Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Quarterly Report Pursuant To Section 13 or 15 (d) of The Securities
Exchange Act of 1934 For The Quarter Ended June 30, 1999
[ ] Transition Report Pursuant To Section 13 or 15 (d) of The
Securities Exchange Act of 1934
Commission file number 1-19773
OTR EXPRESS, INC.
(Exact name of registrant as specified in its charter)
Kansas 48-0993128
(State or other jurisdiction of (IRS Employer
incorporation of organization) Identification No.)
804 N. Meadowbrook Drive
PO Box 2819, Olathe, Kansas 66063-0819
(Address of principal executive offices) (Zip Code)
(913) 829-1616
(Registrant's telephone number, including area code)
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 X No
1,781,671
(Number of shares of common stock outstanding as of July 31, 1999)
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OTR EXPRESS, INC.
BALANCE SHEETS
(Unaudited) June 30 December 31
1999 1998
ASSETS
CURRENT ASSETS
Cash $ 234,832 $ 521,484
Accounts receivable, freight 9,238,650 8,192,252
Accounts receivable, other 180,950 217,080
Inventory 517,586 534,623
Prepaid expenses and other 1,162,934 545,734
TOTAL CURRENT ASSETS 11,334,952 10,011,173
PROPERTY AND EQUIPMENT 56,200,103 49,209,269
TOTAL ASSETS $67,535,055 $59,220,442
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, trade $ 2,339,828 $ 2,060,251
Accrued payroll and taxes 1,087,947 1,007,735
Other accrued expenses 1,504,085 1,365,739
Current portion of long-term debt 13,558,821 13,837,296
TOTAL CURRENT LIABILITIES 18,490,681 18,271,021
LONG-TERM DEBT 36,358,677 28,658,211
DEFERRED INCOME TAXES 2,622,000 2,400,000
STOCKHOLDERS' EQUITY 10,063,697 9,891,210
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $67,535,055 $59,220,442
OTR EXPRESS, INC.
STATEMENTS OF OPERATIONS
Second Quarter Ended Six Months Ended
June 30 June 30
(Unaudited) 1999 1998 1999 1998
OPERATING REVENUE
Freight revenue $18,430,506 $16,853,310 $35,103,610 $32,613,268
Logistics revenue 2,140,416 895,943 4,148,775 1,883,339
Total operating revenue 20,570,922 17,749,253 39,252,385 34,496,607
OPERATING EXPENSES
Salaries, wages and
benefits 7,666,351 6,659,833 14,857,212 13,158,043
Purchased transportation 3,528,601 1,850,256 6,462,865 3,240,493
Fuel 1,484,549 1,480,426 2,556,789 3,068,975
Maintenance 1,245,861 1,164,400 2,442,580 2,238,517
Depreciation 1,838,258 1,954,251 3,467,049 3,830,319
Insurance and claims 469,527 553,380 1,072,703 1,099,740
Taxes and licenses 1,960,331 1,678,262 3,804,897 3,287,235
Supplies and other 1,139,004 1,100,082 2,282,315 2,223,754
Total operating expenses 19,332,482 16,440,890 36,946,410 32,147,076
Operating income 1,238,440 1,308,363 2,305,975 2,349,531
Interest expense 886,201 834,831 1,721,570 1,673,249
Income before income taxes 352,239 473,532 584,405 676,282
Income tax expense 134,000 180,364 222,000 257,561
Net income $ 218,239 $ 293,168 $ 362,405 $ 418,721
Weighted average number
of shares
Basic 1,815,187 1,835,955 1,824,117 1,836,342
Diluted 1,815,187 1,850,914 1,824,316 1,854,695
Earnings per share
Basic $ 0.12 $ 0.16 $ 0.20 $ 0.23
Diluted 0.12 0.16 0.20 0.23
OTR EXPRESS, INC.
