SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Fiscal Year Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
Commission file number 000-20793
SMITHWAY MOTOR XPRESS CORP.
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(Exact name of registrant as specified in its charter)
Nevada 42-1433844
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2031 Quail Avenue
Fort Dodge, Iowa 50501
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 515/576-7418
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Securities Registered Pursuant to Section 12(b) of the Act: None
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Securities Registered Pursuant to Section 12(g) of the Act:
$0.01 Par Value Class A Common Stock
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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 ____
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 amendments to
this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $5,674,647 as of March 15, 2000, (based upon the $3.125 per share
closing price on that date as reported by Nasdaq). In making this calculation
the registrant has assumed, without admitting for any purpose, that all
executive officers, directors, and holders of more than 5% of a class of
outstanding common stock, and no other persons, are affiliates.
As of March 15, 2000, the registrant had 4,010,640 shares of Class A Common
Stock and 1,000,000 shares of Class B Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: The information set forth under Part III,
Items 10, 11, 12, and 13 of this Report is incorporated by reference from the
registrant's definitive proxy statement for the 2000 annual meeting of
stockholders that will be filed no later than April 29, 2000.
1
Cross Reference Index
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The following cross reference index indicates the document and location
of the information contained herein and incorporated by reference into the Form
10-K.
Document and Location
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Part I
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Item 1 Business Page 3 through 6 herein
Item 2 Properties Page 6 herein
Item 3 Legal Proceedings Page 7 herein
Item 4 Submission of Matters to a Vote Page 7 herein
of Security Holders
Part II
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Item 5 Market for the Registrant's Common Equity
and Related Stockholder Matters Page 7 herein
Item 6 Selected Financial Data Page 8 herein
Item 7 Management's Discussion and Analysis of
Financial Condition and
Results of Operations Page 9 through 14 herein
Item 8 Financial Statements and
Supplementary Data Page 15 herein
Item 9 Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure Page 15 herein
Part III
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Item 10 Directors and Executive Officers
of the Registrant Page 3 through 4 of Proxy Statement
Item 11 Executive Compensation Page 5 of Proxy Statement
Item 12 Security Ownership of Principal
Stockholders and Management Page 8 of Proxy Statement
Item 13 Related Party Transactions Page 5 of Proxy Statement
Part IV
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Item 14 Exhibits, Financial Statement Pages 16 through 18 herein
Schedules, and Reports on Form 8-K
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This report contains "forward-looking statements" in paragraphs that
are marked with an asterisk. These statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
anticipated. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Cautionary Statement Regarding Forward-Looking
Statements" for additional information and factors to be considered concerning
forward-looking statements.
2
PART I
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ITEM 1. BUSINESS
The Company
Smithway Motor Xpress Corp. ("Smithway" or the "Company") is a
truckload carrier that provides nationwide transportation of diversified
freight, concentrating primarily on the flatbed segment of the truckload market.
The Company uses its "Smithway Network" of 27 computer-connected field offices,
commission agencies, and Company-owned terminals to offer comprehensive
truckload transportation services to shippers located predominantly between the
Rocky Mountains in the West and the Appalachian Mountains in the East, and in
eight Canadian provinces.
Prior to 1984, the Company specialized in transporting building
materials on flatbed trailers. William G. Smith became President of Smithway in
1984, and led the Company's effort to diversify its customer and freight base,
form the Smithway Network of locations, and implement systems to support the
Company's growth. Management commenced the Company's acquisition strategy in
1995 to take advantage of opportunities offered by industry consolidation.
Smithway acquired the operations of eight trucking companies between
June 1995 and October 1998. In each transaction, Smithway purchased specific
assets for fair market value and paid the selling company's owner a small
percentage of revenue for goodwill or a noncompetition arrangement. The Company
acquired the business of Van Tassel, Inc., a primarily flatbed carrier based in
Pittsburg, Kansas, in June 1995, and Smith Trucking Company, a primarily dry van
carrier based in McPherson, Kansas, in January 1996. Both of these acquisitions
permitted Smithway to expand and solidify existing customer relationships as
well as access new customers. The Smith Trucking location also expanded the
Company's driver recruiting region. In October 1996, the Company acquired the
business of Marquardt Transportation, Inc., a primarily flatbed carrier based in
Yankton, South Dakota, and with a small facility in Stockton, California.
Marquardt further diversified Smithway's freight base by increasing its presence
in hauling large, manufactured items and heavy machinery. In February 1997,
Smithway acquired Fort Dodge, Iowa-based Pirie Motor Freight, Inc. Pirie was a
small flatbed carrier, and its operations were consolidated into Smithway's
headquarters. In September 1997, Smithway acquired the business of Royal
Transport, Ltd. of Grand Rapids, Michigan, primarily a flatbed carrier. The
Royal acquisition provided Smithway a regional niche specializing in heavy loads
hauled primarily on multiple axle trailers. In February 1998, the Company
acquired the business of East West Motor Express, Inc. of Black Hawk, South
Dakota ("East West"), a regional flatbed and dry van carrier. The East West
acquisition added 225 trucks to Smithway's fleet. TP Transportation, Inc.
("TP"), a flatbed carrier from Enid, Oklahoma was acquired in August 1998. In
October 1998 the Company continued to build its dry van freight base with the
acquisition of the business of JHT, Inc. ("JHT") of Cohasset, Minnesota. JHT
operated 185 tractors serving exclusively the dry van market with slightly over
half of the tractors company-owned and the balance being provided by
owner-operators. Through acquisitions and internal growth the Company expanded
from $77 million revenue in 1995 to $197 million in 1999. The Company did not
complete an acquisition in 1999.
Smithway Motor Xpress Corp. was incorporated in Nevada in January 1995
to serve as a holding company and conduct the Company's initial public offering,
which occurred in June 1996. References to the "Company" or "Smithway" herein
refer to the consolidated operations of Smithway Motor Xpress Corp., a Nevada
corporation ("Smithway-Nevada"), and its wholly owned subsidiaries, Smithway
Motor Xpress, Inc., an Iowa corporation ("Smithway-Iowa"), East West Motor
Express, Inc., a South Dakota corporation, SMSD Acquisition Corp., a South
Dakota corporation, and New Horizons Leasing, Inc., an Iowa corporation.
Operations
Smithway integrates its sales and dispatch functions throughout its
computer-connected "Smithway Network." The Smithway Network consists of the
Company's headquarters in Fort Dodge, Iowa, and 26 terminals, field offices, and
independent agencies. The headquarters and 21 terminals and field offices are
managed by Smithway employees, while the five agencies are managed by
independent commission agents. The customer sales representatives and agents at
each location have front-line responsibility for booking freight in their
regions. Fleet managers at the Fort Dodge, Iowa, headquarters coordinate all
load movements via computer link to optimize load selection and promote proper
fleet balance among regions. Personnel at the Company's headquarters also handle
all sales and dispatch functions for van traffic and for flatbed traffic that
does not originate within a specific sales region.
3
Agents are important to the Company's operations because they are the
primary contact for shippers within their region and have regular contact with
drivers and independent contractors. The Company's agents are paid a commission
on revenue they generate. Although agent contracts typically are cancelable on
14 days' notice, Smithway's agents average more than 10 years' tenure with the
Company. In addition to sales and customer service benefits, management believes
agents offer the advantage of minimizing capital investment and fixed costs,
because agents are responsible for all of their own expenses.
Customers and Marketing
Smithway's sales force includes seven national sales representatives,
personnel at 22 terminals and field offices, and five independent commission
agents. National sales representatives focus on national customers and van
freight, while sales personnel at terminals, field offices, and agencies are
responsible for regional customer contact. The Company's sales force emphasizes
rapid response time to customer requests for equipment, undamaged and on-time
pickup and delivery, one of the nation's largest fleets of flatbed equipment,
safe and professional drivers, logistics management, dedicated fleet capability,
and its strategically located Smithway Network. Management believes that few
other carriers operating principally in the Midwest flatbed market offer similar
size, service, and the reliability of a late-model fleet. Consequently, the
Company seeks primarily service-sensitive freight rather than competing for all
freight on the basis of price.
In 1999, the Company's top 50, 25, 10, and 5 customers accounted for
46%, 38%, 27%, and 18% of revenue, respectively, with the remaining customers
accounting for 54% of revenue. No single customer accounted for more than 5% of
Smithway's revenue during 1999.
Technology
Management believes that advances in technology can enhance the
Company's operating efficiency and customer service. Three principal
technologies used by Smithway includes freight selection software,
satellite-based tracking and communication with tractors, and electronic data
interchange ("EDI") with customers. In July 1993, the Company initiated the use
of the Spectrum freight selection software. Spectrum ranks each potential load
based upon rate per loaded mile, empty mile exposure, and history of obtaining a
profitable return load from the proposed destination.
Smithway operates satellite-based tracking and communication units in
all of its Company-owned tractors and has offered rental of these units as an
option to its independent contractors. Management believes on-board
communication capability can reduce unnecessary stops and out-of-route miles
because drivers are not forced to find a telephone to contact the Company or
receive instructions. In addition, drivers can immediately report breakdowns or
other emergency conditions. The system also enables the Company to advise
customers of the location of freight in transit through its hourly position
reports of each tractor's location.
Smithway also offers its customers EDI technology. EDI allows
customers to communicate directly with the Company via computer link and, with
the aid of satellite communication, obtain location updates of in-transit
freight, expected delivery times, and account payment instructions.
Drivers, Independent Contractors, and Other Personnel
Smithway seeks drivers and independent contractors who safely manage
their equipment and treat freight transportation as a business. The Company
historically has operated a fleet comprised of substantial numbers of both
Company-owned and independent contractor tractors. Management believes a mixed
fleet offers competitive advantages because the Company is able to recruit from
both personnel pools to facilitate fleet expansion. The Company intends to
retain a mixed fleet in the future to insure that its recruiting efforts toward
either group are not damaged by becoming categorized as predominantly either a
Company-owned or independent contractor fleet, although acquisitions or other
factors may cause fluctuations in the fleet mix from time to time.
