UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

Form 10-K

 

 

 

 

 

Commission File Number: 001-32172

 

 

 

 

 

3399 South Lakeshore Drive, Suite 225, Saint Joseph, Michigan 49085

(Address of principal executive offices)

 

429 Post Road,

Buchanan, Michigan 49107

(Former address of principal executive offices)

 

 

 

 

 

Securities registered under Section 12(b) of the Exchange Act:

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  o      No  þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes  o      No  þ

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ      No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)  Yes  o      No  þ

 

The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $36.1 million as of June 30, 2007 based upon the closing price of $1.36 per share on the American Stock Exchange on that date.

 

As of March 10, 2008, there were 31,709,336 shares of the Registrant’s $0.001 par value common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Specified portions of the registrant’s proxy statement, which will be filed with the Commission pursuant to Regulation 14A in connection with the registrant’s 2008 Annual Meeting of Stockholders, to be held on June 11, 2008 (the “Proxy Statement”), are incorporated by reference into Part III of this Report. Except with respect to information specifically incorporated by reference in this Report, the Proxy Statement is not deemed to be filed as part hereof.

 

 

 

EXPRESS-1 EXPEDITED SOLUTIONS, INC.

 

FORM 10-K — FOR THE YEAR ENDED DECEMBER 31, 2007

 

TABLE OF CONTENTS

 

 

Exhibit Index

 

This annual report on Form 10-K is for the year ended December 31, 2007. The Securities and Exchange Commission (“SEC”) allows us to “incorporate by reference” information that we file with the SEC, which means that we can disclose important information to you by referring you directly to those documents. Information incorporated by reference is considered to be part of this annual report. In addition, information that we file with the SEC in the future will automatically update and supersede information contained in this annual report. In this annual report, “Company,” “we,” “us” and “our” refer to Express-1 Expedited Solutions, Inc. and its subsidiaries.

 

This Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company has based these forward-looking statements on the Company’s current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us and the Company’s subsidiaries that may cause the Company’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In many cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “believe,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “should,” “will,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” and other similar words. However, the absence of these words does not mean that the statements are not forward-looking. Factors that might cause or contribute to a material difference include, but are not limited to, those discussed elsewhere in this Annual Report, including the section entitled “Risk Factors” and the risks discussed in the Company’s other Securities and Exchange Commission filings. The following discussion should be read in conjunction with the Company’s audited Consolidated Financial Statements and related Notes thereto included elsewhere in this report.

 

Historical Development

 

Our Company changed its name to Segmentz, Inc. (“Segmentz”) in 2001 in conjunction with a reverse merger and remained a Delaware corporation. Immediately prior to this merger, the Company had no on-going operations. The Company was headquartered in Tampa, Florida and its management team planned and executed a series of acquisitions within different modes of the transportation industry. To fund these acquisitions, the Company raised capital through a series of private placements. The Company’s physical presence grew to include operations in twenty (20) cities, but remained unprofitable on a consolidated basis.

 

In accordance with a restructuring plan begun in 2004 and completed in 2005, the Company’s Board of Directors replaced the executive management team and relocated the headquarters to Buchanan, Michigan. During the process, the Company closed all unprofitable locations and businesses. The restructuring plan was completed in 2005 and remaining were the Company’s profitable expedited services provided through the Express-1 and Express-1 Dedicated business segments. The Company incurred charges of $4.5 million in 2005 following $2.6 million in 2004 based upon this restructuring activity.

 

In conjunction with the annual shareholders meeting in June 2006, our name was changed to Express-1 Expedited Solutions Inc., further supporting our break from the past and focus on premium transportation services. Through a newly formed subsidiary, Concert Group Logistics, Inc., we acquired certain assets, liabilities and operations from Concert Group Logistics, LLC in January 2008. Bounce Logistics was also formed in 2008, with operations beginning in March of this year.

 

Our Business Segments

 

As of December 31, 2007, our Company’s operations consisted of two business units, Express-1 and Express-1 Dedicated, which comprised approximately 90% and 10% of our consolidated revenues respectively. Within this annual report on Form 10-K, the financial statements and supporting information presented is comprised of the results of these two business segments, unless otherwise denoted. Subsequent to December 31, 2007, our two new business segments, Concert Group Logistics and Bounce Logistics became part of our consolidated operations. Operating results of these two new business segments will be included in our subsequent reports.

 

Our four business segments — Express-1, Express-1 Dedicated, Concert Group Logistics and Bounce Logistics, are described more fully below. In accordance with Statement of Financial Accounting Standards Number 131, Disclosures about Segments of an Enterprise and Related Information, we summarized segment financial information under Note 19 accompanying the financial statements in Item 8 of this report. Accounting policies for the reportable operation segments are the same as those described in the summary of significant accounting policies in Note 1 to the financial statements and contained in Item 8 of this report. The table below contains some basic information on two of our segments, Express-1 and Express-1 Dedicated. Our other two reporting segments became part of our operations subsequent to December 31, 2007, and were therefore not incorporated into this table.

 

 

Express-1

 

Offering expedited transportation services to over 1,500 customers from our Buchanan, Michigan and Toledo, Ohio facilities, Express-1 has become one of the largest ground expedite companies in North America, handling

more than 60,000 shipments during 2007. Expedite transportation services can be characterized as time-critical, time-sensitive, emergency and/or high priority freight shipments, many of which have special handling needs. A number of transportation companies within the U.S. offer some version of time-sensitive or time-critical shipments within their operations, while others offer high priority transportation services or special handling. Expedited transportation services are unique and can be differentiated, since expedite freight movements are typically created due to an emergency situation. Shipping emergencies are created due to supply chain interruptions, failure within another mode of transportation or for any number of other reasons. Expedited shipments are predominantly direct transit movements offering door-to-door service within very tightly prescribed time parameters.

 

Customers offer loads to Express-1 via telephone, fax, e-mail or the Internet on a daily basis, with only a small percentage of loads being scheduled in advance for longer term delivery cycles. Contracts, as is common within the transportation industry, typically relate to terms and rates, but not committed business volumes. Express-1 offers an ISO 9001:2000 certified, twenty-four hour, seven day-a-week call center allowing its customers immediate communication and status of time sensitive shipments while in transit.

 

Customers are also provided with electronic alerts, shipment tracking, proof of delivery, notifications, billing status and customized performance reports.

 

Express-1 is predominantly a non-asset based service provider, meaning the transportation equipment used in its operations is almost exclusively provided by third parties, with less than one percent of the vehicles being owned by the company. These third-party owned vehicles are driven by independent contract drivers and by drivers employed directly by independent owners of multiple pieces of equipment, commonly referred to as fleet owners. Express-1 generates its profit margin on the difference between the amount charged to customers and the amount it pays the third-party carriers, less applicable insurances, fees and vehicle taxes.

 

Express-1 serves its customers through a variety of exclusive-use vehicles, providing reliable, same-day or high-priority freight movements between shipping points within the United States, parts of Canada and Mexico. Vehicle class sizes include cargo vans, both twelve foot and twenty-four foot straight trucks and semi tractor-trailers. Services include expedited surface transportation and aircraft charters. As of December 31, 2007, we employed 85 full-time associates to support our Express-1 operations.

 

Express-1 Dedicated

 

Our Express-1 Dedicated operation provides dedicated delivery services to approximately 190 automotive dealerships within a 250 mile radius of Evansville, Indiana. Daily, our team receives, sorts, and stages approximately 1,000 pieces of automotive freight from a distribution facility in Evansville, Indiana. The Express-1 Dedicated Team dispatches units on over 20 dedicated routes and manages a stringent on-time delivery schedule. The entire Express-1 Dedicated staff strives to consistently provide an exemplary level of service, and has been recognized by its contract customer as the top performing provider on multiple occasions. Express-1 Dedicated utilizes a fleet of company leased and company owned vehicles to provide its services. An initial four-year contract for dedicated services expired in April 2007 and was mutually extended with an indefinite expiration by the parties. Some of the contract renewal terms were more favorable and should allow Express-1 Dedicated to become more profitable on a prospective basis. As of December 31, 2007, we employed 44 full-time associates in our Express-1 Dedicated operations, including management, office support, dock, and driving personnel.

 

Concert Group Logistics

 

The Concert Group Logistics operations were acquired in January 2008 in a purchase transaction involving certain assets, liabilities and operations of privately held Concert Group Logistics, LLC. Headquartered in Downers Grove, Illinois, Concert Group Logistics, LLC was founded in 2001 as a non-asset based transportation services company with an operational focus on the freight forwarding niche of the transportation industry. The Concert Group Logistics operating model is designed to attract and reward independent owners of freight forwarding services from various domestic markets. These independent owners operate stations within exclusive geographical regions under long-term contracts with Concert Group Logistics. The founders of Concert Group Logistics along with the management team all support the belief that customers’ needs are best served when “owners deliver” the goods and services for customers. The independent network model allows Concert Group Logistics to offer greater

flexibility and reliability than many of its peers in the freight forwarding community, while lowering the total cost of services to customers. We believe the use of the independent station owner network provides some competitive advantages in the market place. As of January 1, 2008, Concert Group Logistics supported its 22 independently owned stations with 20 full-time associates.

 

Through its network and the expertise of its independent station owners, Concert Group Logistics has the capability to provide logistics services on a global basis. Concert Group Logistics services are not restricted by size, weight, mode or location and can be tailored to meet the transportation requirements of its client base. Below, some of the domestic and international services provided by Concert Group Logistics are outlined by service category.

