighted average common stock outstanding:
Basic			15,113,563				15,112,667				15,109,830
Diluted			15,133,571				15,112,667				15,109,830
Earnings (loss) per share available to common stockholders
Basic		$	0.06			$	(0.25	)		$	(0.12	)
Diluted		$	0.06			$	(0.25	)		$	(0.12	)
Pro forma diluted earnings per share (a)										$	0.01
Pro forma diluted earnings per share (as adjusted) (b)										$	0.26
Other Data
Working capital (end of period)		$	15,539			$	13,467			$	19,453
Capital expenditures			1,867				1,098				2,246
Capital expenditures as a percentage of revenues (c)			0.3	%			0.2	%			0.5	%

 

		As of December 31, 2009
(In thousands)		Actual				As Adjusted (d)
Consolidated Balance Sheet Data
Cash		$	667			$	667
Total current assets			63,765				63,765
Property and equipment, net			5,292				5,292
Total assets			290,835				288,575	(e)
Total current liabilities			44,312				36,912
Current maturities of long-term debt			7,400				–
Total debt (including current maturities)			128,060	(f)			17,380
Series A preferred stock subject to mandatory redemption			5,000				5,000
Redeemable common stock			1,740				3,897	(g)
Total stockholder’s investment			117,201				223,464	(h)

(a)		Pro forma diluted earnings per share is computed by dividing net income by the pro forma number of weighted average shares outstanding used in the calculation of diluted earnings per share, but after assuming conversion of our Series B preferred stock (including accrued but unpaid dividends) into shares of our common stock and the exercise of any dilutive stock options and warrants.
(b)		Pro forma diluted earnings per share (as adjusted) is computed by dividing net income, adjusted for the elimination of approximately $10.7 million in interest expense and the related tax benefit of approximately $4.1 million, assuming the retirement of approximately $123.5 million of our outstanding debt (including accrued interest and prepayment penalties), by the pro forma number of weighted average shares outstanding used in the calculation of diluted earnings per share, but after assuming conversion of our Series B preferred stock (including accrued but unpaid dividends) into shares of our common stock, the exercise of any dilutive stock options and warrants, and the issuance of shares in this offering (all of the proceeds of which issuance will be used to retire our outstanding indebtedness).
(c)		Our management uses capital expenditures as a percentage of revenues to evaluate our operating performance and measure the effectiveness of our non-asset based structure. We believe this financial measure is useful in evaluating the efficiency of our operating model compared to other companies in our industry.
(d)		The as adjusted column is unaudited and gives effect to:

	n	The conversion of all outstanding shares of our Series B preferred stock (including accrued but unpaid dividends) into shares of our common stock on a 149.314-for-one basis upon the completion of this offering; and

	n	The sale by us of 9,000,000 shares of our common stock in this offering at an assumed initial public offering price of $15.00 per share (the mid-point of the range shown on the cover page of this prospectus) and the application of the estimated net proceeds of $123.5 million as set forth in “ Use of Proceeds. ”

(e)		Reflects a non-cash write-off of approximately $2.3 million of debt issuance costs as a result of the retirement of our outstanding debt in connection with this offering.
(f)		The actual total debt amount does not include (i) approximately $9.8 million of prepayment penalties we would have incurred as of December 31, 2009 from the repayment of our junior subordinated notes in connection with this offering, or (ii) approximately $3.0 million of unaccreted discount on our junior subordinated notes.
(g)		In connection with this offering, the approximately $1.7 million carrying value of these shares will be adjusted to their fair value, using the assumed public offering price of $15.00 per share.
(h)		Reflects a charge of approximately $15.1 million that would have been incurred as of December 31, 2009 in connection with the repayment of our existing indebtedness in connection with this offering, including (i) approximately $9.8 million of prepayment penalties, (ii) the payment of approximately $3.0 million of unaccreted discount on our junior subordinated notes, and (iii) a non-cash write-off of approximately $2.3 million of debt issuance costs in connection with the repayment of our existing indebtedness included in total assets.

 

The statements and information contained in this prospectus that are not purely historical are forward-looking statements. Forward-looking statements include statements regarding our “expectations,” “anticipation,” “intentions,” “beliefs,” or “strategies” regarding the future. Forward-looking statements also include statements regarding revenue, margins, expenses, and earnings analysis for 2010 and thereafter; potential acquisitions or strategic alliances; and liquidity and anticipated cash needs and availability. All forward-looking statements included in this prospectus are based on information available to us as of the date of this prospectus, and we assume no obligation to update any such forward-looking statements. Our actual results could differ materially from the forward-looking statements. Among the factors that could cause actual results to differ materially are the factors discussed under “ Risk Factors ,” which include, but are not limited to, the following:

 

 

See “ Risk Factors ” for a more complete discussion of these risks and uncertainties and for other risks and uncertainties. These factors and the other risk factors described in this prospectus are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. Consequently, there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us.

Use of Proceeds

 

Assuming an initial public offering price of $15.00 per share, which is the midpoint of the range indicated on the cover of this prospectus, we estimate that we will receive net proceeds of $123.5 million after deducting underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) the net proceeds to us from this offering by approximately $8.4 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and estimated offering expenses payable by us.

 

We intend to use all of the net proceeds of this offering to prepay approximately $49.6 million of the outstanding debt under our credit facility, approximately $42.2 million to retire our senior subordinated notes and accrued interest, and approximately $31.7 million to retire our junior subordinated notes, including prepayment penalties and accrued interest. In addition, we intend to use approximately $33.7 million of borrowings under an anticipated new credit facility, which we anticipate entering into in connection with the consummation of this offering, together with approximately $4.1 million of restricted cash, to retire the approximately $21.4 million remaining balance of existing indebtedness and an aggregate of approximately $11.9 million of outstanding debt under GTS’ credit facility, to pay approximately $1.0 million of refinancing fees, and to pay an aggregate of $3.5 million of transaction fees to terminate management and consulting agreements with certain affiliates concurrent with this offering. See “ Certain Relationships and Related Transactions .”

 

Our current credit facility includes a $50.0 million revolving credit facility, a $40.0 million term note, and a $9.0 million incremental term loan. Our credit facility matures in 2012. Availability under the revolving credit facility is subject to a borrowing base of eligible accounts receivable, as defined in the credit agreement. Interest is payable quarterly at LIBOR plus an applicable margin or, at our option, prime plus an applicable margin. At December 31, 2009, the weighted average interest rate on our credit facility was 5.4%. Principal is payable in quarterly installments ranging from $1.9 million per quarter in 2010 increasing to $2.4 million per quarter through December 31, 2011. A final payment of the outstanding principal balance is due in 2012. The revolving credit facility also provides for the issuance of up to $6.0 million in letters of credit. As of December 31, 2009, we had outstanding letters of credit totaling approximately $4.4 million. As of December 31, 2009, approximately $34.5 million was outstanding under the term loans and $35.7 million was outstanding under the revolving credit facility.

 

Our senior subordinated notes were issued in an aggregate principal amount at maturity of approximately $36.4 million and will mature on August 31, 2012. Each senior subordinated note includes cash interest of 12% plus a deferred margin, payable quarterly, that is treated as deferred interest and is added to the principal balance of the note each quarter. The deferred interest ranges from 3.5% to 7.5% depending on our total leverage calculation, payable at maturity in 2012. As of December 31, 2009, there was $41.1 million in aggregate principal amount of senior subordinated notes outstanding.

 

Our junior subordinated notes were issued in an aggregate face amount of $19.5 million and will mature February 28, 2013. Our junior subordinated notes include interest of 20% accrued quarterly that is deferred and is added to the principal balance of the note each quarter and is payable at maturity on February 28, 2013. In addition, the junior subordinated notes agreement requires us to pay a premium upon repayment of the junior subordinated notes. The applicable premium is based on the timing of the repayment and begins at 50% of the aggregate principal amount and decreases to 10% over the life of the note. Assuming an offering date of May 10, 2010, we anticipate the prepayment penalty will be approximately $10.6 million and that accrued and unpaid interest will total approximately $1.6 million. As of December 31, 2009, there was $16.8 million in aggregate principal amount of junior subordinated notes outstanding, net of an unaccreted discount of $3.0 million.

 

GTS’ credit facility consists of a term loan facility of $10.3 million, of which approximately $9.9 million was outstanding as of December 31, 2009, and a five-year revolving credit facility of up to $4.0 million, of which approximately $1.0 million was outstanding as of December 31, 2009. As of December 31, 2009, the weighted average interest rate on GTS’ credit facility was 4.1%.

 

We will not receive any of the net proceeds from the sale of shares of common stock by the selling stockholders, which are estimated to be approximately $22.3 million. See “ Principal and Selling Stockholders .”

Dividend Policy

 

Historically, we have not paid dividends on our common stock, and we currently do not intend to pay any dividends on our common stock after the completion of this offering. We currently plan to retain any earnings to finance the growth of our business rather than to pay cash dividends. Payments of any cash dividends in the future will depend on our financial condition, results of operations, and capital requirements as well as other factors deemed relevant by our board of directors. Our current debt agreements prohibit us from paying dividends without the consent of our lenders.

 

The following table sets forth our capitalization as of December 31, 2009:

 

 

 

 

See “ Prospectus Summary — The Offering ” for information relating to the expected number of shares to be outstanding after this offering, which assumes an offering date of May 10, 2010 and reflects (i) an additional 138,809 shares that are attributable to an acquisition-related increase in outstanding GTS shares subsequent to December 31, 2009, and (ii) an additional 112,541 shares that are attributable to the offering-related conversion of dividends that accrue on our Series B preferred stock subsequent to December 31, 2009.

 

 

 

Please read the capitalization table together with the sections of this prospectus entitled “ Selected Consolidated Financial and Other Data ” and “ Management’s Discussion and Analysis of Financial Condition and Results of Operations, ” and our financial statements and related notes included elsewhere in this prospectus.

 

At December 31, 2009, our net tangible book deficit (our total assets reduced by approximately $210.8 million of goodwill, $1.4 million of other intangible assets, and all liabilities) was approximately $93.3 million, or $5.43 per share. At December 31, 2009, GTS had a net tangible book deficit of approximately $15.5 million. Our pro forma net tangible book deficit as of December 31, 2009 was approximately $108.8 million, or $5.37 per share. Pro forma net tangible book deficit per share represents the amount of our total tangible assets less total liabilities, after giving effect to the GTS merger, divided by the pro forma aggregate number of shares of our common stock outstanding. Pro forma outstanding shares of common stock as of December 31, 2009 gives retroactive effect to (1) the proposed modification of our capital structure in connection with this offering to, among other things, convert our Class A common stock, Class B common stock, and Series B preferred stock (including accrued but unpaid dividends) into a single class of new common stock on a 149.314-for-one basis; and (2) the GTS merger.