Smithway has implemented several policies to promote driver and
independent contractor recruiting and retention. These include maintaining an
open-door policy with easy access to senior executives, appointing an advisory
board comprised of top drivers and independent contractors to consult with
management, and assigning each driver and independent contractor to a particular
dispatcher to insure personal contact. In addition, the Company utilizes
conventional (engine-forward) tractors, which are more comfortable for the
driver, and operates over relatively short-to-medium distances (678-mile average
length of haul in 1999) to return drivers home as frequently as possible.
4
Smithway is not a party to a collective bargaining agreement and its
employees are not represented by a union. At December 31, 1999, the Company had
757 Company drivers, 346 non-driver employees, and 689 independent contractors.
Management believes that the Company has good relationships with its employees
and independent contractors.
Safety and Insurance
Smithway's active safety and loss prevention program has resulted in
the Department of Transportation's highest safety and fitness rating
(satisfactory) and numerous safety awards. The Company's safety and loss
prevention program includes pre-screening, initial orientation, six weeks
on-the-road training for drivers without substantial experience, 100% log
monitoring, and safety bonuses.
The Company maintains insurance covering losses in excess of a $50,000
self-insured retention for cargo loss, personal injury, property damage, and
physical damage claims. The Company has a $100,000 deductible for workers'
compensation claims in states where a deductible is allowed. Its primary
personal injury and property damage insurance policy has a limit of $2.0 million
per occurrence, and the Company carries excess liability coverage, which
management believes is adequate to cover exposure to claims exceeding its
retention limit.
Revenue Equipment
Smithway's equipment strategy for its own tractors (as opposed to
independent contractors' tractors) is to operate late-model tractors and trade
or dispose of its tractors prior to the expiration of major component
warranties. Management believes that operating newer equipment can minimize
repair and maintenance expense and offer improvements in fuel efficiency.
Smithway orders conventional (engine forward) tractors with standard engine and
drivetrain components, and trailers with standard brakes and tires to minimize
its inventory of spare parts. All equipment is subject to the Company's regular
maintenance program, and is also inspected and maintained each time it passes
through a Smithway maintenance facility. Smithway's Company-owned tractor fleet
had an average age of 22 months at December 31, 1999.
Competition
The truckload segment of the trucking industry is highly competitive
and fragmented, and no carrier or group of carriers dominates the flatbed or van
market. Smithway competes primarily with other regional, short-to-medium-haul
carriers and private truck fleets used by shippers to transport their own
products in proprietary equipment. Competition is based primarily upon service
and price. The Company competes to a limited extent with rail and rail-truck
intermodal service, but attempts to limit this competition by seeking
service-sensitive freight and focusing on short-to-medium lengths of haul.
Although management believes the 870 flatbed trailers it operated at December
31, 1999, rank its flatbed division among the ten largest such fleets in that
industry segment, there are other trucking companies, including diversified
carriers with large flatbed fleets, that possess substantially greater financial
resources and operate more equipment than Smithway.
Fuel Availability and Cost
The Company actively manages its fuel costs. Company drivers purchase
virtually all of the Company's fuel through service centers with which Smithway
has volume purchasing arrangements. In addition, management periodically enters
into futures contracts and price swap agreements on heating oil, which is
derived from the same petroleum products as diesel fuel, in an effort to
partially hedge increases in fuel prices. Most of the Company's contracts with
customers contain fuel surcharge provisions and the Company also attempts to
recover increases in fuel prices through higher rates. However, the recent
increases in fuel prices will not be fully offset through these measures.
Regulation
Historically, the Interstate Commerce Commission ("ICC") and various
state agencies regulated motor carriers' operating rights, accounting systems,
mergers and acquisitions, periodic financial reporting, and other matters. In
1995, federal legislation preempted state regulation of prices, routes, and
services of motor carriers and eliminated the ICC. Several ICC functions were
transferred to the Department of Transportation ("DOT"). Management does not
believe that regulation by the DOT or by the states in their remaining areas of
authority will have a material effect on the Company's operations. The Company's
drivers and independent contractors must comply with the safety and fitness
regulations promulgated by the DOT, including those relating to drug and alcohol
testing and hours of service.
The Company's operations are subject to various federal, state, and
local environmental laws and regulations, implemented principally by the EPA and
similar state regulatory agencies, governing the management of hazardous wastes,
the discharge of pollutants into the air and surface and underground waters, and
the disposal of certain substances. The Company transports certain commodities
that may be deemed hazardous substances, and its Fort Dodge, Iowa, headquarters
and Black Hawk, South Dakota, Enid, Oklahoma, and Stockton, California terminals
5
have above-ground fuel storage tanks and fueling facilities. The Company's
Cohasset, Minnesota terminal has underground fuel storage tanks. If the Company
should be involved in a spill or other accident involving hazardous substances,
if any such substances were found on the Company's properties, or if the Company
were found to be in violation of applicable laws and regulations, the Company
could be responsible for clean-up costs, property damage, and fines or other
penalties, any one of which could have a materially adverse effect on the
Company. Management believes that its operations are in material compliance with
current laws and regulations and does not know of any existing condition that
would cause compliance with applicable environmental regulations to have a
material effect on the Company's capital expenditures, earnings, or competitive
position. If the Company should fail to comply with applicable regulations, the
Company could be subject to substantial fines or penalties and to civil or
criminal liability.
ITEM 2. PROPERTIES
Smithway's headquarters consists of 25,000 square feet of office space
and 51,000 square feet of equipment maintenance and wash facilities, located on
31 acres near Fort Dodge, Iowa. The Smithway Network consists of locations in or
near the following cities with the facilities noted:
Driver
Company Locations Maintenance Recruitment Dispatch Sales Ownership
- -------------------------- ------------ ------------- ----------- ------------- -------------
Altoona, Iowa ................ X X Owned
Birmingham, Alabama .......... X X Leased
Black Hawk, South Dakota...... X X X X Owned
Chicago, Illinois............. X X Owned
Cincinnati, Ohio.............. X X Leased
Cohasset, Minnesota........... X X X X Owned
Dallas, Texas................. X X Leased+
Denver, Colorado.............. X X Leased+
Enid, Oklahoma................ X X X X Leased
Fort Dodge, Iowa.............. X X X X Owned
Grand Rapids, Michigan........ X X Leased
Joplin, Missouri.............. X X X X Owned
Kansas City, Missouri......... X X Leased+
McPherson, Kansas............. X X X Leased
Oklahoma City, Oklahoma....... X X Owned
Oshkosh, Wisconsin............ X X Leased+
Stockton, California.......... X X X X Leased+
St. Louis, Missouri........... X X Leased+
St. Paul, Minnesota........... X X Leased+
Tulsa, Oklahoma .............. X Leased
Yankton, South Dakota......... X X X X Leased
Youngstown, Ohio.............. X X X Leased+
Agent Locations
- --------------------------------
Cedar Rapids, Iowa ........... X X
Detroit, Michigan ............ X X
Hennepin, Illinois ........... X X
Norfolk, Nebraska ............ X X
Toledo, Ohio ................. X X
- --------------------------------
+ Month-to-month leases.
6
ITEM 3. LEGAL PROCEEDINGS
The Company from time to time is a party to litigation arising in the
ordinary course of its business, substantially all of which involves claims for
personal injury and property damage incurred in the transportation of freight.
The Company is not aware of any claims or threatened claims that might have a
materially adverse effect upon its operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 31, 1999,
no matters were submitted to a vote of security holders.
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Price Range of Common Stock. The Company's Class A Common Stock is
traded on the Nasdaq National Market under the symbol "SMXC." The following
table sets forth for the calendar periods indicated the range of high and low
sales prices for the Company's Class A Common Stock as reported by Nasdaq from
January 1, 1998, to December 31, 1999.
Period High Low
- ------------------------------- ---------------------- -----------------------
Calendar Year 1999
1st Quarter $ 9 1/2 $ 7 3/8
2nd Quarter $ 10 11/16 $ 6 3/4
3rd Quarter $ 10 1/2 $ 7 7/16
4th Quarter $ 8 1/2 $ 3 9/16
Period High Low
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Calendar Year 1998
1st Quarter $ 16 1/8 $ 11 1/2
2nd Quarter $ 19 1/8 $ 9 3/4
3rd Quarter $ 10 3/4 $ 6 7/8
4th Quarter $ 10 $ 6 5/8
As of March 15, 2000 the Company had 310 stockholders of record of its
Class A Common Stock. However, the Company believes that many additional holders
of Class A Common Stock are unidentified because a substantial number of the
Company's shares are held of record by brokers or dealers for their customers in
street names.
Dividend Policy. The Company has never declared and paid a cash
dividend on its Class A Common Stock. It is the current intention of the
Company's Board of Directors to continue to retain earnings to finance the
growth of the Company's business rather than to pay dividends. Future payments
of cash dividends will depend upon the financial condition, results of
operations, and capital commitments of the Company, restrictions under
then-existing agreements, and other factors deemed relevant by the Board of
Directors.