 

Domestic Offerings  — time critical services including as-soon-as possible, air charter and expedites: time sensitive services including next day, second day and third day deliveries; and cost sensitive services including deferred delivery and full loads.

 

International Offerings  — time critical services including on-board courier and air charters; time sensitive services including direct transit and consolidation; and cost sensitive services including less-than-container loads, full-container-loads and vessel charters.

 

Other Service Offerings  — value added services including documentation on international loads, customs clearance and banking support services; and customized services including trade show shipment management, transportation partnerships, diversity programs and on-site asset retrieval.

 

Bounce Logistics

 

Bounce Logistics began operations in March 2008 and is headquartered in South Bend, Indiana. Lead by an experienced management team, Bounce Logistics is a non-asset based transportation company operationally focused on providing full-truckload freight brokerage services to customers in need of greater customer service levels than those typically offered in the market place. These premium services are offered to customers of Express-1 and to Concert Group Logistics through CGL’s independent station owners. Bounce also services other customers in need of non-expedite premium transportation movements. As of March 10, 2008, Bounce Logistics employed 4 full-time associates within its operations.

 

GROWTH STRATEGY

 

Our current growth strategy is focused on initiatives, which we feel will enhance both our top and bottom lines. Through internal growth, which we refer to as organic growth, our board of directors and management team believe we will be able to continue to increase our market presence and geographic footprint. We believe our operations are positioned to allow our company to sustain strong rates of organic revenue growth. Our confidence in this strategy is based, in part, upon the successful record of double-digit organic growth within both Express-1 and Concert Group Logistics. We believe our Bounce Logistics business unit will also establish a track record of excellent organic growth, as this operation develops. Our Express-1 Dedicated operations will have more limited growth opportunities, due to the nature of its dedicated contract operating platform.

 

Complementing our organic growth initiatives, we plan to continue evaluating selective acquisitions and start-ups, provided they fit into our footprint of offering premium transportation services through the use of a non-asset based operational model. Prior to making any investment of human resources and capital, each opportunity will be evaluated for its long-term strategic fit and must complement our geographic footprint or provide entry into a different niche of the premium transportation market.

 

INFORMATION SYSTEMS

 

The transportation industry increasingly relies upon information technology to link the shipper with its inventory and as an analytical tool to optimize transportation solutions. We utilize satellite tracking and communication units on our fleet of vehicles to continually update the position of equipment in our Express-1 and Bounce Logistics business units. Our Express-1 Dedicated operation uses an alternative form of wireless communication to stay in touch with its fleet. These two forms of communication equipment allow us to communicate to an individual unit or to a larger group of units, based upon our specific needs. Information received through our satellite tracking

and communication system automatically updates our internal software and provides our customers with real-time electronic updates.

 

We have invested in what we believe are the most advanced operational, support and management software systems available for each of our business segments, with most of this software being provided by third-party vendors. This software has been designed to support the unique operational characteristics of the industry niche in which it is deployed. We have further customized these systems to more readily facilitate the flow of information from outside sources into our operations centers for use by our personnel and customers. Investments in technology including satellite communications equipment, computer networks, software customization and related information technology hardware typically represent our largest single capital expenditure on an annual basis, and we believe the increased utilization of technology is critical to our continued success.

 

CUSTOMERS, SALES AND MARKETING

 

Our business units provide services to a variety of customers ranging in size from small entrepreneurial organizations to Fortune 500 companies. Each year, we collectively serve thousands of different customers and our customer base routinely changes from year-to-year. Our customers include major domestic and foreign automotive manufacturers, manufacturers of automotive components and supplies, commercial printers, consumer staples, pharmaceuticals, non-automotive manufacturers and the high tech sector. We have hazmat authority and transport lower risk hazardous materials such as automotive paint and batteries on occasion. In addition, we serve third-party logistics providers, airfreight forwarders and integrated air-cargo carriers. Our third-party logistics customers vary in size from small, independent, single facility organizations to large, global logistics companies. Within our Express-1 and Bounce Logistics business units, our services are marketed within the United States, portions of Canada and Mexico. In addition to offering services within these same markets, our Concert Group Logistics also provides international services by both air and ocean as well as other value added services. Our Express-1 Dedicated unit principally services one domestic customer.

 

We maintain a staff of external sales representatives and related support staff within Express-1, Express-1 Dedicated and Bounce Logistics. Within Concert Group Logistics services are introduced to customers by our network of independent station owners, who manage the sales relationships within their exclusive markets. We believe our independent station ownership structure enables salespeople to better serve customers by developing a broad knowledge of logistics, local and regional market conditions, and specific logistics issues facing individual customers. Under the guidance of these experienced entrepreneurs independent stations are given significant latitude to pursue opportunities and to commit resources to better serve customers.

 

Each year we seek to establish long-term relationships with new customers and to increase the amount of business done with our existing customers. We are committed to the strategy of providing customers with a full range of logistics services and have grown by adding new customers and by increasing our volumes with, and providing more services to, our existing customers. Our ability to offer multiple services utilizing our four business segments represents a competitive advantage. During 2007, no customer accounted for more than 17% of consolidated gross revenues. Due to the recent acquisition of Concert Group Logistics and the formation of Bounce Logistics, our customer concentration and concentration within the automotive industry has been reduced significantly.

 

COMPETITION AND BUSINESS CONDITIONS

 

The transportation industry is intensely competitive and we anticipate it will remain so for the foreseeable future. The market is also highly fragmented with thousands of transportation companies competing for a portion of the domestic and international market. Our competitors include regional, national and international companies that specialize in premium transportation services such as same-day or high-priority freight movements, freight brokerage and freight forwarding services. Each of our business segments competes with many other transportation service providers for the opportunity to serve the same customer base. None of our business segments operates from a position of dominance within its market, and each unit competes daily to retain the business relationships it has developed.

The competitive landscape is characterized on service, delivery timeframes, flexibility and reliability, as well as rates. We have historically offered superior service at rates we feel are in-line with those charged by competitors in our markets. We believe we have developed an advantage over many competitors based upon the reputation of our business units for quickly and efficiently covering the transportation needs of customers. Consequently, rates are typically not used as a primary means of increasing sales and market position.

 

REGULATION

 

The U.S. Department of Transportation (DOT) regulates the domestic transportation industry. This regulatory authority has broad powers, generally governing matters such as authority to engage in motor carrier operations, safety, hazardous materials transportation, certain mergers, consolidations and acquisitions and periodic financial reporting. The trucking industry is subject to regulatory and legislative changes, which can affect the economics of the industry. We are also regulated by various state agencies and, in Canada, by other regulatory authorities.

 

Our “satisfactory” safety rating is the highest rating given by the Federal Motor Carrier Safety Administration (FMCSA), a department within the DOT. There are three safety ratings assigned to motor carriers: “satisfactory”, “conditional”, meaning that there are deficiencies requiring correction but not so significant to warrant loss of carrier authority, and “unsatisfactory”, which is the result of acute deficiencies that may lead to the revocation of carrier authority.

 

Our operations are also subject to various federal, state and local environmental laws and regulations dealing with transportation, storage, presence, use, and the disposal and handling of hazardous material. The Code of Federal Regulations regarding the transportation of hazardous material, groups these materials into different classes according to risk. These regulations also require us to maintain minimum levels of insurance. At this time, we transport only low to medium risk hazardous material, representing a very small percentage of our total shipments.

 

For domestic business, our Concert Group Logistics business unit is also subject to regulation by the DOT in regards to air cargo security for all business, regardless of origin and destination, is regulated as an “indirect air carrier” by the Department of Homeland Security and Transportation Security Administration. These agencies provide requirements, guidance and in some cases licensing to the freight forwarding industry. This ensures that we have satisfactorily completed the security requirements and qualifications, adhered to the economic regulations, and implemented the required policies and procedures. These agencies require companies to fulfill these qualifications prior to transacting various types of business, failure to do so could results in penalties and fines.

 

For international business, our Concert Group Logistics business unit is a member of the International Air Transportation Association (IATA), a voluntary association of airlines and forwarders, which outlines operating procedures for freight forwarders acting as agents for its members. A substantial portion of our international air freight business is completed with other IATA members. For international ocean business we are registered as an Ocean Transportation Intermediary (OTI) by the Federal Maritime Commission (FMC), which establishes the qualifications and bonding requirements to operate as an OTI for business originating and terminating in the United States of America, as well as providing economic regulation. The FMC has authority to enforce regulations by assessing penalties and fines.

 

Our international services performed in foreign countries are provided through qualified local independent agents who hold the necessary authorities to operate and are subject to regulation and foreign jurisdiction in their respective countries.

 

SEASONALITY

 

Historically, our revenues and profitability have been subject to some seasonal fluctuations. In our historical cycle approximately 45% of our revenues developed in the first half of each year, with the balance coming in the latter half. Over the past couple of years, we have experienced some variation in this historical cyclicality with a stronger first half being dominated by the second quarter in each year. At this time, it is not possible to determine whether this recent cycle will continue or has been created solely from conditions within the U.S. economy.

 

We anticipate the seasonality of both our Concert Group Logistics and Bounce Logistics operations to follow a similar trend as that of our Express-1 business unit, in future periods. However, it is possible that during periods of

rapid growth, seasonal fluctuations will be masked by successful gains in market share in three of our operating units, Express-1, Concert Group Logistics and Bounce Logistics. Our Express-1 Dedicated operating unit is not anticipated to follow this pattern, due to its reliance upon its dedicated contract.