STATEMENTS OF CASH FLOWS
Six Months Ended
June 30
(Unaudited) 1999 1998
OPERATING ACTIVITIES
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,939,137 $ 4,546,202
INVESTING ACTIVITIES
Acquisition of property and equipment (15,153,246) (7,138,516)
Proceeds from disposition of property and
equipment 4,695,384 589,723
NET CASH USED IN INVESTING ACTIVITIES (10,457,862) (6,548,793)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 14,882,904 10,696,638
Repayments of long-term debt (9,207,416) (9,357,319)
Net increase in bank note payable 1,746,503 534,520
Other (189,918) (57,473)
NET CASH PROVIDED BY
FINANCING ACTIVITIES 7,232,073 1,816,366
NET DECREASE IN CASH (286,652) (186,225)
CASH, BEGINNING OF PERIOD 521,484 318,760
CASH, END OF PERIOD $ 234,832 $ 132,535
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest $ 1,721,570 $ 1,673,249
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES
Guarantee of executive officers stock
purchase plan loans $ - $ 240,000
OTR EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - FINANCIAL STATEMENT PRESENTATION
The financial statements included herein have been prepared by management,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations, although management believes that the
disclosures are adequate to enable a reasonable understanding of the
information presented. In the opinion of management, all adjustments
considered necessary for a fair presentation of the financial statements
have been included. For further information, refer to the Company's
financial statements and footnotes thereto included in the Annual Report on
Form 10-K for the year ended December 31, 1998.
NOTE 2 - LONG-TERM DEBT
During the six months ended June 30, 1999, the Company financed the
purchase of revenue equipment through the issuance of long-term debt
totaling $14,883,000. This debt bears interest at effective rates between
6.13% and 7.51%.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
The Company agreed to guarantee payment of four key executive stock loans
for such executives' private purchase of approximately 69,000 shares of the
Company's common stock. The Company has agreed to guarantee payment of the
stock loans to the extent that the pledged value of the stock purchase
(equal to one-half of its market value) is less than the outstanding
principal balance of such loans. In April 1999, one of the executives
resigned from the Company and the Company repaid the principal balance of
his loan.
The amount of the Company's guarantee as of June 30, 1999 was approximately
$297,000. Stockholders' equity was reduced by this amount and long-term
debt was increased by this amount to record the guarantee.
At June 30, 1999, the Company had purchase and finance commitments
outstanding for additional revenue equipment of approximately $10,800,000.
The Company anticipates receiving proceeds from the sale or trade-in of 108
tractors in association with these commitments.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION
Overview. The discussion set forth below as well as other documents
incorporated by reference herein and oral statements made by officers of
the Company relating thereto, may contain forward looking statements. Such
comments are based upon information currently available to management and
management's perception thereof as of the date of this Form 10-Q. Actual
results of the Company's operations could materially differ from those
forward looking statements. Such differences could be caused by a number
of factors including, but not limited to, potential adverse effects of
regulation; potential adverse effects of the Year 2000 issue; changes in
competition and the effects of such changes; increased competition; changes
in fuel prices; changes in economic, political or regulatory environments;
litigation involving the Company; changes in the availability of a stable
labor force; ability of the Company to hire drivers meeting Company
standards; changes in management strategies; environmental or tax matters;
and risks described from time to time in reports filed by the Company with
the Securities and Exchange Commission. Readers should take these factors
into account in evaluating any such forward looking statements.
RESULTS OF OPERATIONS
Second Quarter Ended Six Months Ended
June 30 June 30
(Unaudited) 1999 1998 1999 1998
Operating Revenue $20,570,922 $17,749,253 $39,252,385 $34,496,607
Operating Expenses 19,332,482 16,440,890 36,946,410 32,147,076
Interest Expense 886,201 834,831 1,721,570 1,673,249
Net Income 218,239 293,168 362,405 418,721
2nd Quarter 1999 v. 1998
Operating Revenue. Operating revenue improved by 15.9% in the
second quarter ended June 30, 1999 compared to 1998. Freight revenue
increased by 9.4% and logistics revenue increased by 138.9%.
Freight revenue improved due to increases in rate per mile, tractor
utilization and average number of units in service. The rate per mile
increased to $1.059 in the second quarter of 1999 compared to $1.053 in
1998. The average number of tractors in service increased by 3.6% to 604
in the second quarter of 1999 compared to 583 in 1998. Tractors in service
includes 67 owner operators in 1999 and 41 owner operators in 1998.
Average miles per truck per week increased to 2,234 from 2,129 in 1998.