7
Item 6. Selected Financial and Operating Data
Years Ended December 31,
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Statement of Operations Data: (In thousands, except per share and operating data amounts)
Operating revenue.................................... $ 77,339 $ 93,667 $ 120,117 $ 161,375 $196,945
Operating expenses:
Purchased transportation........................... 31,621 37,386 47,095 66,495 79,735
Compensation and employee benefits................. 17,182 20,800 26,904 38,191 49,255
Fuel, supplies, and maintenance.................... 10,183 12,347 15,965 19,738 23,754
Insurance and claims............................... 1,827 1,995 2,206 2,745 4,212
Taxes and licenses................................. 1,588 1,856 2,299 3,048 4,045
General and administrative......................... 3,592 4,214 5,391 6,237 7,491
Communications and utilities....................... 758 971 1,378 1,838 2,190
Depreciation and amortization...................... 3,879 5,740 7,880 11,015 15,800
------------ ------------- ------------ ------------ ------------
Total operating expenses........................ 70,630 85,309 109,118 149,307 186,482
------------ ------------- ------------ ------------ ------------
Earnings from operations........................ 6,709 8,358 10,999 12,068 10,463
Interest expense (net)............................... 1,225 1,548 1,545 2,965 3,715
------------ ------------- ------------ ------------ ------------
Earnings before income taxes......................... 5,484 6,810 9,454 9,103 6,748
Income taxes......................................... 2,393 2,860 3,781 3,774 2,822
------------ ------------- ------------ ------------ ------------
Net earnings......................................... $ 3,091 $ 3,950 $ 5,673 $ 5,329 $ 3,926
============ ============= ============ ============ ============
Basic and diluted earnings per common share.......... $ 0.88 $ 0.93 $ 1.13 $ 1.06 $ 0.78
============ ============= ============ ============ ============
Operating Data(1)
Operating ratio(2)................................... 91.3% 91.1% 90.8% 92.5% 94.7%
Average revenue per tractor per week................. $ 2,160 $ 2,243 $ 2,342 $ 2,330 $ 2,299
Average revenue per loaded mile(3)................... $ 1.38 $ 1.37 $ 1.36 $ 1.33 $ 1.33
Average length of haul in miles...................... 563 568 609 659 678
Company tractors at end of period.................... 376 458 525 815 844
Independent contractor tractors at end of period..... 303 406 443 711 689
Weighted average tractors during period.............. 619 747 909 1,236 1,532
Trailers at end of period............................ 1,167 1,492 1,673 2,720 2,783
Weighted averages shares outstanding:
Basic.............................................. 3,524 4,250 5,001 5,012 5,031
Diluted............................................ 3,524 4,250 5,019 5,037 5,032
Balance Sheet Data (at end of period):
Working capital...................................... $ 2,516 $ 1,893 $ 10,100 $ 6,811 $ 5,159
Net property and equipment........................... 27,843 39,170 53,132 87,137 94,305
Total assets......................................... 40,702 55,330 74,878 115,494 125,014
Long-term debt, including current maturities......... 23,219 15,904 30,976 61,703 59,515
Total stockholders' equity........................... 7,871 24,193 29,906 35,405 39,508
(1) Excludes brokerage activities except as to operating ratio.
(2) Operating expenses as a percentage of operating revenue.
(3) Net of fuel surcharges.
8
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company has expanded its operations substantially over the past
three years through a combination of acquisitions and internal growth. Operating
revenue growth exceeded 20% for the third straight year. From 1997 to 1999
operating revenue increased 64.0%, to $197 million in 1999 from $120 million in
1997, while net earnings decreased 30.8%, to $3.9 million in 1999 from $5.7
million in 1997.
The Company operates a tractor-trailer fleet comprised of both
Company-owned vehicles and vehicles obtained under leases from independent
contractors and third-party finance companies. Fluctuations among expense
categories may occur as a result of changes in the relative percentage of the
fleet obtained through equipment that is owned versus equipment that is leased
from independent contractors or financing sources. Costs associated with revenue
equipment acquired under operating leases or through agreements with independent
contractors are expensed as "purchased transportation." For these categories of
equipment the Company does not incur costs such as interest and depreciation as
it might with owned equipment. In addition, independent contractor tractors,
driver compensation, fuel, communications, and certain other expenses are borne
by the independent contractors and are not incurred by the Company. Obtaining
equipment from independent contractors and under operating leases reduces
capital expenditures and on-balance sheet leverage and effectively shifts
expenses from interest to "above the line" operating expenses. The fleet profile
of acquired companies and the Company's relative recruiting and retention
success with Company-employed drivers and independent contractors will cause
fluctuations from time-to-time in the percentage of the Company's fleet that is
owned versus obtained from independent contractors and under operating
leases.(*)
Results of Operations
The following table sets forth the percentage relationship of certain
items to revenue for the periods indicated:
1997 1998 1999
---- ---- ----
Operating revenue......................................... 100.0% 100.0% 100.0%
Operating expenses:
Purchased transportation......................... 39.2 41.2 40.5
Compensation and employee benefits............... 22.4 23.7 25.0
Fuel, supplies, and maintenance.................. 13.3 12.2 12.1
Insurance and claims............................. 1.8 1.7 2.1
Taxes and licenses............................... 1.9 1.9 2.1
General and administrative....................... 4.5 3.9 3.8
Communication and utilities...................... 1.1 1.1 1.1
Depreciation and amortization.................... 6.6 6.8 8.0
---------------------------------- ----------------
Total operating expenses......................... 90.8 92.5 94.7
---------------------------------- ----------------
Earnings from operations.................................. 9.2 7.5 5.3
Interest expense, net..................................... 1.3 1.8 1.9
---------------------------------- ----------------
Earnings before income taxes.............................. 7.9 5.6 3.4
Income taxes.............................................. 3.2 2.3 1.4
---------------------------------- ----------------
Net earnings.............................................. 4.7% 3.3% 2.0%
===================================================
Comparison of year ended December 31, 1999 to year ended December 31, 1998.
Operating revenue increased $35.5 million (22.0%), to $196.9 million
in 1999 from $161.4 million in 1998.The revenue increase resulted primarily from
a 24.0% increase in weighted average tractors,to 1,532 in 1999 from 1,236 during
1998 as the Company expanded internally to meet customer demand and acquired the
business of East West in February 1998, TP in August 1998, and JHT in October
1998. This was partially offset by lower revenue per tractor per week (excluding
revenue from brokerage operations), which decreased $31 per week (1.3%), to
$2,299 in 1999 from $2,330 in 1998. This decrease was caused by a shortage of
manned tractors in the fleet in the second half of the year and lower miles and
revenue per tractor in the dry van operations. Revenue from the Company's
brokerage operations increased $1.2 million (11.5%), to $11.6 million in 1999
from $10.4 million in 1998.
9
Purchased transportation consists primarily of payments to independent
contractor providers of revenue equipment, expenses related to brokerage
activities, and payments under operating leases of revenue equipment. Purchased
transportation increased $13.2 million (19.9%), to $79.7 million in 1999 from
$66.5 million in 1998, as the Company's business expanded and the Company
contracted with more independent contractor providers of revenue equipment. As a
percentage of revenue, purchased transportation decreased to 40.5% in 1999 from
41.2% in 1998. This reflects a decrease in the amount of freight brokered by the
Company as a percent of total revenue, a slight decrease in the percentage of
the Company's fleet supplied by independent contractors, and a reduction in
equipment rent caused by the purchase of equipment which was previously leased.
Compensation and employee benefits increased $11.1 million (29.0%) to
$49.3 million in 1999 from $38.2 million in 1998. As a percentage of revenue,
compensation and employee benefits increased to 25.0% in 1999 from 23.7% in
1998. The increase was attributable to (i) an increase in the self-insured
retention for workers compensation and health insurance claims and reserve
amounts for the period, (ii) an increase in the per-mile wage paid to flatbed
drivers in October 1999, (iii) an increase in the number of driver trainers and
trainees, and (iv) a slight increase in the percentage of the Company's fleet
supplied by Company trucks.
Fuel, supplies, and maintenance increased $4.1 million(20.3%), to $23.8
million in 1999 from $19.7 million in 1998. As a percentage of revenue, fuel,
supplies, and maintenance decreased slightly to 12.1% in 1999 from 12.2% in 1998
in spite of a 5.8% increase in fuel costs to $1.09 per gallon during 1999 from
$1.03 per gallon in 1998. The increased fuel costs were largely offset by gains
from fuel hedging transactions as well as lower costs for parts, tires, tarps,
supplies, and binders. The Company is attempting to recover increases in fuel
prices through fuel surcharges and higher rates, however, recent fuel price
increases will not be fully offset through these measures. Going forward, the
Company's fuel hedging positions cover less fuel than in 1999 and expire in June
2000.
Insurance and claims increased $1.5 million (53.4%), to $4.2 million in
1999 from $2.7 million in 1998. As a percentage of revenue, insurance and claims
increased to 2.1% of revenue in 1999 compared with 1.7% in 1998, reflecting an
increase in liability and physical damage claims paid and reserved.
Taxes and licenses increased $1.0 million (32.7%), to $4.0 million in
1999 from $3.0 million in 1998, reflecting an increase in the number of
shipments requiring special permits and an increase in the number of tractors
licensed by the Company. The special permits are paid for by the shippers, which
increases freight revenue. As a percentage of revenue, taxes and licenses
remained relatively constant at 2.1% of revenue in 1999 compared with 1.9% of
revenue in 1998.
General and administrative expenses increased $1.3 million (20.1%), to
$7.5 million in 1999 from $6.2 million in 1998. As a percentage of revenue,
general and administrative expenses remained relatively constant at 3.8% of
revenue in 1999 compared with 3.9% of revenue in 1998.
Communications and utilities increased $352,000 (19.2%), to $2.2
million in 1999 from $1.8 million in 1998. As a percentage of revenue,
communications and utilities remained unchanged at 1.1% in both years.
Depreciation and amortization increased $4.8 million (43.4%), to $15.8
million in 1999 from $11.0 million in 1998. As a percentage of revenue,
depreciation and amortization increased to 8.0% of revenue in 1999 from 6.8% in
1998. The increase was attributable to a larger fleet of Company-owned tractors
and trailers, which increased the cost of the equipment being depreciated, an
increase in the number of Company-owned tractors financed with debt rather than
operating leases, and lower revenue per tractor which less efficiently spread
this fixed cost.
Interest expense, net, increased $750,000 (25.3%), to $3.7 million in
1999 from $3.0 million in 1998. As a percentage of revenue, interest expense,
net, remained relatively constant at 1.9% of revenue in 1999 compared with 1.8%
in 1998.
As a result of the foregoing, the Company's pretax margin decreased to
3.4% in 1999 from 5.6% in 1998.
The Company's effective tax rate was 41.8% in 1999 (1.4% of revenue),
compared with 41.5% in 1998 (2.3% of revenue). The effective tax rate is higher
than the expected combined tax rate for a company headquartered in Iowa because
of the cost of nondeductible driver per diem expense absorbed by the Company.
The impact of the Company's paying per diem travel expenses varies depending
upon the ratio of drivers to independent contractors and the level of the
Company's pretax earnings.
As a result of the factors described above, net earnings decreased to
$3.9 million in 1999 (2.0% of revenue), from $5.3 million in 1998 (3.3% of
revenue).
10
Comparison of year ended December 31, 1998 to year ended December 31, 1997.