 

EMPLOYEES AND INDEPENDENT CONTRACTORS

 

At December 31, 2007, we had 132 full-time employees, none of which were covered by a collective bargaining agreement. Of this number, 85 were engaged in our Express-1 operations, while 44 associates support our Express-1 Dedicated services. Three people are employed in our Corporate group. We recognize our trained staff of employees as one of our most critical resources, and acknowledge the recruitment, training and retention of qualified employees as essential to our ongoing success.

 

In addition to employees, we support the capacity needs of Express-1 and Bounce Logistics through the use of independent contract drivers, which we refer to as “VP’s” for value providers. These individuals operate one or more of their own vehicles and pay for all the operating expenses of their equipment, including: wages, benefits, fuel, fuel taxes, physical damage insurance, maintenance, highway use taxes, and other related equipment costs. By utilizing the services of independent contractors we have reduced the amount of capital required for our growth, which we feel has lessened our financial risk.

 

Within Concert Group Logistics operations, we support our service needs through a network of independently owned stations. Each of these stations is a stand-alone business with its own unique ownership and employee base. These independents provide sales and support for Concert Group Logistics, including negotiating with and maintaining customer relationships, managing transportation services with third-party providers and providing support to the customers of the network. The Concert Group Logistics operating model is designed upon the premise that when owners deliver, superior attention to detail and performance result. The Concert Group Logistics motto is, “owners deliver,” reflecting this belief.

 

SEC FILINGS

 

In 2007, we became a “Smaller Reporting Company” for the purpose of filings with the Securities and Exchange Commission. As such, certain report sections previously required with “Regular Filer” status have become optional. We have chosen to include those optional disclosures that, in the opinion of management, enhance the understanding of our Company.

 

In 2006, we became a regular filer for the purpose of filings with the Securities and Exchange Commission (“SEC”). Prior to 2006, we had been a small business filer. We have filed Form 10-K for annual reporting purposes and Forms 10-Q for interim period reports. Prior to this reporting change, we filed Forms 10-KSB for annual reports and Forms 10-QSB for interim reports. We make available on our website, located at www.express-1.com, all materials filed with the SEC.

 

Our public filings may also be accessed free of charge on the SEC’s Edgar website, located at www.sec.gov, or read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 

Neither the information on our Company website nor the SEC website is incorporated in this report as a result of these references.

 

CORPORATE INFORMATION

 

Express-1 Expedited Solutions, Inc is incorporated in Delaware. Our executive office is located at 3399 South Lakeshore Drive, Saint Joseph, Michigan 49085. Our telephone number is (269) 429-9761 and the Internet website address is www.express-1.com. Our stock is listed on the American Stock Exchange (AMEX) under the symbol “XPO”. The information on our website is not incorporated in this report as a result of this reference.

 

CUSTOMER CONCENTRATION; RELIANCE ON AUTOMOTIVE INDUSTRY COULD SUBJECT OUR BUSINESS TO NEGATIVE TRENDS OR DEFAULTS ON ACCOUNTS RECEIVABLE

 

We obtained approximately 50% of our revenue from our twenty-five largest customers in 2007 and 2006. While the individual customer rankings between our top customers often change from time-to-time, we rely upon our relationship with each of these customers for a significant portion of our revenues. Any interruption in the business volume awarded by these customers could materially adversely impact our revenues and resulting profitability.

 

The automotive industry within the U.S. is highly competitive, with increased competition from foreign-based companies. These companies produce automobiles in both the U.S. as well as foreign locations. The Big Three U.S. automakers have seen declining market shares fueling concern among the media and numerous financial analysts over whether they will be able to sufficiently scale their operations to ensure their continuation. In addition to the Big Three automotive manufacturers, our customers include various automotive industry suppliers that have been, and will continue to be, negatively impacted by the changing landscape in the U.S. automotive market. Continuing negative trends or a worsening in the financial condition of the domestic U.S. automotive manufacturers, or within the associated supplier base, could materially adversely impact our company, our revenues, and our results of operations.

 

ECONOMIC RISKS; RISKS ASSOCIATED WITH THE BUSINESS OF TRANSPORTATION AND LOGISTICS MANAGEMENT COULD SUBJECT US TO BUSINESS SWINGS BEYOND OUR CONTROL

 

Our business is dependent upon a number of factors over which we have little or no control that may have a materially adverse effect on our results of operations. These factors include: capacity swings in the trucking industry, significant increases or rapid fluctuations in fuel prices, interest rates, fuel taxes, government regulations, governmental and law enforcement anti-terrorism actions, tolls, license and registration fees, insurance premiums and labor costs. It is difficult at times to attract and retain qualified drivers and independent contract-drivers. Operations also are affected by recessionary economic cycles and downturns in customers’ business cycles, particularly in market segments and industries (such as manufacturing, retail and commercial printing) in which we have a significant concentration of customers. Seasonal factors could also adversely affect us. Customers tend to reduce shipments after the winter holiday season and operating expenses tend to be higher in the winter months primarily due to increased operating costs in colder weather and higher fuel consumption as a result of increased idle time. Regional or nationwide fuel shortages could also have adverse effects.

 

DEPENDENCE ON EQUIPMENT PROVIDED BY THIRD PARTIES; RELIANCE ON INDEPENDENT CONTRACTORS COULD RESULT IN OUR INABILITY TO PROVIDE SERVICES

 

The trucking industry is dependent upon transportation equipment oftentimes provided by independent third parties. Periods of equipment shortages have occurred periodically in the transportation industry, particularly during a strong economy. If we cannot secure sufficient transportation equipment or transportation services from these third parties to meet our customers’ needs, our business, results of operations and financial position could be adversely affected and our customers could seek to have their transportation needs met by other parties on a temporary or permanent basis.

 

NEW TRENDS AND TECHNOLOGY; CONSOLIDATION AMONG CUSTOMERS COULD ELIMINATE CUSTOMERS

 

If, for any reason, our business of providing services ceases to be a preferred method of obtaining these services by our customers, or if new supply-chain or technological methods become available and widely utilized to reduce the need for expedite transportation services, our business could be adversely affected. Moreover, increasing consolidation among customers and the resulting ability of such customers to utilize their size to negotiate lower outsourcing costs has, and may continue in the future to have, a depressing effect on the pricing of third-party logistic services. Consolidation is not limited to traditional customers such as manufacturers, but also includes

consolidation of expedite volume by third-party logistics companies, which increasingly control more of the expedite market and influence prices of expedite services through the use of technology such as Internet auctions.

 

INTERRUPTION OF BUSINESS DUE TO INCREASED SECURITY MEASURES IN RESPONSE TO TERRORISM COULD NEGATIVELY IMPACT OUR BUSINESS

 

The continued threat of terrorism within the United States and the ongoing military action and heightened security measures in response to such threat has and may cause significant disruption to commerce. Our business depends on the free flow of products and services through these channels of commerce. In response to terrorists’ activities and threats aimed at the United States, transportation and other services have at times been slowed or stopped altogether. Further delays or stoppages in transportation or other services could have a materially adverse effect on our business, results of operations and financial condition. Furthermore, we may experience an increase in operating costs, such as costs for transportation, insurance and security as a result of the activities and potential activities. We may also face interruption of services due to increased security measures in response to terrorism. The U.S. economy in general can be adversely affected by terrorist activities and potential activities. Any economic downturn could adversely impact our results of operations or otherwise adversely affect our ability to grow our business. It is impossible to predict how this may affect our business or the economy in the U.S. and in the world.

 

In the event of further threats or acts of terrorism, our business and operations may be severely and adversely affected.

 

COMPETITION IS INTENSE AND OUR VOLUME OR PROFITS COULD SUFFER AS A RESULT

 

The transportation and logistics services industry is heavily fragmented and intensely competitive and includes numerous regional, inter-regional and national competitors, none of which dominates the market. There are several larger transportation providers with significantly higher capital resources, which could allow that competitor to position their company as a low-cost provider. We often buy and sell transportation services from and too many of our competitors. Increased competition could create downward pressure on freight rates, and continued rate pressure may adversely affect our gross profit and income from operations.

 

REGULATION; WE ARE SUBJECT TO REGULATION BEYOND OUR CONTROL, WHICH COULD NEGATIVELY IMPACT THE WAY IN WHICH WE OPERATE

 

Our operations are regulated and licensed by various U.S. and Canadian agencies. Our drivers and independent contractors also must comply with the safety and fitness regulations of the United States Department of Transportation (DOT), including those relating to drug and alcohol testing and hours-of-service. Such matters as weight and equipment dimensions are also subject to U.S. and Canadian regulations. We also may become subject to new or more restrictive regulations relating to fuel emissions, drivers’ hours-of-service, ergonomics, or other matters affecting safety or operating methods. Future laws and regulations may be more stringent and require changes in our operating practices, influence the demand for transportation services, or require us to incur significant additional costs. Higher costs incurred by us or by our suppliers who pass the costs onto us through higher prices could adversely affect our results of operations.

 

We cannot predict what impact future regulations may have on our business. Our failure to maintain required permits or licenses, or to comply with applicable regulations, could result in substantial fines or revocation of our operating permits and licenses.

 

REVENUE GROWTH MAY SLOW OR CEASE ALTOGETHER, THEREBY HURTING OUR PROFITS

 

We have achieved significant revenue growth on a historical basis within our Express-1 operations. Our Evansville operation has been relatively flat from a revenue growth standpoint and cannot be viewed as a significant source of future company growth. There is no assurance that our revenue growth rate will continue at historical levels or that we can effectively adapt our management, administrative, and operating systems to respond to any future growth. Our operating margins could be adversely affected by future changes in and expansion of our business or by changes in economic conditions. Slower or less profitable growth could adversely affect our stock price.