Logistics revenue increased due to the addition of the rail logistics
division in Salt Lake City, Utah in October 1998.
Operating Expenses. The operating ratio (total operating expenses
as a percent of operating revenue) increased to 94.0% in the second quarter
of 1999 compared to 92.6% in 1998.
Salaries, wages and benefits decreased to 37.3% of revenue in 1999 from
37.5% in 1998 primarily because of the increase in revenue from the
logistics division and the increase in owner operators. Also, the addition
of owner operators, who own their trucks and contract with the Company to
haul freight, increased the revenues but not the wages. Owner operators
pay their own expenses, including payroll taxes, fuel, insurance, licenses
and interest expense. The cost of owner operators is classified in
purchased transportation.
Purchased transportation, which represents the cost of owner operators
and payments to other trucklines and rail carriers for hauling loads
contracted through the Company's logistics division, increased to 17.2% of
revenue in 1999 from 10.4% in 1998. The increase is a result of the 138.9%
increase in logistics revenue and the increase in the number of owner
operators.
Fuel was 6.1% of revenue in 1999 compared to 6.6% in 1998. This is a
result of lower diesel fuel prices nationwide in 1999, higher revenue rates
per mile and the addition of owner operators.
Insurance and claims represented 2.3% and 3.1% of revenue in the second
quarter of 1999 and 1998, respectively. This is a result of more favorable
loss experience and increased revenue rate per mile. The Company's
insurance program for liability, physical damage, cargo damage and worker's
compensation involves insurance with varying deductible levels. Claims in
excess of these deductible levels are covered by insurance in the amounts
management considers adequate. The Company accrues the estimated cost of
the uninsured portion of pending claims. These accruals are estimated
based on management's evaluation of the nature and severity of individual
claims and an estimate of future claims development based on historical
claims development trends. Insurance and claims expense will vary as a
percentage of revenue from period to period based on the frequency and
severity of claims incurred in a given period as well as changes in claims
development trends.
Depreciation as a percent of revenue decreased to 8.9% in 1999 from
11.0% in 1998 as a result of the increase in owner operators, the increase
in logistics revenue and the larger holding period for trucks.
Supplies and other expenses decreased to 5.5% of revenue in 1999 from
6.2% in 1998 as a result of a decrease in advertising costs for new drivers
and a reduction in independent agents' sales commissions.
Interest Expense. Interest expense decreased to 4.3% of revenue in
1999 from 4.7% in 1998 as a result of lower interest rates, the addition
of owner operators and the increase in logistics revenue.
Net Income. The Company reported net income of $218,000, or $0.12
per share (basic and diluted), for the second quarter of 1999 compared to
net income of $293,000, or $0.16 per share (basic and diluted), in 1998.
The effective income tax rate was 38.0% in 1999 compared to 38.1% in 1998.
Six Months Comparison 1999 v. 1998
Operating Revenue. Operating revenue for the six months ended June
30, 1999 increased by 13.8% to compared to 1998. Freight revenue increased
by 7.6% and logistics revenue increased by 120.3%.
Freight revenue improved due to an increase in the rate per mile,
tractor utilization and average number of units in service. The rate per
mile increased to $1.059 during the period from $1.047 in 1998. The higher
rate is primarily a result of a rate increase implemented in May 1998. The
average number of tractors in service was 591 for the first six months of
1999 compared to 566 in 1998. The average number of tractors in service in
1999 includes 67 owner operator drivers compared to 41 in 1998. Average
miles per truck per week increased to 2,185 from 2,144. The Company's
empty mile percent decreased to 8.7% from 9.1% in 1998.
Logistics revenue increased primarily due to the addition of the rail
logistics division in Salt Lake City, Utah.
Operating Expenses. The operating ratio increased to 94.1% for the
first six months of 1999 compared to 93.2% in 1998.
Salaries, wages and benefits decreased to 37.9% of revenue in 1999 from
38.1% in 1998 primarily because of the increase in logistics revenue and
owner operators in 1999.
Purchased transportation, which represents payments to other trucklines
for hauling loads contracted through the Company's logistics division, and
the cost of owner operator drivers, increased to 16.5% of revenue in 1999
from 9.4% in 1998. The increase is a result of the addition of owner
operators to the fleet and the increase in logistics revenue.