Operating revenue increased $41.3 million (34.3%), to $161.4 million in
1998 from $120.1 million in 1997. The revenue increase resulted primarily from a
36.0% increase in weighted average tractors, to 1,236 in 1998 from 909 during
1997 as the Company expanded internally to meet customer demand and acquired the
business of East West in February 1998, TP in August 1998, and JHT in October
1998. Revenue per tractor per week (excluding revenue from brokerage operations)
decreased $12 per week (0.5%), to $2,330 in 1998 from $2,342 in 1997. This
resulted from a decrease in revenue per loaded mile, which was largely offset by
an increase in miles per tractor and a decrease in empty miles percentage. These
changes were a result of the increase in van freight associated with the
acquisition of East West. In addition, revenue from the Company's brokerage
operations increased $3.1 million (42.3%), to $10.4 million in 1998 from $7.3
million in 1997.
Purchased transportation consists primarily of payments to independent
contractor providers of revenue equipment, expenses related to brokerage
activities, and payments under operating leases of revenue equipment. Purchased
transportation increased $19.4 million (41.2%), to $66.5 million in 1998 from
$47.1 million in 1997, as the Company's business expanded and the Company
contracted with more independent contractor providers of revenue equipment. As a
percentage of revenue, purchased transportation increased to 41.2% in 1998 from
39.2% in 1997. This reflects an increase in the percentage of the Company's
fleet supplied by independent contractors as a result of the Company's internal
recruiting efforts and the acquisition of East West, which has obtained a higher
percentage of its fleet from independent contractors. It also reflects an
increase in the freight hauled by brokered equipment.
Compensation and employee benefits increased $11.3 million (42.0%) to
$38.2 million in 1998 from $26.9 million in 1997. As a percentage of revenue,
compensation and employee benefits increased to 23.7% in 1998 from 22.4% in
1997. The increase was attributable to (i) an increase in the per-mile wage paid
to van drivers, (ii) an increase in the number of driver trainers and trainees,
and (iii) an increase in the self-insured retention for health insurance claims
and reserve amounts for the period, which primarily related to unusual health
claims during the second quarter of 1998.
Fuel, supplies, and maintenance increased $3.8 million (23.6%), to
$19.7 million in 1998 from $16.0 million in 1997. As a percentage of revenue,
fuel, supplies, and maintenance decreased to 12.2% in 1998 from 13.3% in 1997,
reflecting a 13.4% decrease in fuel costs to $1.03 per gallon during 1998 from
$1.19 per gallon in 1997. The decrease was partially offset by an increase in
the cost of parts, tires, tarps, supplies, and binders used in the Company's
operations.
Insurance and claims increased $539,000 (24.4%), to $2.7 million in
1998 from $2.2 million in 1997. As a percentage of revenue, insurance and claims
remained relatively constant at 1.7% of revenue in 1998 compared with 1.8% in
1997.
Taxes and licenses increased $749,000 (32.6%), to $3.0 million in 1998
from $2.3 million in 1997. As a percentage of revenue, taxes and licenses
remained unchanged at 1.9% of revenue for each year.
General and administrative expenses increased $846,000 (15.7%), to $6.2
million in 1998 from $5.4 million in 1997. As a percentage of revenue, general
and administrative expenses decreased to 3.9% of revenue in 1998 from 4.5% in
1997, as a result of a decrease in freight revenue being dispatched by terminal
agents, resulting in less commissions paid during the 1998 period. Additionally,
certain fixed costs are being spread over a larger revenue base.
Communications and utilities increased $460,000 (33.4%), to $1.8
million in 1998 from $1.4 million in 1997. As a percentage of revenue,
communications and utilities remained unchanged at 1.1% in both years.
Depreciation and amortization increased $3.1 million (39.8%), to $11.0
million in 1998 from $7.9 million in 1997. As a percentage of revenue,
depreciation and amortization increased to 6.8% of revenue in 1998 from 6.6% in
1997. The increase was attributable to a larger fleet of Company-owned tractors
and trailers, which increased the cost of the equipment being depreciated, an
increase in the number of Company-owned tractors financed with debt rather than
operating leases, slightly lower revenue per tractor, and an increase in
goodwill amortization as a result of the three acquisitions in 1998.
Interest expense, net, increased $1.4 million (91.9%), to $3.0 million
in 1998 from $1.5 million in 1997. As a percentage of revenue, interest expense,
net, increased to 1.8% of revenue in 1998 from 1.3% in 1997, as the Company
incurred debt to finance the acquisition of three trucking companies. This
increase in debt was partially offset by lower average interest rates of 6.79%
in 1998 compared with 7.1% in 1997.
11
As a result of the foregoing, the Company's pretax margin decreased to
5.6% in 1998 from 7.9% in 1997.
The Company's effective tax rate was 41.5% in 1998 (2.3% of revenue),
compared with 40.0% in 1997 (3.1% of revenue). The effective tax rate is higher
than the expected combined tax rate for a company headquartered in Iowa because
of the cost of nondeductible driver per diem expense absorbed by the Company.
The impact of the Company's paying per diem travel expenses varies depending
upon the ratio of drivers to independent contractors and the level of the
Company's pretax earnings.
As a result of the factors described above, net earnings decreased to
$5.3 million in 1998 (3.3% of revenue), from $5.7 million in 1997 (4.7% of
revenue).
Liquidity and Capital Resources
The growth of the Company's business has required significant invest-
ments in new revenue equipment that the Company has financed in recent years
with borrowings under installment notes payable to commercial lending
institutions and equipment manufacturers, borrowings under lines of credit, cash
flow from operations, and equipment leases from third-party lessors. The Company
also has obtained a portion of its revenue equipment fleet from independent
contractors who own and operate the equipment, which reduces overall capital
expenditure requirements compared with providing a fleet of entirely
Company-owned equipment. The Company's primary sources of liquidity currently
are funds provided by operations and borrowings under credit agreements with
financial institutions and equipment manufacturers. Management believes that its
sources of liquidity are adequate to meet its currently anticipated working
capital requirements, capital expenditures, and other needs at least through
2000.(*)
Net cash provided by operating activities was $14.9 million, $16.5
million, and $24.0 million for the years ended December 31, 1997, 1998, and 1999
respectively. The Company's principal use of cash from operations is to service
debt and internally finance accounts receivable associated with growth in the
business. Customer accounts receivable increased $1.2 million, $4.5 million, and
$3.4 million for the years ended December 31, 1997, 1998, and 1999,
respectively. The average age of the Company's accounts receivable was
approximately 34 days for 1997, 33 days for 1998, and 35 days for 1999.
Net cash used in investing activities was $1.8 million, $36.6 million,
and $14.7 million for the years ended December 31, 1997, 1998, and 1999,
respectively. Such amounts related primarily to payments made in acquisitions of
eight trucking companies and purchases, sales, and trades of revenue equipment.
The Company expects capital expenditures (primarily for revenue equipment and
satellite communications units), net of revenue equipment trade-ins, to be
approximately $22.2 million during 2000. Such projected capital expenditures are
expected to be funded with cash flow from operations, borrowings, or operating
leases. The Company continues to evaluate the need to expand its present
headquarters facility and may incur a portion of the expansion costs during
2000. The size and cost of the possible expansion has not yet been determined.
The Company's projected capital expenditures do not include any amount for this
possible expansion.(*)
Net cash (used in) provided by financing activities of ($10.0 million),
$17.3 million, and ($9.9 million) for the years ended December 31, 1997, 1998,
and 1999, respectively, consisted primarily of net (payments) borrowings of
($5.5 million), $17.3 million, and ($9.9 million) of principal under the
Company's long-term debt agreements, and net payments of $4.5 million in 1997
under the Company's former line of credit, which was paid off during that year.
At December 31, 1999, the Company had outstanding long-term debt
including current maturities) of approximately $59.5 million, most of which was
comprised of obligations for the purchase of revenue equipment. Approximately
$34.0 million consisted of borrowings from financial institutions and equipment
manufacturers, $25 million represented the amount drawn under the Company's
revolving credit facility, and $434,000 represented future payments for
purchases of intangible assets. Interest rates on this debt range from 5.81% to
7.62% with maturities through 2004.
At December 31, 1999, the revolving credit facility provided for
borrowings of up to $40.0 million, based upon certain accounts receivable and
revenue equipment values. The interest rate under the credit facility is
currently 1.5% plus the LIBOR rate for the corresponding period. The credit
facility is secured and contains covenants that impose certain minimum financial
ratios and limit additional liens, the size of certain mergers and acquisitions,
dividends, and other matters. The Company was in compliance with the credit
facility at December 31, 1999.
12
Market Risks
The Company is exposed to market risks from changes in (i) certain
interest rates on its debt and (ii) certain commodity prices.
Interest Rate Risk
The revolving credit facility, provided there has been no default,
carries a maximum variable interest rate of LIBOR for the corresponding period
plus 1.5%. This variable interest exposes the Company to the risk that interest
rates may rise. Assuming borrowing levels at December 31, 1999, a one-point
increase in the LIBOR would increase interest expense by $250,000. Most of the
Company's other debt carries fixed interest rates and exposes the Company to the
risk that interest rates may fall. At December 31, 1999, approximately 48.8% of
the Company's debt carries a variable interest rate and the remainder is fixed.
Commodity Price Risk
The Company uses derivative instruments, including heating oil price
swap agreements, to reduce a portion of its exposure to fuel price fluctuations.
At December 31, 1999, the Company had price swap agreements for 1.8 million
gallons at a fixed price of 38.25 cents per gallon. Since the Company's price is
fixed for these gallons, changes in fuel prices would have no impact on the
Company's future fuel expense related to these gallons. Therefore, there is no
earnings or liquidity risk associated with these price swap agreements. The fair
value of the price swap agreements is the estimated amount the Company would pay
or receive to terminate the swap agreements. At December 31, 1999, a ten percent
change in the price of heating oil would result in a $111,000 change in the
current value of $422,000 which the Company would receive from termination of
the swap agreements.
The Company does not trade in these derivatives with the objective of
earning financial gains on price fluctuations, nor does it trade in these
instruments when there are no underlying transaction related exposures.