SUBSTANTIAL ALTERATION OF THE COMPANY’S CURRENT BUSINESS AND REVENUE MODEL COULD REDUCE OUR ABILITY TO OPERATE PROFITABLY

 

Our strategy for increasing our revenue and profitability includes continued focus on the expedite transportation market and cultivation of organic growth opportunities. We may experience difficulties and higher than expected expenses in executing our expedite business strategy. We cannot assure that any adjustment or change in the business and revenue model will prove to be successful.

 

ACQUISITIONS MAY NOT BE ACCRETIVE TO OUR EARNINGS

 

We have made multiple acquisitions since 2001. Accordingly, acquisitions have provided a substantial portion of our historical growth. There is no assurance that we will be successful in identifying, negotiating, or consummating any future acquisitions.

 

Most of our historical acquisitions have not been successful. If we make acquisitions in the future, there is no assurance that we will be able to negotiate favorable terms or successfully integrate the acquired companies or assets into our business. If we fail to do so, or we experience other risks associated with acquisitions, our financial condition and results of operations could be materially and adversely affected.

 

INABILITY TO MANAGE GROWTH AND INTERNAL EXPANSION COULD REDUCE OUR PROFITS

 

Our inability to manage anticipated future growth could hurt the results of operations. Expansion of operations will be required to address anticipated growth of our customer base and market opportunities. Expansion will place a significant strain on our management, operational and financial resources. Currently, we have a limited number of employees. We will need to continually improve existing procedures and controls as well as implement new transaction processing, operational and financial systems, procedures and controls to expand, train and manage our employee base. Failure to manage growth effectively could have a damaging effect on our business, results of operations and financial condition.

 

DEPENDENCE ON DRIVERS SUBJECTS US TO WORKFORCE INTERUPTIONS BEYOND OUR CONTROL

 

Our driver force is primarily made up of independent contract drivers, with only a handful of company drivers in our Express-1 operations and approximately 25 company drivers in our Evansville location. At times we have experienced substantial difficulty in attracting and retaining sufficient numbers of qualified drivers. In addition, due in part to current economic conditions, including the higher cost of fuel, insurance, and equipment, the available pool of independent contract drivers has been declining. This decline is especially apparent within the fleet of straight trucks, which serve many of the critical needs of the expedite industry. Because of the shortage of qualified drivers, the availability of alternative jobs due to current economic conditions, and intense recruiting competition from other trucking companies, we expect to continue to face difficulty increasing the number of drivers, who are our principal source of planned fleet expansion and resulting growth. In addition, our industry as a whole suffers from high rates of driver turnover, which requires us to continually recruit a substantial number of drivers in order to maintain our existing fleet. If we are unable to continue to attract a sufficient number of drivers, we could be required to adjust our compensation packages or operate with fewer pieces of equipment and face difficulty meeting shipper demands, all of which would adversely affect our growth and profitability. In addition, the compensation we offer our driver force is subject to market forces, and we may find it necessary to continue to increase their compensation in future periods. Any increase in our operating costs could adversely affect our growth and profitability.

 

DEPENDENCE ON KEY MANAGEMENT; LOSS OF KEY MANAGEMENT COULD HAVE A MATERIAL ADVERSE EFFECT ON OPERATIONS

 

We believe that the attraction and retention of qualified personnel is critical to our success. If we lose key personnel or are unable to recruit qualified personnel, the ability to manage the day-to-day aspects of the business will be weakened. Our operations and prospects depend in large part on the performance of the senior management

team. The loss of the services of one or more members of the senior management team could have a materially adverse effect on the business, financial condition and results of operations. Because the management team has extensive experience within the transportation industry, it would be difficult to replace them without adversely effecting our business operations. In addition to their unique experience, our management team has fostered key relationships with our customers and suppliers. These relationships are especially important to our Company and the loss of these relationships could have a materially adverse effect on our profitability.

 

INSURANCE AND CLAIMS EXPENSE MAY NEGATIVELY IMPACT OUR RESULTS OF OPERATIONS

 

Our future insurance and claims expenses may exceed historical levels, which could reduce our earnings. We maintain general liability, auto liability, cargo, physical damage, trailer interchange, inland marine, contents, workers’ compensation, excess auto, general liability and director’s and officer’s insurance policies for certain types of risks. Some of these policies are written with deductibles currently up to $25,000 per occurrence. We reserve for anticipated losses and expenses and regularly evaluate and adjust our claims reserves to reflect actual experience. However, ultimate results may differ from our estimates, which could result in losses above reserved amounts. Because of our deductibles, we have significant exposure to fluctuations in the number and severity of claims. Our operating results could be adversely affected if we experience an increase in the frequency and severity of claims for which we maintain higher deductible policies, accruals of significant amounts within a given period, or claims proving to be more severe than originally assessed.

 

We maintain health insurance policies for our employees that have historically provided first-dollar coverage. Going forward, we plan to self-insure our health claims and have those claims administered by a third-party. We plan to purchase stop-loss coverage to limit our exposure on any one claim and aggregate coverage to limit the total claims expense within any one year. There can be no assurance that the levels of specific stop-loss coverage purchased on a claim-by-claim basis or that the specific aggregate loss coverage purchased, will provide a manageable means to control our health costs going forward.

 

We maintain coverage with insurance carriers that we believe are financially sound. Although we believe our aggregate insurance limits are sufficient to cover reasonably expected claims, it is possible that one or more claims could exceed those limits. Insurance carriers recently have been raising premiums for many businesses, including transportation companies. As a result, our insurance and claims expense could increase, or we could find it necessary to raise our deductibles or decrease our aggregate coverage limits when our policies are renewed or replaced. Our operating results and financial condition may be adversely affected if these expenses increase, if we experience a claim in excess of our coverage limits, or if we experience a claim for which we do not have coverage.

 

FLUCTUATIONS IN THE PRICE OR AVAILABILITY OF FUEL MAY CHANGE OUR OPERATIONS STRUCTURE AND RESULTING PROFITABILITY

 

We require large amounts of fuel to operate our fleet, and fuel is one of our contractor’s largest operating expenses. Fuel prices fluctuate greatly, and prices and availability of all petroleum products are subject to economic, political, and other market factors beyond our control. Most of our customer contracts contain fuel surcharge provisions to mitigate the effects of price increases over base amounts set in the contract. Significant changes in the price or availability of fuel in future periods or significant changes in our ability to mitigate fuel price increases through the use of fuel surcharges, could materially adversely impact our operations, fleet capacity and ability to generate both revenues and profits.

 

NEED FOR SUBSTANTIAL, ADDITIONAL FINANCING MAY NOT BE AVAILABLE, IF NEEDED, AND OUR RESULTS COULD BE NEGATIVELY IMPACTED

 

There is no guarantee that we will be able to obtain financing if required to expand our business or that the present funding sources will continue to extend terms under which we can operate efficiently. If we are unable to secure financing under favorable terms, our Company may be negatively affected. There is no assurance that we will continue to be able to maintain financing on acceptable terms.

VOLATILITY OF THE MARKET PRICE OF THE COMPANY’S STOCK CAN IMPACT OUR ABILITY TO RAISE ADDITIONAL CAPITAL, IF NEEDED, AND IMPACTS OUR COMPENSATION EXPENSE

 

The market price of our common stock may be volatile, which could cause the value of your investment to decline. Any of the following factors could affect the market price of our common stock:

 

 

In addition, many of the risks described elsewhere in this section could adversely affect the stock price. The stock markets have experienced price and volume volatility that have affected many companies’ stock prices. Stock prices for many companies have experienced wide fluctuations that have often been unrelated to the operating performance of those companies. These types of fluctuations may affect the market price of our common stock.

 

As a component of the calculations prescribed for use in the calculation of compensation expense to be recorded in Financial Accounting Standard Statements Number 123R (SFAS 123R), volatility within the price of our common stock can impact the amount of compensation expense recorded within our financial statements. We adopted SFAS 123R for periods beginning January 1, 2006 and accordingly recorded compensation expense based in part upon the relative and historic volatility of our Company’s common stock in the statement of income for periods beginning thereafter.

 

NO DIVIDENDS ANTICIPATED; COULD UNFAVORABLY IMPACT THE VALUE OF OUR STOCK TO INVESTORS

 

We have no immediate plans to pay dividends, and currently plan to retain all future earnings and cash flows for use in the development of our business and to enhance shareholder value through growth and continued focus on increasing profitability. Accordingly, we do not anticipate paying any cash dividends on our Common Stock in the near future.

 

 

 

PART II

 

 

There are over 600 holders of record of the Company’s common stock, based upon data available to us from our proxy solicitor, transfer agent and market maker for our common stock. The Company has never paid cash dividends on its common stock and intends to keep future earnings, if any, to finance the expansion of its business. Accordingly the Company does not anticipate that any cash dividends will be paid in the near future. The Company’s future payment of dividends will depend on its earnings, capital requirements, expansion plans, financial condition and other relevant factors.

Performance Graph

 

The following graph is presented to compare the cumulative total return for the Corporation’s Common Stock to the cumulative total returns of the AMEX Composite Index, the Russell Micro Cap Index and the NASDAQ Transportation Index for the period from July 26, 2002 (the start of trading for the stock of our Corporation), through the close of the market on December 31, 2007, assuming an investment of $100 was made in the Corporation’s Common Stock and in each index on July 26, 2002, and that all dividends were reinvested.

 

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Express-1 Expedited Solutions, Inc, The Amex Composite Index,
The Russell MicroCap Index And The Nasdaq Transportation Index

 

 

 

Fiscal year ending December 31.