 

Dilution in net tangible book deficit per share represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the pro forma net tangible book value per share of our common stock immediately after completion of this offering. After giving effect to our sale of 9,000,000 shares at an assumed initial public offering price of $15.00 per share, and after deducting estimated underwriting discounts and our estimated offering expenses, our adjusted pro forma net tangible book deficit at December 31, 2009 would have been approximately $0.4 million, or $0.01 per share. This represents an immediate increase in net tangible book value of $5.36 per share to existing stockholders and an immediate dilution in net tangible book value of $15.01 per share to purchasers of shares in this offering. The following table illustrates this per share dilution:

 

 

The following table summarizes on a pro forma basis as of December 31, 2009, the differences between the number of shares purchased from us, the total consideration paid to us, and the average price per share paid by existing stockholders and by the new investors at an assumed initial public offering price of $15.00 per share, before deducting the estimated underwriting discounts and estimated expenses of this offering.

 

 

 

 

If the underwriters’ over-allotment option is exercised in full, the number of shares held by new investors will increase to 12,190,740 shares, or 39.2% of the total number of shares of common stock to be outstanding after this offering.

 

The discussion and tables above exclude the following:

 

 

The issuance of such shares of common stock will result in further dilution to new investors.

 

The following table sets forth selected consolidated financial and other data as of and for the periods indicated. You should read the following information together with the more detailed information contained in “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” and our consolidated financial statements and the related notes included elsewhere in this prospectus. The consolidated statements of operations for the years ended December 31, 2007, 2008, and 2009, and the consolidated balance sheet data as of December 31, 2008 and 2009, are derived from our audited consolidated financial statements included in this prospectus.

 

 

 

 

Because of these limitations, EBITDA should not be considered a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA only supplementally. See the consolidated statements of cash flows included in our consolidated financial statements included elsewhere in this prospectus. The following is a reconciliation of EBITDA:

 

 

The following expenses have not been added to net income (loss) in the calculation of EBITDA above:

 

 

You should read the following discussion and analysis in conjunction with the information set forth under “Selected Consolidated Financial and Other Data” and our consolidated financial statements and the notes to those statements included elsewhere in this prospectus. The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources, and other non-historical statements in this discussion are forward-looking statements. See “Special Note Regarding Forward-Looking Statements.” These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under “Risk Factors.” Our actual results may differ materially from those contained in or implied by any forward-looking statements.

 

Company Overview

 

We are a leading non-asset based transportation and logistics services provider offering a full suite of solutions, including customized and expedited less-than-truckload (LTL), truckload (TL) and intermodal brokerage, and domestic and international air. Following the GTS merger, third-party logistics (3PL) and transportation management solutions (TMS) will be added to our service offering. We utilize a proprietary web-enabled technology system and a broad third-party network of transportation providers, comprised of independent contractors (ICs) and purchased power, to serve a diverse customer base in terms of end market focus and annual freight expenditures. Although we service large national accounts, we primarily focus on small to mid-size shippers, which we believe represent an expansive and underserved market. Our customized transportation and logistics solutions are designed to allow our customers to reduce operating costs, redirect resources to core competencies, improve supply chain efficiency, and enhance customer service. Our business model is highly scalable and flexible, featuring a variable cost structure that requires minimal investment in transportation equipment and facilities, thereby enhancing free cash flow generation and returns on our invested capital and assets.

 

Because the GTS merger will not occur until the consummation of this offering, our discussion and analysis of financial condition and results of operations includes only a discussion of our LTL and TL brokerage businesses, which constitute our two reportable operating segments as of December 31, 2009. Segment operating income is the primary profitability measure used by our chief executive officer in assessing segment performance and allocating resources.

 

Our LTL business, which accounted for approximately 70% of our 2009 revenues, involves the pickup, consolidation, linehaul, deconsolidation, and delivery of LTL shipments throughout the United States and into Mexico, Puerto Rico, and Canada. With a network of 17 leased service centers and over 200 third-party delivery agents, we employ a point-to-point LTL model that we believe represents a competitive advantage over the traditional hub and spoke LTL model in terms of faster transit times, lower incidence of damage, and reduced fuel consumption.

 

Within our TL brokerage business, which accounted for approximately 30% of our 2009 revenues, we arrange the pickup and delivery of TL freight through our network of nine company dispatch offices and 42 independent brokerage agents primarily located throughout the Eastern United States and Canada. We offer temperature-controlled, dry van, and flatbed services and specialize in the transport of refrigerated foods, poultry, and beverages. We believe this specialization provides consistent shipping volume year-over-year.

 

Our success principally depends on our ability to generate revenues through our network of sales personnel and independent brokerage agents and to deliver freight safely, on time, and cost-effectively. Customer shipping demand and over-the-road freight tonnage levels, which are subject to overall economic conditions, ultimately drive increases or decreases in revenues. Our ability to operate profitably and generate cash is also impacted by over-the-road freight capacity, pricing dynamics, customer mix, and our ability to manage costs effectively. Within our LTL business, we typically generate revenues by charging our customers a rate based on shipment weight, distance hauled, and commodity type. This amount is typically comprised of a base rate and fuel surcharge. Within our TL brokerage business, we typically charge a flat rate negotiated on each load.

 

We incur costs that are directly related to the transportation of freight, including purchased transportation costs and commissions paid to our brokerage agents. We also incur indirect costs associated with the transportation of freight that include other operating costs, such as insurance and claims. In addition, we incur personnel-related costs and other operating expenses, collectively discussed herein as other operating expenses, essential to administering our operations. We continually monitor all components of our cost structure and establish annual budgets, which are generally used to benchmark costs incurred on a monthly basis.

 

Purchased transportation costs within our LTL business represent amounts we pay to ICs or purchased power providers and are generally contractually agreed-upon rates. Purchased transportation costs within our TL brokerage business are typically based on negotiated rates for each load hauled. We pay commissions to each brokerage agent based on a percentage of margin generated. Purchased transportation costs are the largest component of our cost structure and are generally higher as a percentage of revenues within our TL brokerage business than within our LTL business. Our purchased transportation costs typically increase or decrease in proportion to revenues.

 

Our ability to maintain or grow existing tonnage levels is impacted by overall economic conditions, shipping demand, and over-the-road freight capacity in North America, as well as by our ability to offer a competitive solution in terms of pricing,

safety, and on-time delivery. We have experienced significant fluctuations in year-over-year tonnage levels in recent years. According to the ATA, beginning in October 2006, the over-the-road freight sector experienced year-over-year declines in tonnage, primarily reflecting a weakening freight environment in the U.S. construction, manufacturing, and retail sectors. During 2009, our LTL tonnage decreased 4.6% from 2008, while LTL tonnage in the U.S. over-the-road freight sector declined 23.2% during the same period.

 

The industry pricing environment also impacts our operating performance. Our LTL pricing is typically measured by billed revenue per hundredweight and is dictated primarily by factors such as average shipment size, shipment frequency and consistency, average length of haul, freight density, and customer and geographic mix. Pricing within our TL brokerage business generally has fewer influential factors than pricing within our LTL business, but is also typically driven by shipment frequency and consistency, average length of haul, and customer and geographic mix. The pricing environment for both our LTL and TL operations generally becomes more competitive during periods of lower industry tonnage levels and increased capacity within the over-the-road freight sector.

 

The transportation industry is dependent upon the availability of adequate fuel supplies. We experienced significantly higher average fuel prices during 2008 compared to 2009. Our LTL business typically charges a fuel surcharge based on changes in diesel fuel prices compared to a national index. Although revenues from fuel surcharges generally more than offset increases in fuel costs, other operating costs have been, and may continue to be, impacted by fluctuating fuel prices. The total impact of higher energy prices on other nonfuel-related expenses is difficult to ascertain. We cannot predict future fuel price fluctuations, the impact of higher energy prices on other cost elements, recoverability of higher fuel costs through fuel surcharges, and the effect of fuel surcharges on our overall rate structure or the total price that we will receive from our customers. Depending on the changes in the fuel rates and the impact on costs in other fuel- and energy-related areas, operating margins could be impacted. Whether fuel prices fluctuate or remain constant, our operating income may be adversely affected if competitive pressures limit our ability to recover fuel surcharges. The operating income of our TL brokerage business is not impacted directly by changes in fuel rates as we are able to pass through fuel costs to our customers.

 

 

 

 

In December 2009, we acquired certain assets and related operations of Bullet Freight Systems, Inc. The acquired operations had aggregate revenues of approximately $48 million for the period from January 1, 2009 to the acquisition date of December 11, 2009. The impact of Bullet on our net income during that period would have been immaterial. Given identified operating efficiencies and synergies associated with the Bullet integration, we expect the acquired operations to generate approximately $50 million in revenues and contribute over $9 million to our operating income in 2010. These expectations are based upon certain assumptions, which include, but are not limited to, the elimination of corporate overhead costs and operating headquarters that were not acquired or assumed in the Bullet acquisition, the integration of certain of the acquired terminal operations into our existing terminal operations, and revenue growth of approximately 6% resulting primarily from anticipated new customer growth and higher estimated average fuel prices in 2010 as compared with 2009.

 

In addition, concurrent with the consummation of this offering, we will acquire GTS through the GTS merger. In 2009, GTS had revenues of approximately $35 million. GTS is in the process of compiling its financial results for the first quarter of 2010 and expects to report approximately $14.2 million in revenues and approximately $0.8 million of operating income, as compared with approximately $6.4 million in revenues and approximately break-even operating income from the first quarter of 2009. The first quarter 2010 results reflect GTS’ acquisitions of two businesses in 2009 and an additional business in mid-February 2010. Based upon the outlook for GTS for 2010, including the full year impact of GTS’ recent acquisitions, we expect GTS to generate approximately $60 million in revenues and approximately $5 million in operating income for 2010. These expectations are based upon certain assumptions, which include but are not limited to inclusion for the full year of operating results for the acquisitions completed by GTS, combined revenue growth of approximately 12% primarily due to new customer growth, and purchased transportation costs as a percentage of revenues consistent with historical levels attained in

the final three fiscal quarters of 2009. As a result of the common control of both GTS and our company, following the GTS merger our results of operations will include the results of GTS from February 29, 2008.