Inflation and Fuel Costs
Most of the Company's operating expenses are inflation-sensitive, with
inflation generally producing increased costs of operation. During the past
three years, the most significant effects of inflation have been on revenue
equipment prices, the compensation paid to drivers, and fuel prices. Innovations
in equipment technology and comfort have resulted in higher tractor prices, and
there has been an industry-wide increase in wages paid to attract and retain
qualified drivers. The Company attempts to limit the effects of inflation
through increases in freight rates and certain cost control efforts. The failure
to obtain rate increases in the future could adversely affect profitability.
High fuel prices also decrease the Company's profitability. Most of the
Company's contracts with customers contain fuel surcharge provisions. Although
the Company attempts to pass through increases in fuel prices to customers in
the form of surcharges and higher rates, the fuel price increases are not fully
recovered. The recent increases in fuel prices will not be fully offset through
surcharges and higher rates.(*)
Seasonality
In the trucking industry results of operations show a seasonal pattern
because customers generally reduce shipments during the winter season, and the
Company experiences some seasonality due to the open, flatbed nature of the
majority of its trailers. The Company at times has experienced delays in meeting
its shipment schedules as a result of severe weather conditions, particularly
during the winter months. In addition, the Company's operating expenses have
been higher in the winter months due to decreased fuel efficiency and increased
maintenance costs in colder weather.
Year 2000
To date, the Company's information and non information systems have
experienced no adverse impact from the transition to the Year 2000. In addition,
the Company is not aware of any material Year 2000 related issues with any of
its shippers, suppliers, or other third parties with whom it has business
relationships. Through December 31, 1999, the Company spent approximately
$150,000 to address Year 2000 issues. The Company does not expect to incur any
significant additional costs relating to Year 2000 issues.
13
Cautionary Statement Regarding Forward-Looking Statements
The Company may from time-to-time make written or oral forward-looking
statements. Written forward-looking statements may appear in documents filed
with the Securities and Exchange Commission, in press releases, and in reports
to stockholders. The Private Securities Litigation Reform Act of 1995 contains a
safe harbor for forward-looking statements. The Company relies on this safe
harbor in making such disclosures. In connection with this "safe harbor"
provision, the Company is hereby identifying important factors that could cause
actual results to differ materially from those contained in any forward-looking
statement made by or on behalf of the Company. Factors that might cause such a
difference include, but are not limited to, the following:
Economic Factors; Fuel Prices. Negative economic factors such as
recessions, downturns in customers' business cycles, surplus inventories,
inflation, and higher interest rates could impair the Company's operating
results by decreasing equipment utilization or increasing costs of operations.
Increases in fuel prices usually are not fully recovered. Accordingly, high fuel
prices can have a negative impact on the Company's profitability.
Resale of Used Revenue Equipment. The Company historically has
recognized a gain on the sale of its revenue equipment. The market for used
equipment weakened dramatically in late 1999 and into 2000. If the resale value
of the Company's revenue equipment were to remain low or decline, the Company
could find it necessary to dispose its equipment at a lower gain or a loss, or
retain some of its equipment longer, with a resulting increase in operating
expenses.
Recruitment, Retention, and Compensation of Qualified Drivers and
Independent Contractors. Competition for drivers and independent contractors is
intense in the trucking industry. There is, and historically has been, an
industry-wide shortage of qualified drivers and independent contractors. This
shortage could force the Company to significantly increase the compensation it
pays to driver employees and independent contractors or curtail the Company's
growth.
Competition. The trucking industry is highly competitive and
fragmented. The Company competes with other truckload carriers, private fleets
operated by existing and potential customers, and to some extent railroads and
rail-intermodal service. Competition is based primarily on service, efficiency,
and freight rates. Many competitors offer transportation service at lower rates
than the Company. The Company's results could suffer if it cannot obtain
higher rates than competitors that offer a lower level of service.
Acquisitions. A significant portion of the Company's growth since June
1995 has occurred through acquisitions. In 2000, management intends to
concentrate on improving the profitability of its current operations and may not
pursue additional acquisitions as aggressively. Accordingly, the
Company's revenue growth rate may suffer.
- --------------------
(*) May contain "forward-looking" statements.
14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's audited financial statements, including its consolidated
balance sheets and consolidated statements of earnings, cash flows,
stockholders' equity, and notes related thereto, are included at pages 20 to 34
of this report. The supplementary quarterly financial data follows:
Quarterly Financial Data
(Dollars in thousands, except earnings per share)
------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
1999 1999 1999 1999
-------------- ------------------ -------------- -----------------
Operating revenue................................$ 47,295 $ 51,117 $ 50,043 $ 48,490
Earnings from operations......................... 3,150 3,883 1,959 1,471
Earnings before income taxes..................... 2,237 2,952 1,035 524
Income taxes..................................... 933 1,230 425 234
Net earnings..................................... 1,304 1,722 610 290
Basic and diluted earnings per share.............$ 0.26 $ 0.34 $ 0.12 $ 0.06
First Quarter Second Quarter Third Quarter Fourth Quarter
1998 1998 1998 1998
-------------- ------------------ -------------- ---------------
Operating revenue................................$ 33,391 $ 40,835 $ 42,424 $ 44,725
Earnings from operations......................... 2,493 2,396 3,528 3,651
Earnings before income taxes..................... 1,988 1,719 2,743 2,653
Income taxes..................................... 845 698 1,139 1,092
Net earnings..................................... 1,143 1,021 1,604 1,561
Basic and diluted earnings per share.............$ 0.23 $ 0.20 $ 0.32 $ 0.31
As a result of rounding, the total of the four quarters may not equal the
Company's results for the full year.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
No reports on Form 8-K have been filed within the twenty-four months
prior to December 31, 1999, involving a change of accountants or disagreements
on accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information respecting executive officers and directors set forth
under the captions "Election of Directors; Information Concerning Directors and
Executive Officers" on page 3 and 4 and "Section 16(a) Beneficial Ownership
Reporting Compliance" on page 6 of the Registrant's Proxy Statement for the 1999
annual meeting of stockholders, which will be filed with the Securities and
Exchange Commission in accordance with Rule 14a-6 promulgated under the
Securities Exchange Act of 1934, as amended (the "Proxy Statement") is
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information respecting executive compensation set forth under the
caption "Executive Compensation" on page 5 of the Proxy Statement is
incorporated herein by reference; provided, that the "Compensation Committee
Report on Executive Compensation" contained in the Proxy Statement is not
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information respecting security ownership of certain beneficial
owners and management set forth under the caption "Security Ownership of
Principal Stockholders and Management" on page 8 of the Proxy Statement is
incorporated herein by reference.
15
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information respecting certain relationships and transactions of
management set forth under the captions "Compensation Committee Interlocks,
Insider Participation, and Related Party Transactions" on page 5 of the Proxy
Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
The Company's audited financial statements are set forth at the
following pages of this report:
Page
Independent Auditors' Report.............................................. 20
Consolidated Balance Sheets............................................... 21
Consolidated Statements of Earnings....................................... 23
Consolidated Statements of Stockholders' Equity.......................... 24
Consolidated Statements of Cash Flows..................................... 25
Notes to Consolidated Financial Statements................................ 27
2. Financial Statement Schedules.
Financial statement schedules are not required because all required
information is included in the financial statements.
3. Exhibits
See list under Item 14(c) below, with management compensatory plans and
arrangements being listed under 10.2, 10.3, and 10.5.
(b) Reports on Form 8-K
None
16
(c) Exhibits
Exhibit Description
Number
2.1 +++ Asset Purchase Agreement dated February 20, 1998,
by and among Smithway Motor Xpress, Inc., East
West Motor Express, Inc., and Darwyn and David
Stebbins.
2.2 +++++ Asset Purchase Agreement dated September 23,1998,
by and among Smithway Motor Xpress, Inc., JHT,
Inc., JHT LOGISTICS, INC., Bass Brook Truck
Service, Inc., and JERDON TERMINAL HOLDINGS, LLC.
2.3 +++++ First Amendment to Asset Purchase Agreement dated
October 29, 1998, by and among Smithway Motor
Xpress, Inc., JHT, Inc., JHT LOGISTICS, INC.,
Bass Brook Truck Service, Inc., and JERDON
TERMINAL HOLDINGS, LLC.
2.4 * Second Amendment to Asset Purchase Agreement
dated October 30, 1998, by and among Smithway
Motor Xpress, Inc., JHT,Inc., JHT LOGISTICS,INC.,
Bass Brook Truck Service, Inc., and JERDON
TERMINAL HOLDINGS, LLC.
3.1 + Articles of Incorporation.
3.2 + Bylaws.
4.1 + Articles of Incorporation.
4.2 + Bylaws.
10.1 + Outside Director Stock Plan dated March 1, 1995.
10.2 + Incentive Stock Plan adopted March 1, 1995.
10.3 + 401(k) Plan adopted August 14, 1992, as amended.
10.4 + Form of Agency Agreement between Smithway Motor
Xpress,Inc.and its independent commission agents.
10.5 + Memorandum of officer incentive compensation
policy.
10.6 + Form of Independent Contractor Agreement between
Smithway Motor Xpress, Inc. and its independent
contractor providers of tractors.
10.7 ++ Credit Agreement dated September 3, 1997,
between Smithway Motor Xpress Corp., as
Guarantor, Smithway Motor Xpress, Inc., as
Borrower, and LaSalle National Bank.
10.8 +++ Asset Purchase Agreement dated February 20,
1998, by and among Smithway Motor Xpress, Inc.,
East West Motor Express, Inc., and Darwyn and
David Stebbins.
10.9 ++++ First Amendment to Credit Agreement dated
March 1, 1998, between Smithway Motor Xpress
Corp.,as Guarantor, Smithway Motor Xpress, Inc.,
as Borrower, and LaSalle National Bank.
10.10 ++++ Second Amendment to Credit Agreement dated
March 15, 1998, between Smithway Motor Xpress
Corp.,as Guarantor, Smithway Motor Xpress, Inc.,
as Borrower, and LaSalle National Bank.
10.11 +++++ Asset Purchase Agreement dated September 23,
1998, by and among Smithway Motor Xpress, Inc.,
JHT, Inc., JHT LOGISTICS, INC., Bass Brook Truck
Service, Inc., and JERDON TERMINAL HOLDINGS, LLC.