 

 

eliminated in consolidation. Our Company does not have any variable interest entities whose financial results are not included in the consolidated financial statements.

 

Use of Estimates

 

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods. Our management reviews these estimates, including but not limited to, purchased transportation, recoverability of long-lived assets, recoverability of prepaid expenses, valuation of investments, valuation allowances for deferred taxes, and allowance for doubtful accounts, on a regular basis and makes adjustments based on historical experiences and existing and expected future conditions. These evaluations are performed and adjustments are made as information is available. Our management believes that these estimates are reasonable and have been discussed with our audit committee; however, actual results could differ from these estimates.

 

Concentration of Risk

 

Financial instruments, which potentially subject us to concentrations of credit risk, are cash and cash equivalents and account receivables.

 

The majority of cash is maintained with a Michigan financial institution. Deposits with this bank may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand, and, therefore, bear minimal risk.

 

Concentration of credit risk with respect to trade receivables is limited due to our large number of customers and wide range of industries and locations served. One customer comprised more than ten percent of the December 31, 2007 customer accounts receivable balance.

 

We receive a significant portion of our revenue from customers who operate within the U.S. domestic automotive industry. Accordingly, our accounts receivable are comprised of a large aggregate concentration of accounts from within this industry. Recently, the U.S. automotive industry has been in decline according to various sources. In the event of further financial erosion by any of the “Big Three” domestic automotive manufacturers, the effect on our Company could be materially adverse. Further, the weakening of any of the domestic automotive manufacturers can have an adverse effect on a significant portion of our customer base which is comprised in large-part by manufacturers and suppliers for the automotive industry.

 

We extend credit to various customers based on an evaluation of the customer’s financial condition and their ability to pay in accordance with our payment terms. We provide for estimated losses on accounts receivable considering a number of factors, including the overall aging of account receivables, customers payment history and the customer’s current ability to pay its obligation. Based upon our managements’ review of accounts receivable and other receivables, an allowance for doubtful accounts of approximately $77,000 is considered necessary as of December 31, 2007 and 2006. Although we believe our account receivables are recorded at their net realizable value, a decline in our historical collection rate could have a materially adverse effect on our operations and net income. We do not accrue interest on past due receivables.

 

approximately 90% of our consolidated revenues by volume, with Express-1 Dedicated accounting for approximately 10%.

 

Our Express-1 unit has two differing means of generating revenues and business volume. Express-1 transports shipments through the use of its fleet of vehicles, approximately 99% of which are owned and operated by independent contract drivers. We refer to this revenue source as “Express-1 Contractors.” Express-1 also routinely brokers loads to third parties such as to other expedited transportation companies and general truckload carriers. We refer to this revenue source as “Express-1 Brokerage.” These two activities are integral to the Express-1 operations and are managed by the same staff and support team. Therefore they cannot be further detailed beyond revenue, operating costs and gross margin.

 

Our Express-1 Dedicated operation generates revenue by shipments primarily to one dedicated contract account. We refer to this revenue source as “Express-1 Dedicated” within our tables and discussions.

 

In addition to our Express-1 and Express-1 Dedicated business segments, we also separately identify the costs associated with our executive management team, board of directors, legal and other costs of operating as a public company under the caption “Corporate.”

 

We refer to the impact of fuel on our business throughout this discussion and within the annual report. For purposes of these references, we have only considered the impact of fuel surcharge revenues, fuel surcharge payments to contractors and fuel costs associated with our operating units and have excluded those associated with our Express-1 brokerage operations. We feel that this approach most readily conveys the impact of fuel on our business, its revenues and costs. As is common within the freight brokerage industry, fuel cost is not frequently identified as an individual line item in our paperwork for each load. Consequently, it is impossible to accurately separate fuel revenues and costs from other brokerage revenues and costs on a load-by-load basis.

 

Year ended December 31, 2007 compared to year ended December 31, 2006

 

Overview

 

The fiscal year ended December 31, 2007 brought with it many challenges within the general freight market, some of which had an impact upon the operational results of our Company. Overall, freight demand was weaker than over the past few years and the result was softness in spot markets for freight services and weakness in overall rates. Fuel continued to rise in 2007, compared to 2006 and with this increase our revenues were increased through fuel surcharges, while our costs were increased by a similar amount due to our practice of passing along fuel surcharges to our fleet of contract drivers.

 

Our Express-1 unit successfully increased its fleet by a significant amount and balanced this increase with the maintenance of very strong fleet utilization as measured in loaded miles per unit per week. The success of this increase in the size of the Express-1 fleet offset some declines in the percentage of overall margin, which is attributable to the weakened economy, increased fuel surcharges and lack of spot market demand for “capacity expedites” that were common over the previous few years. Coupled with an increase of new accounts and additional business volume from existing accounts, Express-1 weathered the down year by growing the top line at a healthy rate and increasing its operating income at an even higher rate.

 

Our Express-1 Dedicated unit saw 2007 as a year of significant change. The original four-year contract with the primary customer came to an end in April 2007 and Express-1 Dedicated was successful in its bid to get the contract term extended and increase rates to its customer. Express-1 Dedicated now operates under an evergreen provision of the original agreement, which provides for a 120 day notice in the event either party wishes to cease the relationship. In addition, Express-1 Dedicated was successful in receiving certain protections for items such as investments in equipment and facility leases. Express-1 Dedicated also experienced growth in its non-contract business of offering cross-docking facilities and regional transits. Combined with the contract modifications, the Express-1 Dedicated team has successfully strengthened both the top and bottom lines during 2007 and set the stage for further improvements heading into 2008.

 

Consolidated Revenues increased 25.1% for the year ended December 31, 2007 compared to the year ended December 31, 2006. The increase in revenue primarily relates to the strong increase in revenue within our Express-1 unit. Fuel surcharge revenue was $4.8 million and $3.2 million for the years ended December 31, 2007 and 2006, respectively. Fuel surcharges are billed to our customers, based upon a spread above a national index which is published weekly by the Department of Energy.

 

Express-1 Revenues increased 27.8% during 2007 compared to 2006. The increase in revenue was associated with a strong increase in the amount of freight hauled on our fleet of vehicles provided by independent contractors. Express-1 was successful in increasing its fleet size by approximately 38 percent within 2007 compared to 2006. With this added capacity, our team successfully leveraged organic growth opportunities and expanded market share with existing customers as well as acquired new customer accounts. We continued to experience a decline in the opportunity to broker loads within the truckload (semi-truck) portion of our business. This decline first occurred in the third quarter of 2006 and is attributable to weakness in the U.S. economy resulting in excess capacity within the truckload market. Our strategy continues to be to build our own fleet of vehicles and offer services through this fleet, but to be in a position to take advantage of the brokerage opportunity in stronger economic climates or periods when demand outpaces capacity. We internally refer to these shipments as “capacity expedites.” Fuel surcharge revenue was $4.2 million during 2007 compared to $2.6 million in 2006, and is included within our revenue figures.

 

Express-1 Dedicated Revenues increased 4.4% in the year ended December 31, 2007 compared to the prior year. The revenue increase is attributable to an increase in revenue from new customers within this market, and to rate increases awarded by the contract customer in the latter half of 2007. The ability to attract new accounts for service at the facility continues to be a focus of the staff at Express-1 Dedicated and enhances the overall profitability of the segment. Fuel surcharge revenue represented $588,000 for the year ended December 31, 2007 compared to $528,000 in 2006.

 

 

Consolidated Operating Expenses , which consist primarily of payment for trucking services, independent contractors, fuel, insurance, cross dock facilities, equipment costs and payroll expenses increased by 27.1% for the year ended December 31, 2007 compared to the year ended December 31, 2006. As a percentage of revenues, operating expenses amounted to 75.6% of related revenues for the year ended December 31, 2007 compared with 74.4% for the year ended December 31, 2006. The increase in operating expenses as a percentage of revenue resulted from rate compression within the spot market for some of our services. To some degree, fuel prices contributed to the increase in operating expenses as a percentage of revenue. During 2007, fuel costs and fuel surcharge payments were $5.1 million compared to $3.5 million in 2006.

Express-1 Operating Expenses increased by 31.0% during 2007 compared to the prior year. Historically, a level of approximately 75% of revenue for operating expenses has been considered favorable within our Express-1 unit. Operating expenses represented 75.3% and 73.5% of revenues within Express-1 for the years ended December 31, 2007 and 2006 respectively. Fuel played a part in the ratio of operating expenses to revenue for 2007 compared to 2006. Fuel costs and fuel surcharges passed to our contract drivers represented approximately $4.1 million and $2.5 million of operating expenses for 2007 and 2006 respectively.

 

Express-1 Dedicated Operating Expenses increased by less than 1.0% for the year ended December 31, 2007 compared to the year ended December 31, 2007. The Express-1 Dedicated team successfully held equipment costs, insurance expenses, wages and benefits in-line with the levels from 2006. Express-1 Dedicated continued to enjoy a more favorable cost structure on non-contract services provided to customers in 2007. Fuel cost represented $968,000 and $944,000 within this operation for the years of 2007 and 2006, respectively.

 

 

Consolidated Gross Margin increased by 19.3% and represented approximately 24.4% of consolidated revenue for the year ended December 31, 2007 versus 25.6% of consolidated revenue for the year ended December 31, 2006. The change in gross margin as a percentage of revenue was partially due to the aforementioned weakness in freight rates. Mitigating this decline in rates, were improvements in equipment cost within the Express-1 Dedicated business unit. Rising fuel costs also contributed to the decline in gross margin as a percentage of revenue during the 2007 period.