 

THE FORWARD-LOOKING EXPECTATIONS SET FORTH ABOVE ARE BASED ON ASSUMPTIONS THAT ARE INHERENTLY SUBJECT TO UNCERTAINTIES AND CONTINGENCIES, SOME OF WHICH ARE BEYOND OUR CONTROL. ALTHOUGH OUR EXPECTATIONS REFLECT THE MOST RELEVANT AND UP-TO-DATE INFORMATION AVAILABLE TO US, THERE MAY BE MATERIAL DIFFERENCES BETWEEN ACTUAL AND EXPECTED RESULTS AND THIS INFORMATION SHOULD NOT BE RELIED UPON AS BEING NECESSARILY INDICATIVE OF FUTURE RESULTS. NEITHER OUR MANAGEMENT NOR ANY OF OUR REPRESENTATIVES INTENDS TO UPDATE OR OTHERWISE REVISE THESE EXPECTATIONS TO REFLECT NEW CIRCUMSTANCES, AND WE WILL NOT REFER BACK TO THESE EXPECTATIONS IN OUR FUTURE PERIODIC REPORTS FILED WITH THE SEC. NEITHER OUR INDEPENDENT AUDITORS, NOR ANY OTHER INDEPENDENT ACCOUNTANTS, HAVE COMPILED, EXAMINED, OR PERFORMED ANY PROCEDURES WITH RESPECT TO THE PROSPECTIVE EXPECTATIONS SET FORTH ABOVE, NOR HAVE THEY EXPRESSED ANY OPINION OR ANY OTHER FORM OF ASSURANCE ON SUCH INFORMATION OR ITS ACHIEVABILITY, AND ASSUME NO RESPONSIBILITY FOR, AND DISCLAIM ANY ASSOCIATION WITH, SUCH EXPECTATIONS. SEE RISK FACTOR “THE EXPECTED RESULTS FROM OUR 2009 BULLET ACQUISITION AND THE GTS MERGER MAY VARY SIGNIFICANTLY FROM OUR EXPECTATIONS” IN “ RISK FACTORS .”

 

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

 

Revenues

 

Revenues decreased by $87.0 million, or 16.2%, to $450.4 million during 2009 from $537.4 million during 2008. Despite adding over 6,000 new LTL customers in 2009 (excluding customers added in connection with the Bullet acquisition), LTL revenues decreased by $50.4 million, or 13.8%, to $316.1 million during 2009 from $366.5 million during 2008. This was primarily a result of declines in over-the-road freight tonnage, a competitive pricing environment, and declines in diesel fuel prices. During 2009, our LTL tonnage decreased 4.6% from 2008, while LTL tonnage in the U.S. over-the-road freight sector declined 23.2% during the same period. Our LTL tonnage decline compared to prior-year levels abated in each of the first three quarters of 2009 and we experienced tonnage growth of 0.6% during October 2009, 14.0% during November 2009, and 24.6% during December 2009 over prior-year levels. This trend resulted primarily from a 19% increase in our monthly average number of LTL customers during 2009 compared to 2008. We believe that this trend will continue and favorably impact our results in 2010. In that regard, our monthly average number of LTL customers increased 25% during the first quarter of 2010 over to the same period in 2009. In 2009, our LTL revenue per hundredweight, including fuel surcharges, decreased 9.7% from 2008, while LTL revenue per hundredweight in the U.S. over-the-road freight sector declined 12.1% during the same period. TL brokerage revenues declined by $36.6 million, or 21.4%, to $134.8 million during 2009 from $171.4 million during 2008, primarily due to market tonnage declines, a competitive pricing environment, and declines in diesel fuel prices from historic highs experienced in 2008. We partially offset these market factors by continuing to expand our TL brokerage agent network from 24 agents as of June 30, 2008 to 42 agents as of December 31, 2009. We believe this will enhance our TL brokerage revenue growth in the future.

 

Purchased Transportation Costs

 

Purchased transportation costs decreased by $78.0 million, or 18.1%, to $354.1 million during 2009 from $432.1 million during 2008. LTL purchased transportation costs decreased by $43.7 million, or 15.6%, to $235.6 million during 2009 from $279.3 million during 2008, and decreased as a percentage of LTL revenues to 74.5% from 76.2%. Lower freight density and lower revenue per hundredweight were more than offset by our cost reduction initiatives, such as terminal consolidations and targeted rate negotiations with our third-party transportation network. TL brokerage purchased transportation costs decreased by $34.3 million, or 22.4%, to $119.1 million during 2009 from $153.4 million during 2008. As a percentage of TL brokerage revenues, this decrease represents a modest improvement to 88.3% from 89.5%.

 

Operating Income

 

Operating income increased by $5.9 million, or 81.3%, to $13.2 million during 2009 from $7.3 million in 2008. As a percentage of revenues, operating income increased to 2.9% during 2009 from 1.4% during 2008. Within our LTL business, operating income increased by $4.0 million, or 75.0%, to $9.4 million during 2009 from $5.4 million during 2008, which represents an increase as a percentage of LTL revenues to 3.0% during 2009 from 1.5% during 2008. Operating income within our TL brokerage business decreased by $1.3 million, or 22.9%, to $4.3 million during 2009 from $5.6 million during 2008. This represents a slight decline as a percentage of TL brokerage revenues to 3.2% during 2009 from 3.3% during 2008. As discussed above, other operating expenses that were not allocated to our LTL or TL brokerage businesses declined by $3.2 million to $0.5 million during 2009 from $3.7 million during 2008. This positively impacted our operating income by $3.2 million during 2009.

 

Interest Expense

 

Interest expense was relatively flat from 2008 to 2009, increasing modestly to $12.7 million during 2009 from $12.6 million during 2008.

 

Income Tax

 

Income tax provision was $0.3 million during 2009 compared to a benefit of $1.4 million during 2008. The effective tax rate was 64.5% during 2009 compared to a benefit of 27.3% during 2008. The effective income tax rate in each year varies from the federal statutory rate of 35.0% primarily due to state and Canadian income taxes as well as the impact of items causing permanent differences, the largest of which are meals and entertainment.

 

Net Income (Loss) Available to Common Stockholders

 

Net loss available to common stockholders decreased by $2.1 million to $1.8 million during 2009 from a net loss of $3.8 million during 2008. Net loss available to common stockholders in 2009 was impacted by $2.0 million of accretion of Series B preferred stock dividends. Upon completion of this offering, the shares of Series B preferred stock will be converted into shares of our common stock and such accretion will be eliminated as of the date of conversion.

 

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

 

Revenues

 

Revenues decreased by $0.6 million, or 0.1%, to $537.4 million during 2008 from $538.0 million during 2007. Despite declines in over-the-road freight tonnage and a competitive pricing environment, LTL revenues increased by $4.7 million, or 1.3%, to $366.5 million from $361.8 million in 2007. This increase was primarily due to net new business awards and fuel price increases that more than offset industry declines in pricing and tonnage. TL brokerage revenues declined $4.9 million, or 2.8%, to $171.4 million during 2008 from $176.3 million during 2007. This was primarily due to market tonnage declines and a competitive pricing environment, partially offset by higher fuel prices.

 

Purchased Transportation Costs

 

Purchased transportation costs increased by $6.5 million, or 1.5%, to $432.1 million during 2008 from $425.6 million during 2007. LTL purchased transportation costs increased by $10.3 million, or 3.8%, to $279.3 million during 2008 from $269.0 million during 2007 and increased as a percentage of LTL revenues to 76.2% in 2008 from 74.3% in 2007. Increases in fuel costs paid to carriers and lower freight density were partially offset by targeted cost reduction initiatives implemented during 2007 to streamline our cost structure and enhance our position in the event of a market rebound. These initiatives included increasing our recruitment and utilization of ICs where more cost-effective, improving carrier selection tools within our technology system, renegotiating more favorable contracts with delivery agents, and increasing the number of deliveries direct to end users and through our service centers. TL brokerage purchased transportation costs decreased by $3.3 million, or 2.1%, to $153.4 million during 2008 from $156.7 million during 2007. As a percentage of TL brokerage revenues, this represented a modest increase to 89.5% during 2008 from 88.9% during 2007.

 

Other Operating Expenses

 

Other operating expenses (which, in this paragraph, reflects the sum of personnel and related benefits, other operating expenses, acquisition transaction expenses, and restructuring and IPO expenses line items from the “Results of Operations” table above) increased by $3.3 million, or 3.6%, to $96.0 million during 2008 from $92.7 million during 2007. Other operating expenses within our LTL business increased modestly by $0.1 million to $80.5 million during 2008 from $80.4 million in 2007. This was primarily as a result of non-recurring restructuring expenses related to the implementation of cost reduction initiatives, partially offset by increased operating efficiency and savings under a consolidated insurance program. Within our

TL brokerage business, other operating expenses increased by $0.6 million to $11.8 million during 2008 from $11.2 million during 2007, primarily as a result of further investment in TL brokerage agent recruitment efforts. Other operating expenses that were not allocated to our LTL or TL brokerage businesses increased by $2.6 million to $3.7 million during 2008 from $1.1 million during 2007. Of the $1.1 million incurred during 2007, $0.4 million represents management fees that were subsequently waived and $0.7 million represents stock-based compensation expense. Of the $3.7 million incurred during 2008, $0.4 million represents management fees that were subsequently waived, $0.7 million represents stock-based compensation expense, and the remaining $2.6 million represents expenses incurred in 2008 as a result of our postponed IPO efforts.

 

Depreciation and Amortization

 

Depreciation and amortization increased by $0.2 million to $2.0 million during 2008 from $1.8 million during 2007. Within our LTL business, depreciation and amortization increased modestly to $1.4 million during 2008 from $1.2 million during 2007. TL brokerage depreciation and amortization was $0.6 million in both years.

 

Operating Income

 

Operating income decreased by $10.6 million, or 59.4%, to $7.3 million in 2008 from $17.9 million during 2007. As a percentage of revenues, operating income decreased to 1.4% during 2008 from 3.3% during 2007. Within our LTL business, operating income decreased by $5.8 million to $5.4 million during 2008 from $11.2 million during 2007, which represents a decline as a percentage of LTL revenues to 1.5% during 2008 from 3.1% during 2007. Operating income within our TL brokerage business decreased by $2.2 million to $5.6 million during 2008 from $7.8 million during 2007. This represents a decline as a percentage of TL brokerage revenues to 3.3% during 2008 from 4.4% during 2007. As discussed above, other operating expenses that were not allocated to our LTL or TL brokerage businesses increased by $2.6 million to $3.7 million during 2008 from $1.1 million during 2007. This negatively impacted our operating income by $2.6 million during 2008.