17
10.12 +++++ First Amendment to Asset Purchase Agreement dated
October 29, 1998, by and among Smithway Motor
Xpress, Inc., JHT, Inc., JHT LOGISTICS, INC.,
Bass Brook Truck Service, Inc., and JERDON
TERMINAL HOLDINGS, LLC.
10.13 * Second Amendment to Asset Purchase Agreement
dated October 30, 1998, by and among Smithway
Motor Xpress, Inc.,JHT, Inc.,JHT LOGISTICS, INC.,
Bass Brook Truck Service, Inc., and JERDON
TERMINAL HOLDINGS, LLC.
10.14 * Third Amendment to Credit Agreement dated October
30, 1998, between Smithway Motor Xpress Corp., as
Guarantor, Smithway Motor Xpress, Inc.,
as Borrower,and LaSalle National Bank, as Lender.
10.15 ** Amendment No. 2 to Smithway Motor Xpress Corp.
Incentive Stock Plan, adopted May 7, 1999.
10.16 *** Fourth Amendment to Credit Agreement dated August
20, 1999, between Smithway Motor Xpress Corp., as
Guarantor, Smithway Motor Xpress, Inc., as
Borrower, and LaSalle National Bank.
10.17 # Fifth Amendment to Credit Agreement dated
December 17, 1999, between Smithway Motor Xpress
Corp., as Guarantor, Smithway Motor Xpress, Inc.,
as Borrower, and LaSalle National Bank.
21 # List of subsidiaries.
23 # Consent of KPMG LLP, independent auditors.
27 # Financial Data Schedule.
- ---------------------
+ Incorporated by reference from the Company's Registration Statement on
Form S-1, Registration No. 33-90356, effective June 27, 1996.
++ Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 1997. Commission File
No. 000-20793, dated November 12, 1997.
+++ Incorporated by reference from the Company's Form 8-K. Commission File
No. 000-20793, dated March 12, 1998.
++++ Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the period ended March 31, 1998. Commission File No.
000-20793, dated May 14, 1998.
+++++ Incorporated by reference from the Company's Form 8-K. Commission File
No. 000-20793, dated November 12, 1998.
* Incorporated by reference from the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998. Commission File No.
000-20793, dated March 18, 1999.
** Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1999. Commission File No.000-20793,
dated August 13, 1999.
*** Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1999. Commission File No.
000-20793, dated November 10, 1999.
# Filed herewith.
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SMITHWAY MOTOR XPRESS CORP.
Date: March 29, 2000 By: /s/ William G. Smith
-------------- --------------------
William G. Smith
Chairman of the Board, President,
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Position Date
- --------- -------- ----
/s/ William G. Smith Chairman of the Board, President, March 29, 2000
- -------------------- and Chief Executive Officer;
William G. Smith Director (principal executive officer)
/s/ G. Larry Owens Executive Vice President, Chief March 29, 2000
- ------------------ Operating Officer, and Chief Financial
G. Larry Owens Officer; Director
/s/ Michael E. Oleson Treasurer and Chief Accounting March 29, 2000
- --------------------- Officer(principal financial and
Michael E. Oleson accounting officer)
/s/ Herbert D. Ihle Director March 29, 2000
- -------------------
Herbert D. Ihle
/s/ Robert E. Rich Director March 29, 2000
- -------------------
Robert E. Rich
/s/ Terry G. Christenberry Director March 29, 2000
- --------------------------
Terry G. Christenberry
19
Independent Auditors' Report
To the Stockholders and Board of Directors of Smithway Motor Xpress Corp.:
We have audited the accompanying consolidated balance sheets of Smithway
Motor Xpress Corp. and subsidiaries as of December 31, 1998 and 1999, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial 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 financial position of Smithway
Motor Xpress Corp. and subsidiaries as of December 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
/s/KPMG LLP
Des Moines, Iowa
February 3, 2000
20
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
December 31,
-------------------------------------
1998 1999
------------------ ------------------
ASSETS
Current assets:
Cash and cash equivalents...................................................$ 1,276 $ 685
Receivables:
Trade (note 4)............................................................ 15,481 17,928
Other..................................................................... 1,366 1,599
Recoverable income taxes.................................................. 270 1,021
Inventories................................................................. 1,537 1,611
Deposits, primarily with insurers (note 11) 391 281
Prepaid expenses............................................................ 1,110 579
Deferred income taxes (note 5).............................................. 510 1,111
------------------ ------------------
Total current assets................................................. 21,941 24,815
------------------ ------------------
Property and equipment (note 4):
Land........................................................................ 881 1,081
Buildings and improvements.................................................. 6,147 6,865
Tractors.................................................................... 60,915 74,004
Trailers.................................................................... 39,194 42,054
Other equipment............................................................. 6,269 6,765
------------------ ------------------
113,406 130,769
Less accumulated depreciation............................................... 26,269 36,464
------------------ ------------------
Net property and equipment........................................... 87,137 94,305
------------------ ------------------
Intangible assets, net (note 2)............................................... 5,892 5,650
Other assets.................................................................. 524 244
------------------ ------------------
$ 115,494 $ 125,014
================== ==================
See accompanying notes to consolidated financial statements.
21
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
December 31,
-------------------------------------
1998 1999
------------------ ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (note 4)...............................$ 8,124 $ 8,530
Accounts payable............................................................ 3,280 4,962
Accrued compensation........................................................ 1,714 2,436
Accrued loss reserves (note 11)............................................. 1,204 2,540
Other accrued expenses...................................................... 808 1,188
------------------ ------------------
Total current liabilities............................................ 15,130 19,656
Long-term debt, less current maturities (note 4).............................. 53,579 50,985
Deferred income taxes (note 5)................................................ 11,380 14,865
------------------ ------------------
Total liabilities.................................................... 80,089 85,506
------------------ ------------------
Stockholders' equity (notes 7 and 8):
Preferred stock (.01 par value; authorized 5 million shares; issued
none)..................................................... - -
Common stock:
Class A (.01 par value; authorized 20 million shares;
issued 1998 - 4,015, 662; 1999 - 4,035, 989 shares)........ 40 40
Class B (.01 par value; authorized 5 million shares;
issued 1 million shares).................................... 10 10
Additional paid-in capital.................................................. 11,311 11,414
Retained earnings........................................................... 24,118 28,044
Reacquired shares, at cost (1998 - 13,885; 1999 - no shares)................ (74) -
------------------ ------------------
Total stockholders' equity........................................... 35,405 39,508
------------------ ------------------
Commitments (notes 4, 10 and 11)..............................................
------------------ ------------------
$ 115,494 $ 125,014
================== ==================
See accompanying notes to consolidated financial statements.
22
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Dollars in thousands, except per share data)
Years ended December 31,
---------------------------------------------------------
1997 1998 1999
----------------- ------------------ ------------------
Operating revenue:
Freight..............................................$ 119,688 $ 160,975 $ 196,420
Other................................................ 429 400 525
----------------- ------------------ ------------------
Operating revenue................................ 120,117 161,375 196,945
----------------- ------------------ ------------------
Operating expenses:
Purchased transportation............................. 47,095 66,495 79,735
Compensation and employee benefits................... 26,904 38,191 49,255
Fuel, supplies, and maintenance...................... 15,965 19,738 23,754
Insurance and claims................................. 2,206 2,745 4,212
Taxes and licenses................................... 2,299 3,048 4,045
General and administrative........................... 5,391 6,237 7,491
Communications and utilities......................... 1,378 1,838 2,190
Depreciation and amortization........................ 7,880 11,015 15,800
----------------- ------------------ ------------------
Total operating expenses........................ 109,118 149,307 186,482
----------------- ------------------ ------------------
Earnings from operations........................ 10,999 12,068 10,463
Financial (expense) income
Interest expense..................................... (1,654) (3,200) (3,829)
Interest income...................................... 109 235 114
----------------- ------------------ ------------------
Earnings before income taxes.................... 9,454 9,103 6,748
Income taxes (note 5)..................................... 3,781 3,774 2,822
----------------- ------------------ ------------------
Net earnings....................................$ 5,673 $ 5,329 $ 3,926
================= ================== ==================
Basic and diluted earnings per share (note 8).............$ 1.13 $ 1.06 $ 0.78
================= ================== ==================
See accompanying notes to consolidated financial statements.
23
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1998, and 1999
(Dollars in thousands)
Additional Total
Common paid-in Retained Reacquired stockholders'
stock capital earnings shares equity
---------------------------------------------------------------------
Balance at December 31, 1996 $ 50 $ 11,104 $ 13,116 $ (77) $ 24,193
Net earnings - - 5,673 - 5,673
Issuance of stock bonuses - 40 - - 40
---------------------------------------------------------------------
Balance at December 31, 1997 50 11,144 18,789 (77) 29,906
Net earnings - - 5,329 - 5,329
Issuance of stock bonuses - 165 - - 165
Treasury stock reissued (519 shares) - 2 - 3 5
---------------------------------------------------------------------
Balance at December 31, 1998 50 11,311 24,118 (74) 35,405
Net earnings - - 3,926 - 3,926
Issuance of stock bonuses - 56 - - 56
Treasury stock reissued for stock
bonuses (13,885 shares) - 47 - 74 121
---------------------------------------------------------------------
Balance at December 31, 1999 $ 50 $ 11,414 $ 28,044 $ - $ 39,508
======================================================================
See accompanying notes to consolidated financial statements.