 

Express-1 Gross Margin increased by 18.9% and represented 24.7% of revenue for the year ended December 31, 2007 compared to 26.5% of revenues for the prior year. The decline in gross margin as a percentage of revenue was partially due to softness in rates within components of Express-1 revenue during the 2007 period. As previously mentioned this was due to overall weakness in portions of the U.S. economy and the impact of this weakness on available capacity within the transportation sectors. Gross margin was also impacted by the rising price of fuel in 2007 versus 2006.

 

Express-1 Dedicated Gross Margin increased by 23.2% and represented 22.0% of revenue for 2007, versus 18.6% for the prior year. The increase in margin within this unit was principally due to rate increases awarded on the primary contract and was further impacted by a reduction in equipment costs as a percentage of revenue within this unit. Fuel cost also impacted the margin within Express-1 Dedicated.

 

 

 

Consolidated Sales, General and Administrative Expenses (SG&A) increased by 17.3% and represented 17.8% of revenue during the year ended December 31, 2007 compared to 19.0% of revenue for the year ended December 31, 2006. In each of our operating units and within our corporate expenses, we continue to be successful in holding the rates of increase in these charges below the rates of increase in revenue, thereby creating leverage. Our consolidated headcount was unchanged at the end of the 2007 compared to the end of 2006. Remaining at 133 associates at the end of each period, we did experience an increase in headcount within Express-1 but had a decrease within Express-1 Dedicated for the same periods. We continue to anticipate achieving more leverage going forward in our SG&A expense, since the largest component of these charges, wage expense, should continue to increase at a slower pace than that of our consolidated revenue.

 

Express-1 Selling, General and Administrative Expense increased by 20.7% during 2007, and represented 15.2% of revenues within this business unit for 2007 versus 16.1% of revenue for 2006. The increase in SG&A was primarily related to headcount additions, as the unit increased the number of full-time employees to handle the growth in fleet and business volume during 2007. Express-1 also experienced increases within its advertising and marketing line items as it began to roll out new initiatives such as expanded service to Mexico and incurred increased advertising costs associated with the 38% growth within its fleet of contract drivers. Communication costs also increased in relationship to this fleet growth as the cost of satellites, satellite recovery, repairs and satellite communications all increased within 2007 in response to the fleet growth. The ability of the Express-1 team to manage increases in revenue, while holding down SG&A cost as a percentage of revenue remains one of the core goals and biggest opportunities within this unit. All employees of Express-1 are provided some form of incentive that rewards successful increases in the fleet and revenue, resulting in improvements in the bottom line.

 

Express-1 Dedicated Selling, General and Administrative Expense decreased by 22.3% during 2007 compared to 2006 and represented 10.3% of revenues for 2007 versus 13.9% in the prior year. Due to some routing changes within the core customer, Express-1 Dedicated reduced its headcount and associated wages and benefits during 2007 versus 2006. This unit also experienced decreases in expense associated with the elimination of amortization on its original start-up. We anticipate Express-1 Dedicated SG&A expenses will be relatively flat going forward, based upon our belief that the growth rate in revenue will also be relatively flat.

 

Corporate General and Administrative Expense increased by 22.3% during 2007 and represented 3.1% of consolidated revenue for 2007 versus 3.2% of consolidated revenue for 2006. The largest components of the increase in cost were charges associated with locations closed down in the restructuring activities. During 2006, the Company recovered approximately $170,000 from previously written down account receivables from closed operations. During 2007, the Company incurred additional impairments on a remaining Orlando office lease remaining from a closed location. This swing from a recovery in 2006 to a charge in 2007 accounts for most of the increase during 2007. The Company also incurred increases from additional option expense associated with FAS 123R, additional compensation and benefits costs and increased expenses associated with its Board of Directors and operating as a public company.

 

 

Consolidated Income from Operations increased by 25.0% during 2007 versus the prior year which reflects some of the operating leverage we have discussed over the past few years. During 2007, as our margin declined, we successfully increased pre-tax earnings at a rate equivalent to the rate of increase in revenue, due to our leverage within the areas of SG&A. Increases in revenue have traditionally been greater than the corresponding increases in

our overhead costs. We continue to believe additional leverage can be achieved in the future and operating income can continue to increase at a rate higher than that of our consolidated revenue.

 

Express-1 Income from Operations improved by 16.3% during 2007 and represented 9.5% of revenue in 2007 versus 10.4% of revenue in 2006. During the year, Express-1 invested in programs such as its Mexican operations that are anticipated to have a greater impact on earnings in 2008 and beyond. Express-1 also invested in its team of associates by enhancing staffing levels within operational areas and training within all areas. Coupled with this investment in operational programs and personnel, Express-1 continued to face softness in the rate environment. The management team believes the investments made in 2007 will help sustain the growth goals of this unit for 2008 and beyond. As the economy recovers, Express-1 should be positioned to continue to grow at historical levels, and realize more operating leverage.

 

Express-1 Dedicated Income from Operations increased by 157.0% during 2007 and represented 11.6% of revenue in 2007 versus 4.7% of revenue in 2006. The rate increases awarded by the primary customer in this unit were instrumental in this turn around. Coupled with these rate increases, Express-1 Dedicated continued to grow its profitable non-contract business during the year. The cost of operating the equipment used within this operation continued to decease both in total dollars and as a percentage of revenue during 2007 compared to 2006. The ability of the Express-1 Dedicated team to continue to hold cost relatively flat as a percentage of revenue is critical to the continuation of the recent level of profitability in this unit, as the ability to increase revenues is more limited.

 

Provision for, Benefit from Income Tax

 

During the year ended December 31, 2007, we recorded a provision for current income taxes of $1.3 million compared to recording a tax benefit of $1.1 million for 2006. For 2007, we continued to use our net operating loss carry forwards (NOL’s) to reduce the amount of taxes paid, even though a current income tax provision was recorded within the financial statements. As of December 31, 2007, we estimate our NOL’s have been reduced to $5.4 million and we do not anticipate using a significant amount of cash for tax payments, until these NOL’s are eliminated. We plan to record a current tax provision in our financial statements on a prospective basis at the rate of approximately 39.5% of pre-tax income, which we refer to as income from operations. A more detailed discussion of our tax situation is provided within the notes to our financial statements, elsewhere in this report.

 

Net Income (Loss)

 

Net Income declined in 2007, versus 2006 due to the aforementioned recording of a tax provision in 2007 versus a tax benefit in 2006. Pretax income increased by 25.0% during the period, which we feel is a more accurate reflection of our operating results, due to the evolution of our earnings and income associated tax provisions and benefits.

 

Earnings per Share

 

Basic Earnings per Share was $0.08 for the year ended December 31, 2007 compared to $0.15 per share for the year ended December 31, 2006. For the year ended December 31, 2007, basic average shares outstanding were 26,690,382 compared to 26,297,120 for the year ended December 31, 2006.

 

Diluted Earnings per Share was $0.08 for the year ended December 31, 2007 compared to $0.15 per share for the year ended December 31, 2006. For purposes of calculating earnings per share, for the year ended December 31, 2007, diluted average shares outstanding were 27,326,729 compared to 26,641,012 for the year ended December 31, 2006.

 

Year ended December 31, 2006 compared to year ended December 31, 2005

 

Tables presented for use in the comparison of the years ended December 31, 2006 and 2005 are modified from those presented for use in the comparison of the years ended December 31, 2007 and 2006. The modifications are related to the identification of locations closed in conjunction with our restructuring plan which was implemented within 2004 and completed in 2005, which are identified as “closed locations” and to the charges associated with the restructuring activities. It is our belief that this added detail for the 2006 and 2005 periods allows the users of these

statements more transparency into the performance of the Company and its operating units in place during those periods.

 

 

Consolidated Revenues increased 5.9% for the year ended December 31, 2006, as compared to the year ended December 31, 2005. The increase in revenue primarily relates to the strong increase in revenue within our Express-1 business, and was mitigated by revenue recorded in the prior year, from within operations closed in our restructuring efforts. During 2005, we disposed of our Temple and Bullet operations, as well as ceased activity at our unprofitable Tampa brokerage. These closed locations accounted for $4.7 million of our consolidated revenue during the year ended December 31, 2005. Fuel surcharge revenue was $3.2 million and $2.7 million for the years ended December 31, 2006 and 2005, respectively.

 

Express-1 Revenues increased 21.7% during 2006 as compared to 2005. Most of the increase in revenue was associated with the contractor portion of our Express-1 operations, which represents the freight hauled on our fleet of independent contractor trucks. Express-1 was successful in increasing its fleet size by approximately 23 percent within 2006 compared to 2005. With this added capacity, we successfully leveraged our organic growth opportunities and expanded our market share with existing customers as well as acquired new customer accounts. In the second half of 2006, we experienced a decline in the number of loads available to be brokered within the truckload portion (class 8, semi-trucks) of our brokerage operations, as a result of a weakening within the overall U.S. freight economy and excess capacity within the truckload market. Fuel surcharge revenue was $2.6 million during 2006 as compared to $2.3 million in 2005, and is included within our revenue figures.

 

Express-1 Dedicated Revenues increased 8.9% in the year ended December 31, 2006 compared to the prior year. The revenue increase within Express-1 Dedicated was primarily attributable to an increase of $0.2 million in revenue from new customers within this market. The primary contract customer in this unit experienced an increase of less than 2% in revenue for the period. Express-1 Dedicated recorded $528,000 in fuel surcharges for the year ended December 31, 2006 compared to $420,000 in fuel surcharges for the year earlier.