 

Interest Expense and Loss on Early Extinguishment of Debt

 

Interest expense decreased by $1.5 million, or 11.0%, to $12.6 million during 2008 from $14.1 million during 2007.

 

Loss on early extinguishment of debt of $1.6 million during 2007 relates to the refinancing on March 14, 2007 in conjunction with our merger with Sargent.

 

Income Tax

 

Income tax benefit was $1.4 million during 2008 compared to a provision of $1.3 million during 2007. The effective tax rate was a benefit of 27.3% during 2008 compared to 58.1% during 2007. The effective income tax rate in each year varies from the federal statutory rate of 35.0% primarily due to state and Canadian income taxes and due to the impact of items causing permanent differences , the largest of which are meals and entertainment.

 

Net Income Available to Common Stockholders

 

Net income decreased by $4.7 million to a net loss of $3.8 million during 2008 from net income of $0.9 million during 2007.

 

In addition to the contractual obligations described below, we expect that our and GTS’ 2010 capital expenditures will total approximately $2.0 million. We may also be required to pay up to $3.5 million in contingent cash consideration pursuant to the agreement governing the February 2008 acquisition of the operating subsidiaries of GTS. Moreover, we may be required to make aggregate contingent payments of $3.0 million to former owners of businesses that were recently acquired by GTS. Such contingent payments would be paid using funds from our operations or borrowings under our new credit facility.

 

Although we can provide no assurances, the net proceeds from this offering, together with amounts available under our anticipated new credit facility, net cash provided by operating activities, and available cash and cash equivalents should be adequate to finance working capital and planned capital expenditures for at least the next twelve months. Thereafter, we may find it necessary to obtain additional equity or debt financing as we continue to execute our business strategy. In the event additional financing is required, we may not be able to raise it on acceptable terms or at all.

 

 

Cash Flows from Operating Activities

 

Cash provided by (used in) our operating activities primarily consists of net income (loss) adjusted for certain non-cash items, including depreciation and amortization, loss on early extinguishment of debt, deferred interest, share-based compensation, provision for bad debts, deferred taxes and the effect of changes in working capital and other activities.

 

Cash used in operating activities was $0.1 million during the year ended December 31, 2009 and consisted of $0.2 million of net income plus $7.4 million of non-cash items, consisting primarily of depreciation and amortization, deferred interest and deferred taxes, less $7.7 million of net cash used for working capital purposes and other activities. Cash used for working capital and other activities during 2009 reflected a $4.7 million increase in accounts receivable, a $1.4 million increase in prepaid expenses and other assets, a $2.1 million decrease in accounts payable and accrued expenses, and a $0.5 million increase in other liabilities.

 

Cash Flows from Investing Activities

 

Cash used in investing activities was $25.4 million during 2009 compared to cash used of $6.5 million during 2008. Our 2009 cash used in investing activities reflects our December 2009 acquisition of certain assets of Bullet Freight Systems, Inc. for $24.2 million, the release of $0.9 million of restricted assets for covenant compliance purposes as well as $2.2 million of capital expenditures used to support our operations.

 

Cash Flows from Financing Activities

 

Cash provided by financing activities was $25.6 million during 2009 compared to cash provided of $6.3 million during 2008. Our 2009 cash provided by financing activities reflects our net borrowings of $25.5 million for the Bullet acquisition and $0.1 million for working capital and general corporate purposes.

 

Existing Credit Facility

 

On March 14, 2007, we entered into an amended and restated credit agreement, which has been amended since that time and is collectively referred to as our credit facility. Our credit facility is secured by all of our assets and includes a $50.0 million revolving credit facility, a $40.0 million term note, and a $9.0 million incremental term loan. Our credit facility matures in 2012. Availability under the revolving credit facility is subject to a borrowing base of eligible accounts receivable, as defined in the credit agreement. Interest is payable quarterly at LIBOR plus an applicable margin or, at our option, prime plus an applicable margin. Principal is payable in quarterly installments ranging from $1.9 million per quarter in 2010 increasing to $2.4 million per quarter through December 31, 2011. A final payment of the outstanding principal balance is due in 2012. The revolving credit facility also provides for the issuance of up to $6.0 million in letters of credit. As of December 31, 2009, we had outstanding letters of credit totaling approximately $4.4 million. As of December 31, 2009,

approximately $34.5 million was outstanding under the term loans and $35.7 million was outstanding under the revolving credit facility. In addition, we had approximately $4.4 million available under the revolving credit facility as of December 31, 2009. Our credit facility also includes covenants that require us to, among other things, maintain a specified fixed charge coverage ratio and maximum total leverage levels. We were in compliance with all debt covenants as of December 31, 2009.

 

New Credit Facility

 

In April 2010, we and U.S. Bank National Association signed a commitment letter with respect to a new five-year $55 million revolving credit facility effective upon the consummation of this offering. We currently expect to use approximately $33.7 million of borrowings under the new facility, together with the net proceeds from this offering and our restricted cash, to retire all of our and GTS’ outstanding debt, as well as pay approximately $4.5 million of transaction expenses. Borrowings under the credit facility will be subject to a borrowing base equal to 85% of eligible accounts receivable. We anticipate that our new revolving credit facility will be (i) jointly and severally guaranteed by each of our subsidiaries; (ii) secured by a first priority lien on substantially all of our subsidiaries’ tangible and intangible personal property; and (iii) secured by a pledge of all of the capital stock of our subsidiaries.

 

We also expect that our new revolving credit facility will require us to meet financial tests, including a minimum fixed charge coverage ratio and a maximum cash flow leverage ratio. In addition, our new revolving credit facility will contain negative covenants limiting, among other things, additional indebtedness, capital expenditures, transactions with affiliates, additional liens, sales of assets, dividends, investments and advances, prepayments of debt, mergers and acquisitions, and other matters customarily restricted in such agreements. Our new revolving credit facility will contain customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, events of bankruptcy and insolvency, failure of any guaranty or security document supporting the new revolving credit facility to be in full force and effect, and a change of control of our business.

 

Our borrowings under the new revolving credit facility will bear interest at LIBOR plus the applicable LIBOR margin of 2.5% - 3.0%, or the stated base rate plus the applicable base rate margin of 1.5% - 2.0%. The applicable margins with respect to the revolving credit facility will vary from time to time in accordance with agreed upon pricing grids based on our total cash flow leverage ratio.

 

Subordinated Debt

 

Our senior subordinated notes were issued in an aggregate principal amount at maturity of approximately $36.4 million and will mature on August 31, 2012. Each senior subordinated note includes cash interest of 12% plus a deferred margin, payable quarterly, that is treated as deferred interest and is added to the principal balance of the note each quarter. The deferred interest ranges from 3.5% to 7.5% depending on our total leverage calculation, payable at maturity in 2012. As of December 31, 2009, there was $41.1 million in aggregate principal amount of senior subordinated notes outstanding.

 

Our junior subordinated notes were issued in an aggregate face amount of $19.5 million and will mature February 28, 2013. Our junior subordinated notes include interest of 20% accrued quarterly that is deferred and is added to the principal balance of the note each quarter and is payable at maturity on February 28, 2013. In addition, the junior subordinated notes agreement requires us to pay a premium upon repayment of the junior subordinated notes. The applicable premium is based on the timing of the repayment and begins at 50% of the aggregate principal amount and decreases to 10% over the life of the note. As of December 31, 2009, there was $16.8 million in aggregate principal amount of junior subordinated notes outstanding, net of an unaccreted discount of $3.0 million.

 

 

 

 

Contractual obligations for long-term debt include required principal and interest payments on our credit facility, senior subordinated notes, and junior subordinated notes. The interest rates on these long-term debt obligations are variable and the amounts in the table represent payments on the credit facility, senior subordinated notes, and junior subordinated notes assuming rates of 5.4%, 18.5%, and 20.0% respectively, as were in effect on December 31, 2009.

 

Borrowings under the credit facility bear interest at a floating rate and may be maintained as alternate base rate loans or as LIBOR rate loans. Alternate base rate loans bear interest at (1) the Federal Funds Rate plus 0.5%, (2) the prime rate plus the applicable base rate margin, which margin is 1% to 3.5%, and (3) the LIBOR rate for a 30-day interest period plus 1%. LIBOR rate loans bear interest at the LIBOR rate, as described in the credit facility, plus the applicable LIBOR rate margin, which margin is 2.5% to 5%. At December 31, 2009, the weighted average interest rate on our credit facility was 5.4%. Our senior subordinated notes include cash interest of 12% plus a deferred margin that is treated as payment of deferred interest and is added to the principal balance of the notes each quarter. The deferred interest ranges from 3.5% to 7.5% depending on our total leverage calculation. Our junior subordinated notes include interest of 20% accrued quarterly that is deferred and is added to the principal balance of the note each quarter and is payable at maturity on February 2013.

 

The table does not reflect our planned use of proceeds from this offering to reduce outstanding indebtedness or to pay transaction fees of $3.5 million to certain of our affiliates in connection with this offering. See “Use of Proceeds.”

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements, other than operating leases as disclosed in the table of Contractual Obligations.

 

Seasonality

 

The transportation industry is subject to seasonal sales fluctuations as shipments generally are lower during and immediately after the winter holiday season because shippers generally tend to reduce the number of shipments during that time. This is because merchandise to be sold or used during the holiday season is generally manufactured, shipped, and delivered before the holiday season. In addition, inclement weather can impede operations and increase operating expenses because harsh weather can lead to increased accident frequency and increased claims. For these reasons, transportation sales have historically been higher in the third quarter of the calendar year than in the fourth quarter.

 

Effects of Inflation

 

Based on our analysis of the periods presented, we believe that inflation has not had a material effect on our operating results as inflationary increases in fuel and labor costs have generally been offset through fuel surcharges and price increases.