24
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years ended December 31,
------------------------------------------------
1997 1998 1999
-------------- ------------- ---------------
Cash flows from operating activities:
Net earnings.....................................................$ 5,673 $ 5,329 $ 3,926
-------------- ------------- ---------------
Adjustments to reconcile net earnings to cash provided
by operating activities:
Depreciation and amortization................................ 7,880 11,015 15,800
Deferred income taxes........................................ 2,460 2,880 2,884
Stock bonuses................................................ 40 165 177
Change in:
Receivables............................................. (1,154) (4,546) (3,431)
Inventories............................................. (326) (107) (74)
Deposits, primarily with insurers....................... 151 379 110
Prepaid expenses........................................ (264) 343 531
Accounts payable and other accrued liabilities.......... 450 1,050 4,120
-------------- ------------- ---------------
Total adjustments...................................... 9,237 11,179 20,117
-------------- ------------- ---------------
Net cash provided by operating activities.............. 14,910 16,508 24,043
-------------- ------------- ---------------
Cash flows from investing activities:
Payments for acquisitions....................................... (2,599) (26,266) -
Purchase of property and equipment............................... (357) (12,865) (18,342)
Proceeds from sale of property and equipment..................... 1,317 2,592 3,478
Other............................................................ (117) (36) 130
-------------- ------------- ---------------
Net cash used in investing activities.................. (1,756) (36,575) (14,734)
-------------- ------------- ---------------
Cash flows from financing activities:
Proceeds from long-term debt..................................... 14,300 41,000 -
Principal payments on long-term debt............................. (19,822) (23,744) (9,900)
Borrowings on line of credit agreement........................... 44,670 - -
Payments on line of credit agreement............................. (49,160) - -
Other............................................................ - 5 -
-------------- ------------- ---------------
Net cash (used in) provided by financing activities.... (10,012) 17,261 (9,900)
-------------- ------------- ---------------
Net increase (decrease) in cash and cash equivalents... 3,142 (2,806) (591)
Cash and cash equivalents at beginning of year..................... 940 4,082 1,276
-------------- ------------- ---------------
Cash and cash equivalents at end of year...........................$ 4,082 $ 1,276 $ 685
============== ============= ===============
See accompanying notes to consolidated financial statements.
25
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years ended December 31,
------------------------------------------------
1997 1998 1999
-------------- ------------- ---------------
Supplemental disclosure of cash flow information:
Cash paid during year for:
Interest.................................................$ 1,455 $ 3,262 $ 3,806
Income taxes............................................. 835 1,438 689
============== ============= ===============
Supplemental schedules of noncash investing and financing activities:
Notes payable issued for tractors and trailers..................$ 20,594 $ 11,780 $ 7,712
Issuance of stock bonuses....................................... 40 165 177
Liability issued for intangible assets.......................... - 1,691 -
============== ============= ===============
Cash payments for acquisitions:
Revenue equipment...............................................$ 1,990 $ 21,671 $ -
Intangible assets............................................... 472 2,779 -
Land, buildings and other assets................................ 137 1,816 -
-------------- ------------- ---------------
$ 2,599 $ 26,266 $ -
============== ============= ===============
See accompanying notes to consolidated financial statements.
26
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Note 1: Summary of Significant Accounting Policies
Operations
Smithway Motor Xpress Corp. and subsidiaries (the Company) is a
truckload carrier that provides nationwide transportation of diversified
freight, concentrating primarily in flatbed operations. It generally operates
over short-to-medium traffic routes, serving shippers located predominantly in
the central United States. The Company also operates in the southern provinces
of Canada. Canadian revenues, based on miles driven, were approximately $339 and
$667 for the years ended December 31, 1998 and 1999, respectively. The
consolidated financial statements include the accounts of Smithway Motor Xpress
Corp. and its three wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Customers
The Company serves a diverse base of shippers. No single customer
accounted for more than 10 percent of the Company's total operating revenues
during any of the years ended December 31, 1997, 1998, and 1999. The Company's
10 largest customers accounted for approximately 23 percent, 26 percent, and 27
percent of the Company's total operating revenues during 1997, 1998, and 1999,
respectively. The Company's largest concentration of customers is in the steel
and building materials industries, which together accounted for approximately 51
percent, 46 percent, and 43 percent of the Company's total operating revenues in
1997, 1998, and 1999, respectively.
Drivers
The Company faces intense industry competition in attracting and
retaining qualified drivers and independent contractors. This competition from
time to time results in the Company temporarily idling some of its revenue
equipment or increasing the compensation the Company pays to its drivers and
independent contractors.
Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
Cash and Cash Equivalents
The Company considers interest-bearing instruments with maturity of
three months or less at the date of purchase to be the equivalent of cash. At
December 31, 1998 and 1999 cash equivalents consisted of $1,471 and $348 of
commercial paper and United States Treasury bills.
Receivables
Trade receivables are stated net of an allowance for doubtful accounts
of $66 and $70 at December 31, 1998 and 1999, respectively. The financial status
of customers is checked and monitored by the Company when granting credit. The
Company routinely has significant dollar transactions with certain customers. At
December 31, 1998 and 1999, no individual customer accounted for more than 10
percent of total trade receivables.
Inventories
Inventories consist of tractor and trailer supplies and parts.
Inventories are stated at lower of cost (first-in, first-out method) or market.
Prepaid Expenses
Prepaid expenses consist primarily of the cost of tarps, which are
amortized over 36 months and licenses which are amortized over 12 months.
27
Accounting for Leases
The Company is a lessee of revenue equipment under operating leases.
Rent expense is charged to operations as it is incurred under the terms of the
respective leases.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided
by use of the straight-line and declining-balance methods over lives of 5 to 39
years for buildings and improvements, 5 to 7 years for tractors and trailers,
and 3 to 10 years for other equipment. Expenditures for maintenance and minor
repairs are charged to operations, and expenditures for major replacements and
betterments are capitalized. The cost and related accumulated depreciation on
property and equipment retired, traded, or sold are eliminated from the property
accounts at the time of retirement, trade, or sale. In accordance with industry
practices, the gain or loss on retirement or sale is included in depreciation
and amortization in the consolidated statements of earnings. Gains or losses on
trade-ins are included in the basis of the new asset.
Tires purchased as part of revenue equipment are capitalized as a cost
of the equipment. Effective January 1, 1998, the Company changed its estimate of
the life of these tires from two years to the life of the underlying revenue
equipment. This change is in accordance with standard industry practice and was
based on the Company's experience with the warranties and tread life of tires.
The change was accounted for prospectively. The effect of this change on net
earnings, during 1998, was an increase of $175. Replacement tires are expensed
when placed in service.
Intangibles
Intangible assets, primarily goodwill, are recorded at cost and are
amortized using the straight-line method over periods ranging from 5 to 15
years. Accumulated amortization of $583 and $1,178, at December 31, 1998 and
1999, respectively, have been netted against these intangible assets. Goodwill
represents the excess of purchase price over fair value of net assets acquired.
The Company assesses the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the acquired
operation. The amount of goodwill impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of the recover
ability of goodwill will be impacted if estimated future operating cash flows
are not achieved.
Revenue Recognition
The Company generally recognizes operating revenue when the freight to
be transported has been loaded. The Company operates primarily in the
short-to-medium length haul category of the trucking industry; therefore, the
Company's typical customer delivery is completed one day after pickup.
Accordingly, this method of revenue recognition is not materially different from
recognizing revenue based on completion of delivery. The Company recognizes
operating revenue when the freight is delivered for longer haul loads where
delivery is completed more than one day after pickup. Amounts payable to
independent contractors for purchased transportation, to Company drivers for
wages, and other direct expenses are accrued when the related revenue is
recognized.
Insurance and Claims
Losses resulting from personal liability, physical damage, workers'
compensation, and cargo loss and damage are covered by insurance subject to
certain deductibles. Losses resulting from uninsured claims are recognized when
such losses are known and can be estimated. The Company estimates and accrues a
liability for its share of ultimate settlements using all available information.
Expenses depend on actual loss experience and changes in estimates of settlement
amounts for open claims which have not been fully resolved.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect of a change in tax rates on deferred tax assets
and liabilities is recognized in income in the period that includes the
enactment date.
28
Stock Option Plans
The Company has elected the pro forma disclosure option of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." The Company will continue applying the accounting treatment
prescribed by the provisions of APB Opinion No. 25, "Accounting for Stock Issued
to Employees." Pro forma net earnings and pro forma net earnings per common
share have been provided as if SFAS No. 123 were adopted for all stock-based
compensation plans.
Derivative Instruments
The Company uses purchased options and futures contracts to hedge a
portion of its anticipated fuel purchases. These derivative instruments are
linked to heating oil which has a high correlation to diesel fuel. These
derivative instruments meet the criteria for hedge accounting and are accounted
for on this basis. The Company does not hold or issue options and futures
contracts for trading purposes. Unrealized gains and losses related to
qualifying hedges are deferred and recognized in income when the fuel purchases
are made, or immediately if the commitment has been canceled.
The Company also uses "floating to fixed" heating oil price swap
agreements tolimit its exposure to potentially adverse fluctuations in fuel
prices. As the fuel is purchased, the differential to be paid or received on the
swap agreements is recognized as an adjustment to fuel, supplies, and
maintenance expense in the consolidated statement of earnings.
Net Earnings Per Common Share
Basic earnings per share have been computed by dividing net earnings by
the weighted-average outstanding Class A and Class B common shares during each
of the years. Diluted earnings per share have been calculated by also including
in the computation the effect of employee stock options, nonvested stock, and
similar equity instruments granted to employees as potential common shares.
Effect of New Accounting Standards
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," will be effective for the Company for the year beginning January 1,
2001. Management is evaluating the impact the adoption of SFAS No. 133 will have
on the Company's consolidated financial statements. The Company expects to adopt
SFAS No. 133 when required.
Note 2: Acquisitions
In February 1998, the Company acquired tractors, trailers, real estate
and certain other assets owned or leased by East West Motor Express, Inc. of
Black Hawk, South Dakota. In exchange for these assets, the Company repaid
approximately $4,287 in equipment financing secured by these assets and paid
$5,896 to the former owners of the acquired assets. In addition, the Company
agreed to pay $2,256 for goodwill and other intangible assets.
In October 1998, the Company acquired tractors, trailers, and certain
other assets owned or leased by JHT, Inc. of Cohasset, Minnesota. In exchange
for these assets, the Company assumed and repaid approximately $10,200 in
equipment financing secured by these assets and paid $813 to the former owners
of the acquired assets. In addition, the Company agreed to pay $1,515 for
goodwill and other intangible assets.
The Company also acquired tractors, trailers, and certain other assets
of TP Transportation, Inc. of Enid, Oklahoma in August 1998. In exchange for
these assets, the Company assumed or repaid approximately $4,333 in equipment
financing secured by these assets and paid $125 to the former owners of TP
Transportation, Inc. In addition, the Company agreed to pay $675 for goodwill
and other intangible assets. The effect of this transaction was not material to
the consolidated financial statements of the Company.