 

 

Consolidated Operating Expenses , which consist primarily of payment for trucking services, independent contractors, fuel, insurance, cross dock facilities, equipment costs and payroll expenses increased by 1.8% for the year ended December 31, 2006 compared to the year ended December 31, 2005. As a percentage of revenues, operating expenses amounted to 74.4% of related revenues for the year ended December 31, 2006 compared with

77.4% for the year ended December 31, 2005. The decrease in operating expenses as a percentage of revenue resulted primarily from the cessation of our unprofitable businesses in conjunction with our restructuring plan during 2005. During 2006, fuel costs and fuel surcharge payments were $3.5 million compared to $3.3 million in 2005. Exclusive of these fuel costs and payments, operating expenses decreased as a percentage of revenue, during 2006.

 

Express-1 Operating Expenses increased by 20.9% during 2006 compared to the prior year. As a percentage of revenue, operating expenses decreased by less than 1% during the year. Operating expenses are primarily variable costs associated with the cost of contractor payments, fuel and insurance and the ability to hold these at a comparable rate of revenue between periods is essential to maintaining our margins. Operating expenses represented 73.3% and 73.8% of revenues for Express-1 for the years ended December 31, 2006 and 2005 respectively. Fuel costs and fuel surcharges passed to our contract drivers represented approximately $2.5 million and $2.5 million of operating expenses for 2006 and 2005 respectively.

 

Express-1 Dedicated Operating Expenses decreased by 1.3% for the year ended December 31, 2006 compared to the year ended December 31, 2005. The decrease was due primarily to the implementation of more stringent maintenance practices and management policy on equipment utilized within the this operation. Coupled with this was a switch from the use of outside contract carriers to provide shipment services to the use of company owned or leased trucks. Express-1 Dedicated also enjoyed more favorable margins on the new revenue streams developed within the local market than that realized from its primary customer contract. The addition of this new business and the associated margin helped lower the operating expenses as a percentage of revenue considerably, within the year.

 

 

Consolidated Gross Margin increased by 20.0% and represented approximately 25.6% of consolidated revenues for the year ended December 31, 2006 compared to 22.6% of consolidated revenue for the year ended December 31, 2005. The improvement was partially due to the closing of lower-margin locations and operations in conjunction with our restructuring efforts during 2005. Additionally, some changes in the management philosophy and use of equipment within our Express-1 Dedicated operations coupled with the addition of some new local accounts greatly improved the margin derived from the Evansville operations. Fuel costs and surcharges had the effect of lowering the gross margin for the company. Exclusive of the impact of fuel surcharges the gross margin as a percentage of consolidated revenue was 71.6% and 74.4% for the years ended December 31, 2006 and 2005, respectively.

 

Express-1 Gross Margin increased by 23.9% and represented 26.7% of revenue for the year ended December 31, 2006 compared to 26.2% of revenues for the prior year. The improvement in gross margin as a percentage of revenue was primarily due to decreases in fuel costs. Gross margin as a percentage of revenue within the Express-1 brokerage operations declined due to the weakness of the transportation market in the second half of 2006.

 

Express-1 Dedicated Gross Margin increased by 99.1% and represented 18.6% of revenue for 2006, versus 10.2% for the prior year. The increase in margin within Express-1 Dedicated was principally due to a shift from the use of independent contractor leased units to company owned or leased trucks within this market, coupled with a reduction in maintenance charges associated with a change in maintaining equipment. This unit also benefited greatly due to the introduction of additional revenue streams and the stronger gross margin associated with those

revenues compared to the margin available from its contract customer. Fuel cost also played a part in the change in margin.

 

 

 

Consolidated Sales, General and Administrative Expenses (SG&A) decreased by 45.9% and represented 19.0% of revenue during the year ended December 31, 2006 compared to 37.2% of revenue for the year ended December 31, 2005. Of this decrease, $5.9 million was associated with the operations closed in our restructuring activities and the charges associated with restructuring. Within the remaining operations and corporate activities SG&A expenses declined by 9.8% to $8.2 million during 2006, from $9.1 million in 2005. Most of this decline was associated with the closing of the offices in Tampa Florida and the relocation of those administrative functions to Buchanan, Michigan.

 

Express-1 Selling, General and Administrative Expense at $6.0 million was essentially flat in 2006 compared to 2005. During this same period, Express-1 increased it revenue by approximately 21.7%, which underscores the significant operating leverage within this business segment. The ability of the personnel to manage increases in revenue, while holding down costs, underscores the commitment and strength of the employees and operating model within this business segment.

 

Express-1 Dedicated Selling, General and Administrative Expense increased by 13.0% as a percentage of revenue during 2006 compared to 2005. Principal components of SG&A within Evansville include wages and benefits, depreciation, amortization, office expenses and general supplies. The increase in SG&A was predominantly due to an increase in wages associated with the Evansville personnel. We anticipate Evansville SG&A expense to be relatively flat going forward, based upon the likelihood that the growth rate in revenue will also be relatively flat.

 

Consolidated Income from Operations became positive during 2006, as we completed the restructuring of our organization and focused our company on non-asset based premium transportation services. The primary component of the change was the elimination of approximately $5.2 million of charges and expenses associated with restructuring activity and unprofitable business units. Coupled with this was a significant reduction in Corporate expenses, where the total expense decreased by $1.0 million to $1.5 million in 2006 from $2.5 million in 2005. Most of this reduction was associated with a change in our executive management and the associated relocation of our corporate offices from Tampa, Florida to Buchanan, Michigan. These reductions, along with improvements in margin within the Express-1 and Evansville operations resulted in the improvement within our income from operations.

 

Express-1 Income from Operations improved by 94.0% during 2006, as compared to 2005. The principal factors in this change were the increase in revenues and continued strong margin, coupled with the ability to hold SG&A expenses relatively flat. The significance of operating leverage within Express-1 facilitated this increase in income from operations.

 

Express-1 Dedicated Income from Operations became positive during 2006 compared to a loss from operations during 2005. The principal factors contributing to this increase were the increases in revenue from newly acquired non-contract accounts and the stronger margin attributable to those, coupled with a reduction in the costs of transportation expenses within the contract portion of business. To a lesser extent the ability to hold SG&A increases to a relatively small amount also contributed to this shift in operating income.

 

Provision for, Benefit from Income Tax

 

During the year ended December 31, 2006, we recorded a benefit of $1.1 million for income taxes as opposed to no provision for, nor benefit from, income taxes during 2005. Based upon the fact that our consolidated operations had been unprofitable, the likelihood of generating profits and utilizing additional tax benefits against future earnings was determined to be less than assured. Consequently, we did not record a tax benefit associated with the pretax net loss of $5.8 million during 2005. During 2006, based upon the successful completion of the restructuring efforts and the return of profitability to our remaining consolidated operations, we reevaluated the valuation allowance and reduced it by approximately $2.1 million. The difference between the $2.1 million valuation allowance adjustment and the $1.1 million tax benefit recorded is due to a provision for income taxes on 2006 earnings of approximately $1.0 million.

 

Net Income (Loss)

 

Net Income became positive during the year ended December 31, 2006 compared to a net loss during the year ended December 31, 2005. For the year we earned $3.9 million compared to a net loss of $5.8 million during 2005.

 

Earnings per Share

 

Basic Earnings per Share was $0.15 for the year ended December 31, 2006 compared to a loss of $0.22 per share for the year ended December 31, 2005. For the year ended December 31, 2006, basic average shares outstanding were 26,297,120 compared to 26,523,650 for the year ended December 31, 2005.

 

Diluted Earnings per Share was $0.15 for the year ended December 31, 2006 compared to a loss of $0.22 per share for the year ended December 31, 2005. For purposes of calculating earnings per share, for the year ended December 21, 2006, diluted average shares outstanding were 26,641,012 compared to 26,523,650 for the year ended December 31, 2005. For purposes of these calculations, diluted shares outstanding were the same as basic shares outstanding during 2005, due to the loss in 2005.

 

proceeds from our new line of credit facility. Our liquidity position changed significantly upon the completion of this purchase transaction. Any analysis of our liquidity and capital resources should take into consideration the impact of this transaction upon our overall cash flows and financial position. For more information on this transaction, please refer to Item 1 and to Item 8, Footnote 13 elsewhere within this report.

 

The impact of weakness within the economy within the United States upon our financial performance should also be considered within an analysis of our liquidity and capital resources. Further discussion on the impact on the economy upon our operating results can be found in Item 1A. and Item 7, within this report.

 

Cash Flow

 

As of December 31, 2007, we had $3,781,000 of working capital with associated cash and cash equivalents of $800,000 compared with working capital of $2,248,000 and cash of $79,000 at December 31, 2006. This represents an increase of 68% or $1,533,000 in working capital during the period. The improvement in working capital can be attributed to our non-asset and asset light business models. Due to the low capital investment requirements within our operating segments, a large percentage of the cash flow generated from operations can be used to reduce debt and increase cash, thereby helping to improve working capital within the organization.

 

During the year ended December 31, 2007, we generated $4,043,000 in cash from operations compared to $3,637,000 for the prior year. Primary components of this increase were (i) an increase of approximately $646,000 in tax-adjusted net income (net income before tax, less the amount of cash paid for income taxes), (ii) an increase in receivables and related provisions for doubtful accounts, and (iii) a decrease in other assets, and in accrued expenses and other accruals.