 

Quantitative and Qualitative Disclosures about Market Risk

 

Commodity Risk

 

In our LTL and TL businesses, our primary market risk centers on fluctuations in fuel prices, which can affect our profitability. Diesel fuel prices fluctuate significantly due to economic, political, and other factors beyond our control. Our ICs and purchased power pass along the cost of diesel fuel to us, and we in turn attempt to pass along some or all of these costs to our customers through fuel surcharge revenue programs. There can be no assurance that our fuel surcharge revenue programs will be effective in the future. Market pressures may limit our ability to pass along our fuel surcharges.

 

Interest Rate Risk

 

We have exposure to changes in interest rates on our revolving credit facility and term notes. The interest rate on these credit facilities fluctuates based on the prime rate or LIBOR plus an applicable margin. Assuming the $50.0 million revolving credit facility was fully drawn, a 1.0% increase in the borrowing rate would increase our annual interest expense by $0.5 million. We do not use derivative financial instruments for speculative trading purposes and are not engaged in any interest rate swap agreements.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that we make estimates and assumptions. In certain circumstances, those estimates and assumptions can affect amounts reported in the accompanying financial statements and related footnotes. In preparing our financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We base our estimates on historical experience and on various other assumptions that we believe

to be reasonable. Application of the accounting policies described below involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. The following is a brief discussion of our critical accounting policies and estimates.

 

Goodwill and Other Intangibles

 

Goodwill represents the excess of purchase price over the estimated fair value assigned to the net tangible and identifiable intangible assets of a business acquired. Goodwill is tested for impairment at least annually in our second quarter using a two-step process that begins with an estimation of the fair value at the “reporting unit” level. Our reporting units are our operating segments as this is the lowest level for which discrete financial information is prepared and regularly reviewed by management. The impairment test for goodwill involves comparing the fair value of a reporting unit to its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, a second step is required to measure the goodwill impairment loss. The second step includes hypothetically valuing all the tangible and intangible assets of the reporting unit as if the reporting unit had been acquired in a business combination. Then, the implied fair value of the reporting unit’s goodwill is compared to the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying amount. For purposes of our impairment test, the fair value of our reporting units are calculated based upon an average of an income fair value approach and market fair value approach. Based on these tests, we have concluded that the fair value for all reporting units is substantially in excess of the respective reporting unit’s carrying value. Accordingly, no goodwill impairments were identified in 2009, 2008, or 2007.

 

Other intangible assets recorded consist of two definite lived customer lists. We evaluate our other intangible assets for impairment when current facts or circumstances indicate that the carrying value of the assets to be held and used may not be recoverable. No indicators of impairment were identified in 2009, 2008, or 2007.

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial reporting basis and the tax basis of assets and liabilities at enacted tax rates expected to be in effect when such amounts are recovered or settled. The use of estimates by management is required to determine income tax expense, deferred tax assets and any related valuation allowance and deferred tax liabilities. The determination of a valuation allowance is based on estimates of future taxable income by jurisdiction in which the deferred tax assets will be recoverable. In making such a determination, all available positive and negative evidence, scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations, is considered. When evaluating the need for a valuation allowance as of December 31, 2009 and 2008, we considered that we achieved cumulative net income before provision for income taxes for the most recent three years, after considering the impact of offering expenses. Further, we expect to achieve cost savings from the restructuring and synergies related to the Bullet acquisition that will further increase our ability to realize the benefits of the net operating loss carry forwards. The tax deductibility of the goodwill related to our acquisitions will reduce taxable income in future years; however, under our current structure, we estimate that we will generate taxable income in 2010 and will utilize all existing net operating losses carry forwards before their expiration. These estimates can be affected by a number of factors, including possible tax audits or general economic conditions or competitive pressures that could affect future taxable income. Although management believes that the estimates are reasonable, the deferred tax asset and any related valuation allowance will need to be adjusted if management’s estimates of future taxable income differ from actual taxable income. An adjustment to the deferred tax asset and any related valuation allowance could materially impact the consolidated results of operations. At December 31, 2009 and 2008, there was no valuation allowance recorded.

 

At December 31, 2009, we had $37.1 million of gross federal net operating losses which are available to reduce federal income taxes in future years and expire in the years 2025 through 2029. We are subject to federal and state tax examinations for all tax years subsequent to December 31, 2005. Although the pre-2006 years are no longer subject to examinations by the Internal Revenue Service and various state taxing authorities, NOL carryforwards generated in those years may still be adjusted upon examination by the IRS or state taxing authorities if they have been or will be used in the future.

 

As of December 31, 2009, we had no unrecognized tax benefits recorded and no income tax related interest or penalties accrued. It is our policy to recognize interest and penalties related to unrecognized tax benefits as a component of our income tax expense.

 

Revenue Recognition

 

LTL revenue is recorded when all of the following have occurred: an agreement of sale exists; pricing is fixed or determinable; and collection of revenue is reasonably assured. We use a percentage of completion method to recognize revenue, which results in an allocation of revenue between reporting periods based on the distinctive phases of each LTL

transaction completed in each reporting period, with expenses recognized as incurred. In accordance with ASC 605-20-25-13, management believes that this is the most appropriate method for LTL revenue recognition based on the multiple distinct phases of a typical LTL transaction, which is in contrast to the single phase of a typical TL transaction.

 

TL revenue is recorded when all of the following have occurred: an agreement of sale exists; pricing is fixed or determinable; delivery has occurred; and our obligation to fulfill a transaction is complete and collection of revenue is reasonable assured. This occurs when we complete the delivery of a shipment.

 

We recognize revenue on a gross basis, as opposed to a net basis, because we bear the risks and benefits associated with revenue-generated activities by, among other things, (1) acting as a principal in the transaction, (2) establishing prices, (3) managing all aspects of the shipping process and (4) taking the risk of loss for collection, delivery and returns.

 

Recent Accounting Pronouncements

 

The issuance by the Financial Accounting Standards Board (FASB) of the Accounting Standards Codification (the Codification) on July 1, 2009 (effective for our fiscal year 2009) changes the way that accounting principles generally accepted in the United States (GAAP) are referenced. Beginning on that date, the Codification officially became the single source of authoritative nongovernmental GAAP. The change affects the way we refer to GAAP in our financial statements and accounting policies. All existing standards that were used to create the Codification were superseded.

 

In December 2007, the FASB issued authoritative accounting guidance which significantly changes the accounting for business combinations in a number of areas, including the treatment of contingent consideration, pre-acquisition contingencies, transaction costs, in-process research and development, and restructuring costs. We adopted this accounting pronouncement in fiscal year 2009 and are applying the accounting treatment for business combinations on a prospective basis.

 

Introduction

 

We are a leading non-asset based transportation and logistics services provider offering a full suite of solutions, including customized and expedited LTL, TL and intermodal brokerage, and domestic and international air. Following the GTS merger, third-party logistics and transportation management solutions will be added to our services. We utilize a proprietary web-enabled technology system and a broad third-party network of transportation providers, comprised of ICs and purchased power, to serve a diverse customer base in terms of end market focus and annual freight expenditures. Although we service large national accounts, we primarily focus on small to mid-size shippers, which we believe represent an expansive and underserved market. Our customized transportation and logistics solutions are designed to allow our customers to reduce operating costs, redirect resources to core competencies, improve supply chain efficiency, and enhance customer service. Our business model requires minimal investment in transportation equipment and facilities, thereby enhancing free cash flow generation and returns on our invested capital and assets. Further, our business model is highly scalable and flexible, featuring a variable cost structure that helped contribute to the growth of our operating income and our improvement from a net loss of approximately $3.8 million in 2008 to net income of approximately $0.2 million in 2009 despite the recent economic downturn.

 

According to the ATA, beginning in October 2006, the over-the-road freight sector experienced year-over-year declines in tonnage, primarily reflecting a weakening freight environment in the U.S. construction, manufacturing, and retail sectors. During 2009, our less-than-truckload tonnage decreased 4.6% from 2008, while less-than-truckload tonnage in the U.S. over-the-road freight sector declined 23.2% during the same period. Throughout this downturn, we have actively managed our less-than-truckload business by adding new customers and streamlining our cost structure to enhance our operating efficiency and improve margins. We believe our variable cost, non-asset based operating model serves as a competitive advantage and allows us to provide our customers with cost-effective transportation solutions regardless of broader economic conditions. We believe we are well-positioned for continued growth, profitability, and market share expansion as an anticipated rebound occurs in the over-the-road freight sector.

 

Our History

 

We were formed in February 2005 for the purpose of acquiring Dawes Transport. Dawes Transport was established in Milwaukee, Wisconsin in 1981 to provide LTL service primarily between the Midwest and West Coast using a blend of purchased power and ICs. Shortly thereafter, Roadrunner Freight, a provider of LTL services similar to Dawes Transport in scale and customer mix, but utilizing primarily purchased power, was acquired by a company sponsored by Thayer | Hidden Creek and other stockholders. In June 2005, the parent holding company of Roadrunner Freight was merged with and into us. As a result, Dawes Transport and Roadrunner Freight became our wholly owned subsidiaries as of the merger date, resulting in our current corporate structure. Based on our research, we believe we are the largest non-asset based provider of LTL services in North America in terms of revenue.

 

In January 2006, Mark A. DiBlasi joined us as chief executive officer to lead the final integration of the two LTL businesses, the expansion of the current management team and the transformation of our company into a full-service transportation and logistics provider. Our strategy throughout the transformation was to develop a comprehensive suite of services while maintaining a non-union, non-asset based structure. In October 2006, Sargent was acquired by a company sponsored by Thayer | Hidden Creek. In March 2007, we expanded our service offerings through our merger with Sargent, a TL brokerage operation serving primarily the Eastern United States and Canada.

 

In December 2009, we acquired certain assets of Bullet Freight Systems, Inc. through our wholly owned subsidiary, Bullet Transportation Systems, Inc. Bullet is a non-asset based transportation and logistics company that provides a variety of services throughout the United States and into Canada. Bullet provides LTL services as well as third-party logistics services such as truckload and intermodal brokerage and air freight forwarding. Bullet has operations in California, Oregon, Washington, and Illinois and utilizes independent contractors and an extensive third-party network of purchased power providers to deliver its freight. Bullet provides services to a broad range of industries and serves over 4,000 customers, including leading manufacturers, retailers, and wholesalers.

 

The addition of Bullet increased our market share across all of our service offerings by providing greater LTL coverage throughout North America and geographically expanding our TL brokerage operation. In addition, the integration of shipments from Bullet’s customer base into our operations has increased the freight density and balance in our less-than-truckload network. We believe this additional density and greater balance in our network will result in higher operating margins and improved levels of customer service through reduced transit times and fewer claims.