Fuel was 6.5% of revenue in 1999 compared to 8.9% in 1998. This is a
result of lower diesel fuel prices nationwide for the first six months of
1999, higher revenue rates per mile and the addition of owner operator
drivers.
Insurance and claims represented 2.7% and 3.2% of operating revenue for
the first six months of 1999 and 1998, respectively. The Company's
insurance program for liability, physical damage, cargo damage and worker's
compensation involves insurance with varying deductible levels. Claims in
excess of these deductible levels are covered by insurance in the amounts
management considers adequate. The Company accrues the estimated cost of
the uninsured portion of pending claims. These accruals are estimated
based on management's evaluation of the nature and severity of individual
claims and an estimate of future claims development based on historical
claims development trends.
Depreciation as a percent of revenue decreased to 8.8% in 1999 from
11.1% in 1998 as a result of the addition of owner operator drivers, the
increase in logistics revenue and the longer holding period for tractors.
Supplies and other expenses decreased to 5.8% of revenue in 1999 from
6.4% in 1998 as a result of a decrease in advertising costs for new drivers
and a decrease in commissions paid to independent sales agents.
Interest Expense. Interest expense decreased to 4.4% of revenue in
1999 from 4.9% in 1998 as a result of lower interest rates, the addition of
owner operators and the increase in logistics revenue.
Net Income. The Company reported net income of $362,000, or $0.20
per share, for the first six months of 1999 compared to a net income of
$419,000, or $0.23 per share, in 1998. The effective income tax rate was
38.0% in 1999 compared to 38.1% in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The growth of the Company's business has required significant
investments in new revenue equipment, which has been acquired primarily
through secured borrowings. Capital expenditures for revenue equipment
purchases totaled $14,883,000 for the six months ended June 30, 1999. The
Company received $4,695,000 in proceeds from the disposition of revenue
equipment. The Company has outstanding purchase commitments for 108
replacement tractors and 27 expansion tractors at a cost of $10.8 million.
The Company has finance commitments for all of the expansion tractors and
replacement tractors at rates that will be fixed at time of origination.
The Company's other capital expenditures will be financed through
internally generated funds and secured borrowings.
Historically, the Company has obtained loans for revenue equipment which
are of shorter duration than the economic useful lives of the equipment.
While such loans have current maturities that tend to create working
capital deficits that could adversely affect cash flows, it was
management's belief that these factors were mitigated by the more
attractive interest rates and terms available on these shorter maturities.
This financing practice has been a significant cause of the working capital
deficit which has existed since the Company's inception. This method of
financing can be expected to continue to produce working capital deficits
in the future. The Company's working capital deficit at June 30, 1999 was
$7.2 million. Primarily due to the Company's equity position and the
potential for refinancing of both unencumbered and encumbered assets,
working capital deficits historically have not been a barrier to the
Company's ability to borrow funds for operations and expansion.
The Company has a revolving line of credit with its primary lending
bank which bears interest at a variable rate, based upon the prime rate or
LIBOR, at the Company's election, and is secured by accounts receivable of
the Company. Effective June 30, 1999, the Company's line of credit was
increased from $8.0 million to $10.0 million and the maturity date was changed
from June 9, 2000 to August 1, 2001. The agreement allows for maximum
advances of 85% of eligible accounts receivable less than 60 days past
invoice date. The agreement contains certain covenants relating to tangible
net worth, leverage ratios, debt service coverage and other factors.
The Company was in compliance with all required covenants at June 30, 1999.
The Company had borrowings of $5.3 million under this line at June 30, 1999.
A total of $1.3 million of the available credit line was committed for letters
of credit issued by the financial institution. Additionally, approximately
$297,000 of the available line of credit was committed for the Company's
Guaranty of Executive Officer Stock Loans as more fully described in Note 3
to the financial statements.
In management's opinion, the Company has adequate liquidity for the
foreseeable future based upon funds expected to be generated from
operations, the Company's equity position, the potential for refinancing
assets owned by the Company and the Company's ability to obtain secured
equipment financing.