 

Investing activities used approximately $2,293,000 during the year ended December 31, 2007 compared to our use of $2,516,000 on these activities during the prior year. Most of this cash was used to satisfy earn-out payments to the former owners of Express-1, Inc. and Dasher Express, Inc. during both years. These payments totaled $1,960,000 and $1,710,000, respectively during 2007 and 2006, respectively. In addition to these payments, we used $372,000 and $956,000, net of sales proceeds, on capital expenditure items, such as satellite communications equipment for our fleet, computer software and related computer hardware, during the 2007 and 2006 periods respectively. During 2007 and 2006, we received approximately $39,000 and $150,000 in proceeds from loans on former business units.

 

Financing activities used approximately $1,029,000 and $1,428,000 for the year ended December 31, 2007 and 2006 respectively. We reduced our outstanding debt balances by $1,319,000 and $1,428,000 for the 2007 and 2006, respectively. We also received $290,000 from the exercise of warrants during the 2007 period.

 

Line of Credit

 

To ensure that our Company has adequate near-term liquidity, we entered into a new credit facility with National City Bank in January, 2008. This $14.6 million facility provides for a receivables based line of credit of up to $11.0 million and a term debt component of $3.6 million. The Company may draw upon the receivables based line of credit the lesser of $11.0 million or 80% of eligible accounts receivables, less amounts outstanding under letters of credit. To fund the Concert Group Logistics, LLC purchase, the Company drew down $3.6 million on the term facility and $5.4 million on the receivables based line of credit. Substantially all the assets of our Company and wholly owned subsidiaries (Express-1, Inc., Express-1 Dedicated, Inc., Concert Group Logistics, Inc. and Bounce Logistics, Inc.) are pledged as collateral securing our performance under the line. The line bears interest based upon a spread above thirty-day LIBOR with an initial increment of 125 basis points above thirty-day LIBOR for the receivables line and 150 basis point above thirty-day LIBOR for the term portion. The term loan amortizes over a thirty-six month period and requires that monthly principal payments of $100,000 together with accrued interest be paid until retired. The weighted average initial rate of interest on the credit facility was approximately 5.5% and rates are adjusted quarterly. Available capacity under the line was approximately $4.0 million as of January 31, 2008. The credit facility carries an initial maturity date of June 30, 2009 and we anticipate renewing this facility prior to this time.

As of December 31, 2007, we had in place a line of credit facility originally entered in November 2005 with a Michigan banking corporation (the “Bank”). Under the loan documents, we could draw down under this line of credit the lesser of $6,000,000 or 80% of the eligible accounts receivable of Express-1 and Express-1 Dedicated, plus $912,000. The additional $912,000 was available based upon the granting of a security interest in our Buchanan, Michigan facilities. All advances under the agreement were subject to interest at the rate of the Bank’s prime plus an applicable margin ranging from negative 0.50% to positive 0.25% based upon the performance of our consolidated company in the preceding quarter. The maturity date of the loan was September 30, 2008 and the line contained various covenants pertaining to the maintenance of certain financial ratios. As of December 31, 2007, we had available borrowing capacity of approximately $4.9 million and an effective interest rate of 7.25% under the facility. We were in compliance with all terms and conditions of the Bank agreement, as of December 31, 2007. This former line of credit was retired simultaneously with the execution of the Company’s new credit facility in January 2008.

 

We believe that the new credit facility provides adequate capacity to fund our operations, when combined with our anticipated cash generated from operations for the foreseeable future. In the event our operating performance deteriorates, we might find it necessary to seek additional funding sources in the future.

 

We had outstanding standby letters of credit at December 31, 2007 of $411,000, related to insurance policies either continuing in force or recently canceled. Amounts outstanding for letters of credit reduce the amount available under our line of credit, dollar-for-dollar.

 

 

 

 

The following table is provided to allow the users of the financial statements more insight into different groupings of warrants and options. The options and warrants reflected within this table are the same as those above with a different viewpoint. The table is designed to reflect maturity date groupings in rows and ranges of exercise prices in columns.

 

 

 

 

Acquisition of Concert Group Logistics

 

In January 2008, in conjunction with the purchase of the assets of Concert Group Logistics, LLC. The Company entered in a commitment to pay the former owners of that company up to $2.0 million in additional consideration, provided the Company’s newly formed subsidiary, Concert Group Logistics, Inc. meets certain performance targets during 2008 and 2009. This contingent payment will be included in subsequent tables disclosing our contractual obligations and should be considered in analysis thereof. The Concert transaction also contained a new operating lease for real property which will be reported in subsequent periods. For more information on the Concert Transaction, please refer to Footnote 13 elsewhere in this report.

 

We may have to secure additional sources of capital to fund some portion of the contingent consideration payment as it becomes due. This presents us with certain business risks relative to the availability and pricing of future fund raising, as well as the potential dilution to our stockholders if the fund raising involves the sale of equity.

 

NEW ACCOUNTING PRONOUNCEMENTS

 

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation Number (“FIN”) 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement N. 109”, (“FIN 48”) effective for fiscal years beginning after December 15, 2006. FIN 48 specifies how tax benefits for uncertain tax positions are to be recognized, measured, and derecognized in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified in the balance sheet; and provides transition and interim-period guidance, among other provisions. Management has reviewed the provisions of FIN 48, analyzed the Company’s tax position in respect to the standards within FIN 48 and has concluded that no adjustments to the financial statements are necessary based upon the adoption of this standard.

 

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,” Fair Value Measurement”. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Where applicable, this statement simplifies and codifies related guidance with generally accepted accounting principles. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years. We are of the opinion that the adoption of this new pronouncement will not have a material impact on our financial statements.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at

fair value at specified election dates. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. The fair value option may be applied instrument by instrument, with certain exceptions, is irrevocable (unless a new election date occurs), and is applied only to entire instruments and not to portions of instruments. SFAS 159 is effective for the Company on January 1, 2008. We do not believe the adoption of SFAS 159 will have a material impact on our financial statements.

 

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS 141R”) which replaces SFAS 141, “Business Combinations”. SFAS 141R establishes principles and requirements for determining how an enterprise recognizes and measures the fair value of certain assets and liabilities acquired in a business combination, including noncontrolling interests, contingent consideration, and certain acquired contingencies. SFAS 141R also requires acquisition-related transaction expenses and restructuring costs be expensed as incurred rather than capitalized as a component of the business combination. SFAS 141R will be applicable to the Company prospectively to business combinations for which the acquisition date is on or after January 1, 2009. SFAS 141R would have an impact on accounting for any business acquired after the effective date of this pronouncement.

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary (previously referred to as a minority interest). SFAS 160 also requires that a retained noncontrolling interest upon the deconsolidation of a subsidiary be initially measured at its fair value. Upon adoption of SFAS 160, the Company would be required to report any noncontrolling interests as a separate component of shareholder’s equity. The Company would also be required to present any net income allocable to noncontrolling interests and net income allocable to the shareholders of the Company separately in its consolidated statement of operations. SFAS 160 is effective for the Company on January 1, 2009. SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS 160 shall be applied prospectively. SFAS 160 would have an impact on the presentation and disclosure of the noncontrolling interest of any non-wholly owned business acquired in the future.

 

Intangible Asset Risk

 

We have a substantial amount of intangible assets including goodwill and are required to perform impairment tests whenever events or circumstances indicate that the carrying value may not be recoverable from estimated future cash flows. As a result of our periodic evaluations, we may determine that the intangible asset values need to be written down to their fair values, which could result in material charges that could be adverse to our operating results and financial position. Although at December 31, 2007, we believed our intangible assets were recoverable, changes in the economy, the business in which we operate and our own relative performance could change the assumptions used to evaluate intangible asset recoverability. We continue to monitor those assumptions and their effect on the estimated recoverability of our intangible assets.

 

Equity Price Risk

 

We do not own any equity investments other than in our subsidiaries. As a result, we do not currently have any operating equity price risk. We have used the stock of our Company in transactions involving the purchase of business units and assets, as well as in general fund raising activities. Fluctuations in the price of our own common stock, expose us to some risk in future transactions where our stock is used as a medium of exchange.

 

Commodity Price Risk

 

We do not enter into contracts for the purchase or sale of commodities. As a result, we do not currently have any operating commodity price risk. Commodity prices do impact our company in the form of prices for fuel used by our value providers and the resulting impact of commodities such as fuel on the overall economy within the United States.

 

Consolidated Financial Statements
Express-1 Expedited Solutions, Inc.
Years Ended December 31, 2007, 2006 and 2005

Report of Independent Registered Public Accounting Firm

 

Board of Directors

Express-1 Expedited Solutions, Inc.

Tampa, Florida

 

We have audited the accompanying consolidated balance sheets of Express-1 Expedited Solutions, Inc. as of December 31, 2007, 2006 and 2005 and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the years ended December 31, 2007, 2006 and 2005. These consolidated financial statements are the responsibility of the management of Express-1 Expedited Solutions, Inc. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Express-1 Expedited Solutions, Inc. as of December 31, 2007, 2006 and 2005 and the results of its operations and its cash flows for the years ended December 31, 2007, 2006 and 2005 in conformity with accounting principles generally accepted in the United States of America.

 

Pender Newkirk & Company LLP

Certified Public Accountants

 

Tampa, Florida

March 26, 2008

 

 

Included within the line item operating expenses is depreciation expense of $320,000 , $415,000 and $458,000 for the years ended December 31, 2007, 2006 and 2005, respectively.

 

Included within the line item sales, general and administrative expense is depreciation expense of $240,000 , $216,000 and $475,000 and amortization expense of $283,000 , $423,000 and $502,000 for the years ended December 31, 2007, 2006 and 2005 respectively.

 

The accompanying notes are an integral part of the consolidated financial statements.

 

The accompanying notes are an integral part of the consolidated financial statements.