GTS Merger

 

One of our key strategic objectives has been to acquire a third-party logistics and transportation management solutions operation with a scalable technology system and management infrastructure capable of assimilating and enhancing our collective growth initiatives. We believe the proposed GTS merger, occurring simultaneous with this offering, will satisfy this strategic objective. In February 2008, GTS acquired Group Transport Services, Inc. and GTS Direct, LLC, which collectively provide transportation management solutions. GTS is based in Hudson, Ohio and is led by former executives of FedEx Global Logistics, Inc. Since 2009, GTS has made several complementary acquisitions that have expanded its geographical reach and sales force and enhanced its service offering.

 

The GTS merger will provide us with a number of competitive advantages as well as significant growth opportunities. The addition of a TMS offering will enable us to provide shippers with a comprehensive “one-stop,” multi-modal transportation and logistics solution that meets all of their transportation needs. Through the use of a coordinated sales effort, we believe that we will be able to capitalize on substantial cross-selling opportunities with existing and new customers. The increased geographic coverage and enhanced scale provided by the GTS merger will allow us to service customers outside of our existing terminal network and more effectively compete with larger integrated transportation providers. Incremental LTL volume anticipated from GTS customers will increase freight density within our existing LTL network and allow us to more cost-effectively grow our regional LTL market share as well as expand our terminal network to other regional locations. Our broad network of third-party carriers will provide GTS access to a stable source of cost-effective transportation capacity, which we believe is a competitive advantage, particularly during periods of tightened supply. Our management team and the management team of GTS have developed a strong working relationship and are implementing a cohesive plan to enhance our collective growth initiatives.

 

Our Market Opportunity

 

The transportation and logistics industry involves the physical movement of goods using a variety of transportation modes and the exchange of information related to the flow, transportation, and storage of goods between points of origin and destination. The domestic transportation and logistics industry is an integral part of the U.S. supply chain and the broader economy, representing estimated annual spending of approximately $1.3 trillion in 2008, according to Armstrong & Associates.

 

Within the industry, transportation and logistics providers are generally categorized as “asset-based” or “non-asset based” depending on their ownership of transportation equipment and facilities. Many large transportation and logistics providers are asset-based and have significant capital expenditure and infrastructure requirements. As a result of their significant fixed cost bases, these companies are focused on maintaining high asset utilization in order to maximize returns on invested capital. Conversely, non-asset based providers maintain greater operational flexibility to adapt to changes in freight volumes because they own minimal transportation equipment and facilities and therefore have minimal capital expenditure and infrastructure requirements.

 

The U.S. domestic over-the-road freight sector has been experiencing a downturn that began in late 2006 and has continued through 2009. We believe our variable cost, non-asset based operating model serves as a competitive advantage in this market environment, as we were able to streamline our cost structure and improve efficiencies in response to market conditions. As a result of the freight downturn, many of our competitors across all the LTL, TL, and third-party logistics areas have experienced financial and operational difficulty. Through organic growth and strategic acquisitions, we believe we are well-positioned for market share expansion and earnings growth as an anticipated rebound occurs in the over-the-road freight sector.

 

Industry Sectors

 

Third-Party Logistics

 

Third-party logistics providers offer transportation management and distribution services including the movement, storage, and assembly of inventory. The U.S. 3PL sector increased from $45.3 billion in 1999 to $127.0 billion in 2008 (and did not experience a decline in any year during such period), according to Armstrong & Associates. Only 16.1% of logistics expenditures by U.S. businesses were outsourced in 2008, according to Armstrong & Associates. Although we believe, based on our industry knowledge, that the U.S. 3PL sector declined in 2009, we also believe that the market penetration of third-party logistics will expand in the future as companies increasingly redirect their resources to core competencies and outsource their transportation and logistics requirements as they realize the cost-effectiveness of third-party logistics providers.

Over-the-Road Freight

 

According to the ATA, the U.S. over-the-road freight sector represented approximately $660 billion in revenue in 2008 and accounted for approximately 83% of domestic spending on freight transportation. The ATA estimates that U.S. over-the-road freight transportation will increase to over $1.1 trillion by 2020. The over-the-road freight sector includes both private fleets and “for-hire” carriers (ICs and purchased power). Private fleets consist of tractors and trailers owned and operated by shippers that move their own goods and, according to the ATA, accounted for approximately $290 billion of revenue in 2008. For-hire carriers transport freight belonging to others, including LTL and TL, and accounted for approximately $375 billion in revenue in 2008, according to the ATA.

 

LTL carriers specialize in consolidating shipments from multiple shippers into truckload quantities for delivery to multiple destinations. LTL carriers are traditionally divided into two segments – national and regional. National carriers typically focus on two-day or longer service across distances greater than 1,000 miles and often operate without time-definite delivery, while regional carriers typically offer time-definite delivery in less than two days. According to the ATA, the U.S. LTL market generated $51.8 billion of revenue in 2008.

 

TL carriers dedicate an entire trailer to one shipper from origin to destination and are categorized by the type of equipment they use to haul a shipper’s freight, such as temperature-controlled, dry van, tank, or flatbed trailers. According to the ATA, excluding private fleets, revenues in the U.S. TL segment were approximately $320.4 billion in 2008.

 

Industry Trends

 

We believe the following trends will continue to drive growth in the transportation and logistics industry:

 

Growing Demand for “One-Stop” Transportation and Logistics Service Providers

 

We believe that shippers are increasingly seeking “one-stop” transportation and logistics providers that can offer a comprehensive suite of services to meet all of their shipping needs. We believe shippers will continue to consolidate their vendor base to increase outsourcing efficiencies and focus on core competencies. As a result, we believe that transportation and logistics providers that offer broad geographic coverage and multiple modes of transportation in conjunction with technology-enabled solutions are positioned to gain market share from smaller providers that typically lack the scale, resources, and expertise to remain competitive.

 

Recognition of Outsourcing Efficiencies

 

We believe that companies are increasingly recognizing the potential cost savings, improved service, and increased financial returns gained from outsourcing repetitive and non-core activities to specialized third-party providers. By utilizing third-party transportation and logistics providers, companies can benefit from the specialists’ technology, achieve greater operational flexibility, and redeploy resources to core operations.

 

Consolidation in the Highly Fragmented 3PL, LTL, and TL Sectors

 

The transportation and logistics industry is highly fragmented and, based on our research, no single third-party transportation and logistics provider accounts for more than 5% of the overall U.S. market. Given the large number of small industry participants, we believe there is a significant opportunity for growth and consolidation, especially during periods of economic uncertainty. We believe we are well positioned to take advantage of the continuing consolidation of the transportation and logistics industry due to our quality of service, breadth of service offerings, scalable operating and technology platforms, experienced management team, and financial stability. We also believe better-capitalized companies with scalable operating models, like us, will have significant opportunities to improve profit margins and gain market share as smaller, less flexible competitors exit our industry over time.

 

Increasing Demand for Customized Transportation and Logistics Solutions

 

 

 

Our Competitive Strengths

 

We consider the following to be our principal competitive strengths, which collectively helped us increase our operating income and reduce our net losses from 2008 to 2009 notwithstanding industry-wide declines in LTL tonnage and the related increasing pressures on pricing during that period:

 

Comprehensive Logistics and Transportation Management Solutions.  Our broad offering of transportation and logistics services allows us to manage a shipper’s freight from dispatch through final delivery utilizing a wide range of transportation modes. Following the GTS merger, we will have the ability to provide third-party logistics and transportation management solutions to shippers seeking to redirect resources to core competencies, improve service, reduce costs, and utilize the most appropriate modes of transportation. We can accommodate the diverse needs and preferred means of communication of shippers of varying sizes with any combination of services we offer. We leverage our scalable, proprietary technology systems to manage our multi-modal nationwide network of service centers, delivery agents, dispatch offices, brokerage agents, ICs, and purchased power. As a result of our integrated offering of services and solutions, we believe we have a competitive advantage in terms of service, delivery time, and customized solutions.

 

Flexible Operating Model.  Because we utilize a broad network of purchased power, ICs, and other third-party transportation providers to transport our customers’ freight, our business is not characterized by the high level of fixed costs and required concentration on asset utilization that is common among many asset-based transportation providers. As a result, we are able to focus solely on providing quality service and specialized transportation and logistics solutions to our customers, which we believe provides a significant competitive advantage. Our flexibility to scale our independent contractor base to react to contractions in freight capacity or increases in purchased transportation costs allows us to maintain attractive margins on our freight and continue to meet customer demand. Furthermore, our operating model requires minimal investment in transportation equipment and facilities, which enhances our returns on our invested capital and assets. For example, we do not own any tractors or other powered transportation equipment used to transport our customers’ freight. Although we own or lease approximately 1,000 trailers for use in local city pickup and delivery, the book value of our approximately 900 owned trailers and the lease costs for the approximately 100 leased trailers is immaterial to our operations as of December 31, 2009. As a result of our flexible operating model and execution of our strategic plan, we have continued to grow through the economic downturn, with growth in operating income of 81.3% from 2008 to 2009 and our improvement from a net loss of approximately $3.8 million in 2008 to net income of approximately $0.2 million in 2009.

 

Well-Positioned to Capitalize on Acquisition Opportunities.  The domestic transportation and logistics industry is large and highly fragmented, thereby providing significant opportunities to make strategic acquisitions. Our scalable platform, experienced and motivated management team, and proven ability to identify, execute and integrate acquisitions enable us to be an attractive partner for potential acquisition candidates. Furthermore, our ability to leverage our substantial infrastructure and technology capacity allows us to maximize the benefits of acquisitions. As a result of our extensive strategic planning and execution throughout the recent downturn, we are uniquely positioned to take advantage of continuing consolidation opportunities given our improved capital position following this offering. We believe that this offering will also improve our ability to capitalize on acquisition opportunities by deleveraging our business and reducing our significant historical interest expense.

 

Focus on Serving a Diverse, Underserved Customer Landscape.  We serve over 35,000 customers, with no single customer accounting for more than 3.0% of our 2009 revenue. In addition, we serve a diverse mix of end markets, with no industry sector accounting for more than 18.0% of our 2009 revenue. We concentrate primarily on small to mid-size shippers with annual transportation expenditures of less than $25 million, which we believe represents an underserved market. Our services are designed to satisfy these customers’ unique needs and desired level of integration. Furthermore, we believe our target customer base presents attractive growth opportunities for each of our current and future service offerings given that many small to mid-size shippers have not yet capitalized on the benefits of third-party transportation management.