Year 2000 Issue
The Company has completed a comprehensive inventory and assessment of
its Year 2000 issues and its internal systems (both information technology
"IT" and non-IT). The Company's application software programs which have
been developed internally will be Year 2000 compliant with minor
modifications that the Company's IT department will complete. Computer
hardware consists almost exclusively of Apple Macintosh computers which are
Year 2000 compliant according to Apple Computer, Inc. Non-Macintosh
computer hardware has been replaced. Certain of the Company's application
and equipment software programs are purchased from and/or maintained by
vendors. The Company is working with these software vendors to verify that
these applications become Year 2000 compliant.
The Company believes that with modifications to existing software, the
cost of which is not expected to be material, the Year 2000 issue will not
pose significant operational problems for the Company. The Company
expensed less than $10,000 in costs relating to the Year 2000 issue in the
six months ended June 30, 1999. As of June 30, 1999, the Company completed
an organization-wide test on its proprietary software, involving employees
from all areas of the Company, during which the systems were tested with year
2000 dates. There were no significant issues discovered during the test
and minor issues identified are being addressed by the Company's management
information services (MIS) department and they expect to resolve those
issues prior to October 31, 1999.
As part of the Company's comprehensive review, it is continuing to
verify the Year 2000 readiness of third parties (vendors and customers)
with whom the Company has material relationships. The Company has material
vendor relationships with financial institutions and telecommunications
companies. These vendors indicate that they expect to achieve compliance
and do not anticipate business interruptions as the century changes. The
Company is developing contingency plans to address Year 2000 issues that
may arise with these key vendors. At present the Company is not able to
determine with certainty the effect on the Company's results of operations,
liquidity, and financial condition in the event the company's material
vendors and customers are not Year 2000 compliant. The Company will
continue to monitor the progress of its material vendors and customers
Market Risk
The Company is exposed to various market risks, including the effects
of interest rates and fuel prices. The company utilizes primarily fixed
rate financial instruments with varying maturities. The Company's long-
term financing is all at fixed rates. The Company's working capital line
of credit is at a variable rate.
The Company uses call options as hedges on heating oil in order to
manage a portion of its exposure to variable diesel prices. These
agreements provide some protection from rising fuel prices. The Company's
exposure to loss on the call options is limited to the premium cost of the
contract. Based on historical information, the Company believes the
correlation between the market prices of diesel fuel and heating oil is
highly effective. The Company's heating oil option contracts are not
material to the Company's financial position and represent no significant
market exposure. The Company maintained fuel inventories for use in normal
operations at June 30, 1999 and represented no significant market exposure.
There was no material change in the Company's exposure to market risk in
the six months ended June 30, 1999 as compared to December 31, 1998. For
further information, refer to Management's Discussion and Analysis of
Operations and Financial Condition included in the Annual Report on Form
10-K for the year ended December 31, 1998.
PART II OTHER INFORMATION
ITEM 1 - Legal Proceedings.......................................*
ITEM 2 - Changes in Securities and Use of Proceeds...............*
ITEM 3 - Defaults Upon Senior Securities.........................*
ITEM 4 - Submission of Matters to a Vote of Security Holders.....*
ITEM 5 - Other Information
The Company's common stock discontinued trading on the NASDAQ
national market at the close of business on August 12, 1999. Trading in the
Company's common stock began on the American Stock Exchange (AMEX) at 10:00
a.m. Eastern Standard Time on Friday, August 13, 1999.
In May 1999, the Company repurchased 50,000 shares of its common stock
from an unaffiliated third party in a privately negotiated transaction. The
purchase was made pursuant to specific board authorization and was not part of
a regular stock repurchase program. The purchase price was $3.375 per share
and was funded through the Company's operating cash flow. The repurchased
shares will be held as treasury stock pending re-issuance or cancellation.
ITEM 6 - Exhibits and Reports on Form 8-K.........................*
*No information submitted under this caption.
The Company did not file any exhibits or reports on Form 8-K during the six
months ended June 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OTR EXPRESS, INC.
(Registrant)
Date: August 16, 1999 /s/ Gary J. Klusman
By: Gary J. Klusman
President and Principal
Executive Officer
Date: August 16, 1999 /s/ Steven W. Ruben
By: Steven W. Ruben
Principal Financial Officer and
Principal Accounting Officer