 

Scalable Technology Systems.  We have invested significant resources to develop and continually enhance our scalable, proprietary technology systems. Our web-enabled technology is designed to serve our customers’ distinct logistics needs and provide them with cost-effective solutions and consistent service on a shipment-by-shipment basis. In addition to managing the physical movement of freight, we offer real-time shipment tracking, order processing, and automated data exchange. Our technology also enables us to more efficiently manage our multi-modal capabilities and broad carrier network, and provides the scalability necessary to accommodate significant growth.

 

Experienced and Motivated Management Team.  We have been successful in attracting a knowledgeable and talented senior management team with an average of 25 years of industry experience and a complementary mix of operational and

technical capabilities, sales and marketing experience, and financial management skills. Our management team is led by our chief executive officer, Mark A. DiBlasi. Mr. DiBlasi has over 30 years of industry experience and previously managed a $1.2 billion-revenue business unit of FedEx Ground, Inc., a division of FedEx Corporation. Our executives have experience leading high-growth logistics companies and/or business units such as FedEx Ground, Inc., FedEx Global Logistics, Inc., and YRC Worldwide, Inc. Additionally, several members of our management team founded and ran their own transportation and logistics companies prior to joining us or being acquired by us. We believe this provides us with an entrepreneurial culture and a team capable of executing our growth strategies. Our executives’ experience is also expected to help our company address and mitigate negative industry trends and the various risks inherent in our business, including significant competition, reliance on independent contractors, a prolonged economic downturn, the integration of recently acquired companies, and fluctuations in fuel prices.

 

Our Growth Strategies

 

We believe our business model has positioned us well for continued growth and profitability, which we intend to pursue through the following initiatives:

 

Continue Expanding Customer Base.  In 2009, we expanded our customer base by over 10,000 customers (over 4,000 of which were added through the Bullet acquisition), and we intend to continue to pursue greater market share in the LTL, TL brokerage and TMS markets. The GTS merger will further expand our customer base, enhance our geographic coverage and create a broader menu of services for existing and future customers. Our expanded reach and broader service offering will provide us with the ability to add new customers seeking a “one-stop” transportation and logistics solution. We expect to establish additional customer relationships in connection with the GTS merger by utilizing our LTL sales force of over 100 people to expand the market reach of our TMS offering, which will be added to our suite of services through the GTS merger. Based on our research, we also believe the pool of potential new customers will grow as the benefits of third-party transportation management solutions continue to be embraced by shippers.

 

Increase Penetration with Existing Customers.  With a more comprehensive service offering and an expanded network resulting from the Bullet acquisition and the GTS merger, we will have substantial cross-selling opportunities and the potential to capture a greater share of each customer’s annual transportation and logistics expenditures. Along with our planned cross-selling initiatives, we believe that macroeconomic factors will provide us with additional opportunities to further penetrate existing customers. During the recent economic downturn, existing customers generally reduced their number of shipments and pounds per shipment. We believe an economic rebound will result in increased revenue through greater shipment volume, improved load density, and the addition of new customers, and will allow us to increase profits at a rate exceeding our revenue growth.

 

Continue Generating Operating Improvements.  Over the last 18 months, we have completed a number of operating improvements, such as headcount reductions, terminal consolidations, and carrier and delivery agent rate reductions. These improvements streamlined our cost structure, improved operating efficiency, and enhanced our margins. We believe that we would have generated approximately $5.3 million of additional cost savings if we had implemented these headcount reductions, terminal consolidations and other improvements at the beginning of 2009. As a result of our improvement efforts with respect to purchased transportation costs, our linehaul cost per mile, excluding fuel surcharges, decreased from $1.24 at the beginning of 2009 to $1.16 by year-end. By contrast, according to statistics provided in ITS Trans4cast Letter, an industry publication by Internet Truckstop (an Internet-based provider of transportation industry and load data), industry-wide linehaul cost per mile increased from approximately $1.39 to $1.42 during the same period. In order to continue to capitalize on these improvements and enhance our competitive position, as well as accelerate earnings growth, we are implementing additional initiatives designed to:

 

 

Pursue Selective Acquisitions.  The transportation and logistics industry is highly fragmented, consisting of many smaller, regional service providers covering particular shipping lanes and providing niche services. We built our LTL, TL brokerage, and TMS (assuming completion of the GTS merger) platforms in part by successfully completing and integrating a number of accretive acquisitions. According to a recent article in The Journal of Commerce, one in four transportation companies are looking to complete a sale transaction in the next 18 months. We intend to continue to pursue acquisitions that will complement our existing suite of services and extend our geographic reach. Our LTL delivery agents also present an opportunity for growth via acquisition. If we decide to offer outbound LTL service from a new strategic location, we could

potentially acquire one of our delivery agents and train them to manage local pickup, consolidation, and linehaul dispatch using our technology systems. With a scalable, non-asset based business model, we believe we can execute our acquisition strategy with minimal investment in additional infrastructure and overhead.

 

Our Services

 

We are a leading non-asset based transportation services provider offering a full suite of customized transportation solutions with a primary focus on serving the specialized needs of small to mid-size shippers. Because we do not own the transportation equipment used to transport our customers’ freight, we are able to focus solely on providing quality service rather than on asset utilization. Our customers generally communicate their freight needs to one of our transportation specialists on a shipment-by-shipment basis via telephone, fax, Internet, e-mail, or electronic data interchange. We leverage our proprietary technology systems and a diverse group of over 9,000 third-party carriers to provide scalable capacity and reliable service to more than 35,000 customers in North America.

 

Less-than-Truckload

 

Based on our industry knowledge, we believe we are the largest non-asset based provider of LTL transportation services in North America in terms of revenue. We provide LTL service originating from points within approximately 150 miles of our service centers to most destinations throughout the United States and into Mexico, Puerto Rico, and Canada. Through GTS’ network relationships, we expect to substantially expand our coverage area and service points beyond those historically served by our service center locations. Within the United States, we offer national, long-haul service (1,000 miles or greater), inter-regional service (between 500 and 1,000 miles), and regional service (500 miles or less). We serve a diverse group of customers within a variety of industries, including retail, industrial, paper goods, manufacturing, food and beverage, health care, chemicals, computer hardware, and general commodities.

 

As the diagram below illustrates, we utilize a point-to-point LTL model that is differentiated from the traditional, asset-based hub and spoke LTL model. Our model does not require intermediate handling at a break-bulk hub (a large terminal where freight is offloaded, sorted, and reloaded), which we believe represents a competitive advantage in terms of timeliness, lower incidence of damage, and reduced fuel consumption. For example, we can transport LTL freight from Cleveland, Ohio to Los Angeles, California without stopping at a break-bulk hub, while the same shipment traveling through a traditional hub and spoke LTL model would likely be unloaded and reloaded at break-bulk hubs in, for example, Akron, Ohio and Adelanto, California prior to reaching its destination.

 

Representative Asset-Based National Hub and Spoke LTL Model
versus Non-Asset Based National Point-to-Point LTL Model

 

We believe our model allows us to offer LTL average transit times more comparable to that of deferred air freight service than to standard national LTL service, yet more cost-effective. Our LTL claims ratio (the ratio of claims to revenues including fuel surcharge) was 0.8% during 2009. Key aspects of our LTL service offering include the following:

 

LTL Service Center and Delivery Agent Network

 

 

As illustrated by the graph below, our change in LTL tonnage during 2009 outperformed the average for publicly traded LTL providers as well as the broader ATA LTL tonnage index.

 

Change in LTL Tonnage ⁽¹⁾

 

 

 

 

As illustrated by the graph below, our 2009 change in pricing, or revenue per hundredweight (including fuel surcharges), also outperformed the average for the publicly traded LTL providers set forth above.

 

Change in LTL Revenue per Hundredweight, Including Fuel Surcharges ⁽¹⁾

 

 

 

 

We believe a rebound in the over-the-road freight sector would provide greater freight density and increased shipping volumes, thereby allowing us to build full trailer loads more quickly and deliver freight faster under our point-to-point model. We believe this will further distinguish our LTL service offering as even more comparable in speed to deferred air freight service, leading to enhanced market share and improved operating margins.

 

Truckload Brokerage

 

We are a leading TL brokerage operation in North America in terms of revenue. We provide a comprehensive range of TL solutions for our customers by leveraging our broad base of over 7,000 third-party carriers who operate temperature-controlled, dry van, and/or flatbed capacity. Although we specialize in the transport of refrigerated foods, poultry and beverages, we also provide a variety of TL transportation solutions for dry goods ranging from paper products to steel, as well as flatbed service for larger industrial load requirements. We arrange the pickup and delivery of TL freight either through our nine company dispatch offices (operated by our employees) or through our network of 42 independent brokerage agents. Our dispatch offices and brokerage agents are located primarily throughout the Eastern United States and Canada, as illustrated on the map below.

 

TL Dispatcher and Agent Network

 

 

Company Dispatchers.  Our 39 company brokers, whom we refer to as dispatchers, not only engage in the routing and selection of our transportation providers, but also serve as our internal TL sales force, responsible for managing existing customer relationships and generating new customer relationships. Because the performance of these individuals is essential to our success, we offer attractive incentive-based compensation packages that we believe keep our dispatchers motivated, focused, and service-oriented.

 

We typically earn a margin ranging from 10-20% of the cost of a standard TL shipment. On shipments generated by one of our dispatchers, we retain 100% of this margin. This differs for shipments generated by our brokerage agents, to whom we pay commissions as described below.

 

Dispatch Office Expansion.  We have traditionally expanded our dispatch operations based upon the needs of our customers. Going forward, we plan to open new dispatch offices, particularly in geographic areas where we lack coverage of the local freight market. Importantly, opening a new dispatch office requires only a modest amount of capital – it usually involves leasing a small amount of office space and purchasing communication and information technology equipment. Typically the largest investment required is in working capital as we generate revenue growth from new customers. While the majority of growth within our dispatch operations has been organic, we will continue to evaluate selective acquisitions that would allow us to quickly penetrate new customers and geographic markets.

 

Independent Brokerage Agents.  In addition to our dispatchers, we also maintain a network of independent brokerage agents that have partnered with us for a number of years. Brokerage agents complement our network of dispatch offices by bringing pre-existing customer relationships, new customer prospects, and/or access to new geographic markets. Furthermore, they typically provide immediate revenue and do not require us to invest in incremental overhead. Brokerage agents own or lease their own office space and pay for their own communications equipment, insurance, and any other costs associated with running their operation. We only invest in the working capital required to execute our quick pay strategy and generally pay a commission to our brokerage agents ranging from 40-70% of the margin we earn on a TL shipment. Similar to our

dispatchers, our brokerage agents engage in the routing and selection of transportation providers for our customer base and perform sales and customer service functions on our behalf.

 

Brokerage Agent Expansion.  We believe we offer brokerage agents a very attractive partnership opportunity. We offer access to our reliable network of over 175 ICs (operating over 300 power units) and over 7,000 purchased power providers and invest in the working capital required to pay these carriers promptly and assume collection responsibility. We believe this has contributed to our reputation for quality and reliable service, as well as to the consistent growth of our brokerage agent network. Since June 30, 2008, we have expanded our TL brokerage agent network from 24 agents to 42 agents. Additionally, 16 of our brokerage agents each generated more than $1 million in revenue in 2009. We believe our increased development efforts and attractive value proposition will allow us to further expand our brokerage agent network and enhance the growth of our TL brokerage business.

 

Transportation Management Solutions

 

GTS’ TMS offering, which will be added to our suite of services through the GTS merger, is designed to provide comprehensive or à la carte third-party logistics services. GTS provides the necessary operational expertise, information technology capabilities, and relationships with third-party transportation providers to meet the unique needs of its customers. For customers that use the most comprehensive service plans, GTS complements their internal logistics and transportation management personnel and operations, enabling them to redirect resources to core competencies, reduce internal transportation management personnel costs and, in many cases, achieve substantial annual freight savings. Following the GTS merger, key aspects of our TMS capabilities will include the following:

 

 

With a broad TMS offering, we believe we can accommodate a shipper’s unique needs with any combination of services along our entire spectrum, and cater to their preferred means of shipment processing and communication.

 

We believe GTS’ comprehensive service approach and focus on building long-term customer relationships lead to greater retention of existing business compared to a more short-term gain sharing model employed by many 3PLs. We believe GTS’ approach is more sustainable as industry freight capacity tightens and it becomes more difficult for 3PLs employing the gain sharing model to generate substantial incremental savings for shippers after the first year of implementation. Before becoming fully operational with a customer, GTS conducts thorough feasibility and cost savings analyses and collaborates with the customer to create a project scope and timeline with measurable milestones. We believe this approach enables GTS to

identify any potential issues, ensure a smooth integration process, and set the stage for long-term customer satisfaction. Within its TMS operation, GTS has consistently met customer implementation deadlines and achieved anticipated levels of freight savings.

 

Capacity

 

We offer scalable capacity and reliable service to our more than 35,000 customers in North America through a diverse third-party network of over 9,000 transportation providers. Our various transportation modes include LTL, TL and intermodal brokerage, and domestic and international air. No single carrier accounted for more than 4.0% of our 2009 purchased transportation costs. We ensure that each carrier is properly licensed and regularly monitor their capacity, reliability, and pricing trends. With enhanced visibility provided by our proprietary technology systems, we leverage the competitive dynamics within our network to renegotiate freight rates that we believe are out of market. This enables us to provide our customers with more cost-effective transportation solutions while enhancing our operating margins.

 

We continually focus on building and enhancing our relationships with reliable transportation providers to ensure that we not only secure competitive rates, but that we also gain access to consistent capacity, especially during peak shipping seasons. Because we do not own any transportation equipment used to deliver our customers’ freight, these relationships are critical to our success. We typically pay our third-party carriers either a contracted per mile rate or the cost of a shipment less our contractually agreed upon commission, and generally pay within seven to ten days from the delivery of a shipment. We pay our third-party carriers promptly in order to drive loyalty and reliable capacity.

 

Our third-party network of transportation providers can be divided into the following groups:

 

Independent Contractors.  Independent contractors are individuals or small teams that own or lease their own over-the-road transportation equipment and provide us with dedicated freight capacity. ICs are a key part of our long-term strategy to maintain service and provide cost stability. In selecting our ICs, we adhere to specific screening guidelines in terms of safety records, length of driving experience, and personnel evaluations. In the event of a rebound in the transportation sector, freight capacity would likely tighten and purchased power providers would likely reduce fleet sizes to eliminate under-utilized assets. Should this occur, we believe we are well positioned to increase our utilization of ICs as a more cost-effective and reliable solution.

 

To enhance our relationship with our ICs, we offer per mile rates that, based on our research, we believe are highly competitive and often above prevailing market rates. In addition, we focus on keeping our ICs fully utilized in order to limit the number of “empty” miles they drive. We regularly communicate with our ICs and seek new ways to enhance their quality of life. As a result of our efforts, we have experienced increased IC retention. In our opinion, this ultimately leads to better service for our customers.

 

Purchased Power.  In addition to our large base of ICs, we have access to approximately 8,000 unrelated asset-based over-the-road transportation companies that provide us with freight capacity under non-exclusive contractual arrangements. We have established relationships with carriers of all sizes, including large national trucking companies and small to mid-size regional fleets. With the exception of safety incentives, purchased power providers are generally paid under a similar structure as ICs within our LTL and TL brokerage businesses. In contrast to contracts established with our ICs, however, we do not cover the cost of liability insurance for our purchased power providers.

 

Delivery Agents.  For the de-consolidation and delivery stages of our LTL shipment process, our network of 17 service centers is complemented by over 200 delivery agents. The use of delivery agents is also a key part of our long-term strategy to maintain a variable cost, scalable operating model with minimal overhead.

 

Intermodal Brokerage.  We maintain intermodal capability through relationships with third-party carriers who rent capacity on Class 1 railroads throughout North America. Intermodal transportation rates are typically negotiated between us and the capacity provider on a customer-specific basis.

 

Domestic/International Air Carriers.  For our customers’ domestic/international air freight needs, we operate under an exclusive arrangement with FreightCo Logistics, a third-party provider, to provide such services to our customers. Under our arrangement, FreightCo Logistics is responsible for all services, and we receive a commission based on a percentage of the total bill. In 2009, our domestic/international air freight services represented less than 1% of our LTL revenues.

 

Customers

 

Our goal is to establish long-term customer relationships and achieve year-over-year growth in recurring business by providing reliable, timely, and cost-effective transportation and logistics solutions. While we possess the scale, operational expertise, and capabilities to serve shippers of all sizes, we focus primarily on small to mid-size shippers, which we believe represent a large and underserved market. We serve over 35,000 customers within a variety of end markets, with no customer accounting for more than 3.0% of 2009 revenue and no industry sector accounting for more than 18.0% of 2009

revenue. Additionally, we added over 10,000 customers in 2009, both through organic growth and through the Bullet acquisition. Our organic growth was driven by our new sales team initiative and a focus on shippers seeking to reduce their exposure to asset-based logistics providers. We believe this reduces our exposure to a decline in shipping demand from any customer and a cyclical downturn within any end market.

 

Sales and Marketing

 

In addition to our 42 TL brokerage agents, we currently market and sell our transportation and logistics solutions through over 100 sales personnel located throughout the United States and into Canada. We are focused on actively expanding our sales force to new geographic markets where we lack a strong presence. Our objective is to leverage our collective, national sales force to sell our full suite of transportation services. In addition to expanding our sales force, we intend to leverage a broader service offering and capitalize on substantial cross-selling opportunities with existing and new customers. We believe this will allow us to capture a greater share of a shipper’s annual transportation and logistics expenditures.

 

Our sales force can be categorized by primary service offering:

 

 

 

We believe we effectively compete with various market participants by offering shippers attractive transportation and logistics solutions designed to deliver the optimal combination of cost and service. To that end, we believe our most significant competitive advantages include:

 

 

Seasonality

 

Our operations are subject to seasonal trends that have been common in the North American over-the-road freight sector for many years. Our results of operations for the quarter ending in March are on average lower than the quarters ending in June, September, and December. Typically, this pattern has been the result of factors such as inclement weather, national holidays, customer demand, and economic conditions.

 

Technology

 

We believe the continued development and innovation of our technology systems is essential not only to improving our internal operations and financial performance, but also to providing our customers with the most cost-effective, timely, and reliable transportation and logistics solutions. We regularly evaluate our technology systems and personnel to ensure that we maintain a competitive advantage and that all critical applications are scalable and operational as we grow.

 

Through ongoing investment of time and financial resources, we have developed numerous proprietary, customized applications that allow us to track, query, manipulate, and interpret a range of different variables related to our operations, our network of third-party transportation providers, and our customers. Our objective is to allow our customers and vendors to easily do business with us via the Internet. Our customers have the ability, through a paperless process, to receive immediate pricing, place orders, track shipments, process remittance, receive updates on arising issues, and review historical shipping data through a variety of reports over the Internet.

 

Our LTL operation utilizes a combination of an IBM Series I5 computer system and web-based servers with customized software applications to improve every aspect of our LTL model and manage our broad carrier base from pickup through final delivery. Our corporate headquarters and service centers are completely integrated, allowing real-time data to flow between locations. Additionally, we make extensive use of electronic data interchange, or EDI, to allow our service centers to communicate electronically with our carriers’ and customers’ internal systems. We offer our EDI-capable customers a paperless process, including document imaging and shipment tracking and tracing. As part of our ongoing initiative to enhance our information technology capabilities, our LTL operation has developed a proprietary carrier selection tool used to characterize carriers based on total cost to maximize usage of the lowest available linehaul rates.

 

Our TL brokerage operation uses a customized OMNI technology system to broker our customers’ freight. Our software enhances our ability to track our third-party drivers, tractors, and trailers, which provides customers with visibility into their supply chains. Additionally, our systems allow us to operate as a paperless operation through electronic order entry, resource planning and dispatch.

 

GTS continually enhances its proprietary TMS technology system, which we will add through the GTS merger, and has integrated other proven transportation management software packages with the goal of providing customers with broad-based, highly competitive solutions. Through an extensive use of database configuration and integration techniques, hardware and software applications, communication mediums, and security devices, GTS is able to design a customized solution to address each customer’s unique shipping needs and preferred method of processing. GTS’ web-based technology will allow us to process and service customer orders, track shipments in real time, select optimal modes of transportation, execute customer billing, provide carrier rates, establish customer specific profiles, and retain critical information for analysis. We will use this system to maximize supply chain efficiency through mode, carrier, and route optimization.