In 1997, the Company acquired tractors, trailers, and certain other
assets of Pirie Motor Freight, Inc. of Fort Dodge, Iowa and Royal Transport,
Ltd. of Grand Rapids, Michigan. In exchange for these assets, the Company repaid
approximately $1,929 in equipment financing secured by these assets and paid
$179 to former owners and $516 for noncompete and consulting agreements. The
effect of these transactions was not material to the consolidated financial
statements.
The above acquisitions were accounted for by the purchase method of
accounting.
29
Note 3: Financial Instruments
SFAS 107, "Disclosures About Fair Value of Financial Instruments,"
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
At December 31, 1999, the carrying amounts of cash and cash equivalents, trade
receivables, other receivables, accounts payable, and accrued liabilities,
approximate fair value because of the short maturity of those instruments. The
fair value of the Company's long-term debt, including current maturities, was
$59,236 at December 31, 1999, based upon estimated market rates.
The Company uses derivative instruments including purchased options and
futures contracts to hedge a portion of their anticipated fuel purchases. The
Company does not hold these instruments with the objective of earning financial
gains on price fluctuations alone, nor does it enter into derivative hedge
instruments for which there are no underlying transaction related exposures. The
notional amounts for options and futures contracts in place at December 31, 1998
and 1999 are 1.6 million gallons and -0- gallons, respectively. These options
and futures contracts generally mature in less than one year. At December 31,
1998 and 1999 deferred unrealized losses were $140 and $-0-, respectively, based
upon broker quoted prices.
The Company has also entered into several "floating to fixed"
heating oil price swap agreements. At December 31, 1998 and 1999 the notional
amount of the agreements was 7.5 and 1.8 million gallons, respectively, related
specifically to 1999 and 2000 fuel purchases. At December 31, 1999, the fixed
price in the agreements was 38.25 cents per gallon. Fair value of these swaps,
based upon the estimated amount the Company would (pay) or receive upon
terminating the agreements, was ($317) and $422 at December 31, 1998 and 1999,
respectively.
Note 4: Long-Term Debt
Long-term debt includes a credit agreement, entered into during 1997,
with an outstanding balance of $25,000 at December 31, 1998 and 1999. The
agreement allows for borrowings up to the lesser of 85 percent of eligible
accounts receivable and 75 percent of the net book value of unencumbered revenue
equipment or $40,000. Borrowings under the agreement are secured by liens on
revenue equipment, accounts receivable, and certain other assets, at December
31, 1999. The agreement, amended in 1999 to extend the expiration date to
September 1, 2002, contains certain compliance covenants. The Company was in
compliance with these covenants at December 31, 1998 and 1999. The weighted
average interest rate on the outstanding balance is defined in the agreement and
at December 31, 1998 and 1999 was 6.79 percent and 7.62 percent, respectively.
The credit agreement also includes financing for letters of credit. At December
31, 1998 and 1999, the Company had letters of credit of $2,000 and $3,000
outstanding for self-insured amounts related to its insurance programs. (See
note 11.) These letters of credit directly reduced the amount of potential
borrowings available under the credit agreement.
Long-term debt also includes equipment notes with balances of $35,444
and $34,080 at December 31, 1998 and 1999, respectively. Interest rates on the
equipment notes range from 5.81 percent to 6.76 percent with maturities through
2004. The equipment notes are collateralized by the underlying equipment.
At December 31, 1998 and 1999, long-term debt also includes future
payments for intangible assets of $1,259 and $434, respectively.
Future maturities on long-term debt for years ending December 31, are
as follows: 2000, $8,530; 2001, $7,539; 2002, $34,892; 2003, $6,185; and 2004,
$2,369.
30
Note 5: Income Taxes
Income taxes consisted of the following components for the three years
ended December 31:
1997 1998 1999
----------------------------------- --------------------------------- ---------------------------------
Federal State Total Federal State Total Federal State Total
---------- ----------- ----------- ---------- ---------- ---------- ---------- ---------- ----------
Current $ 1,082 $ 239 $ 1,321 $ 805 $ 89 $ 894 $ (50) $ (12) $ (62)
Deferred $ 2,016 $ 444 $ 2,460 $ 2,304 $ 576 $ 2,880 $ 2,422 $ 462 $ 2,884
---------- ----------- ----------- ---------- ---------- ---------- ---------- ---------- ----------
$ 3,098 $ 683 $ 3,781 $ 3,109 $ 665 $ 3,774 $ 2,372 $ 450 $ 2,822
========== =========== =========== ========== ========== ========== ========== ========== ==========
Total income tax expense differs from the amount of income tax expense
computed by applying the normal United States federal income tax rate of 34
percent to income before income tax expense. The reasons for such differences
are as follows:
Years ended December 31,
------------------------
1997 1998 1999
------------------ ------------------ -----------------
Computed "expected" income tax expense $ 3,214 $ 3,095 $ 2,294
State income tax expense net of federal benefit 451 439 297
Permanent differences, primarily
nondeductible portion of driver per diem and
travel expenses
230 234 291
Other (114) 6 (60)
------------------ ------------------ -----------------
$ 3,781 $ 3,774 $ 2,822
================== ================== =================
Temporary differences between the financial statement basis of assets
and liabilities and the related deferred tax assets and liabilities at December
31, 1998 and 1999, were as follows:
1998 1999
------------- ---------------
Deferred tax assets:
Net operating loss carryforwards (expiring 2019) $ - $ 2,197
Alternative minimum tax (AMT) credit carryforwards 1,783 1,773
Accrued expenses 650 1,187
Other 96 134
------------- ---------------
Total gross deferred tax assets 2,529 5,291
------------- ---------------
Deferred tax liabilities:
Property and equipment (13,399) (19,045)
------------- ---------------
Net deferred tax liabilities $ (10,870) $ (13,754)
============= ===============
The AMT credit carryforwards are available indefinitely to reduce
future income tax liabilities to the extent they exceed AMT liabilities.
31
Note 6: Stockholders' Equity
On all matters with respect to which the Company's stockholders have a
right to vote, each share of Class A common stock is entitled to one vote, while
each share of Class B common stock is entitled to two votes. The Class B common
stock is convertible into shares of Class A common stock on a share-for-share
basis at the election of the stockholder and will be converted automatically
into shares of Class A common stock upon transfer to any party other than
William G. Smith, his wife, Marlys L. Smith, their children, their
grandchildren, trusts for any of their benefit, and entities wholly owned by
them.
Note 7: Stock Plans
The Company has reserved 25,000 shares of Class A common stock for
issuance pursuant to an outside director stock option plan. The term of each
option shall be six years from the grant date. Options vest on the first
anniversary of the grant date. Exercise price of each stock option is 85 percent
of the fair market value of the common stock on the date of grant.
The Company has reserved 500,000 shares of Class A common stock for
issuance pursuant to an incentive stock option plan. Any shares which expire
unexercised or are forfeited become available again for issuance under the plan.
Under this plan, no awards of incentive stock options may be made after December
31, 2004.
The Company applied APB Opinion No. 25 in accounting for its stock
option plans; and, accordingly, no compensation expense has been recognized in
the consolidated financial statements. Had the Company determined compensation
based on the fair value at the grant date for its outstanding stock options
under SFAS 123, the effect on Company's net earnings and net earnings per common
share for 1998 and 1999 would have been immaterial. The full impact of
calculating compensation cost for stock options under SFAS 123 is reflected over
the options' vesting period.
A summary of stock option activity and weighted-average exercise prices
follows:
1997 1998 1999
------------------------ -------------------------- -----------------------------
Exercise Exercise Exercise
Shares price Shares price Shares price
----------- ------------ ----------- -------------- ------------ ---------------
Outstanding at beginning of year 88,000 $9.42 114,000 $9.25 149,000 $9.90
Granted 28,000 8.73 35,000 12.00 3,000 7.60
Exercised - - - - - -
Forfeited (2,000) 9.50 - - - -
----------- ------------ ----------- -------------- -- ------------ ---------------
Outstanding at end of year 114,000 $9.25 149,000 $9.90 152,000 $9.85
=========== ============ =========== ============== == ============ ===============
Options exercisable at end of year 48,700 $9.20 97,400 $9.21 106,800 $9.50
Weighted-average fair value of $2.22 $5.25 $5.45
options granted during the
year
At December 31, 1999, the weighted-average remaining contractual life of the
outstanding options was 5.99 years and the exercise prices ranged from $7.23 to
$14.05 per share.
The Company used the Black-Scholes option pricing model to determine
the fair value of stock options for the years ended December 31, 1997, 1998, and
1999. The following assumptions were used in determining the fair value of these
options: weighted-average risk-free interest rate, 6.12% in 1997, 5.46% in 1998,
and 5.64% in 1999; weighted-average expected life, 5 years in 1997, 5 years in
1998 and 3 years in 1999; and weighted-average expected volatility, 21% in 1997,
41% in 1998, and 83% in 1999. There were no expected dividends.
The Company has reserved 50,000 shares of Class A common stock for
issuance pursuant to an independent contractor driver bonus plan. The Company
awarded 3,211, 5,696 and 11,362 shares under the plan in 1997, 1998 and 1999,
respectively.
32
The Company also has a Class A common stock profit incentive plan under
which the Company will set aside for delivery to certain participants the number
of shares of Class A common stock having a market value on the distribution date
equal to a designated percentage (as determined by the board of directors) of
the Company's consolidated net earnings for the applicable fiscal year. In 1999,
the Company awarded $59 to certain employees for which common stock will be
issued in 2000. In 1998 and 1999 the Company issued 6,079 and 7,838 shares of
Class A common stock, respectively, to participants in the plan.
In 1996, the Company granted a common stock bonus of 2,254 shares of
nonvested Class A common stock with a fair value of $8.88 on the grant date.
During 1997, 1998 and 1999, 563, 564 and 1,127 shares, respectively, became
vested and were issued by the Company.
Note 8: Earnings per Share
A summary of the basic and diluted earnings per share computations is
presented below:
Years ended December 31 1997 1998 1999
----------------- ----------------- ------------------
Net earnings available to common stockholders $ 5,673 $ 5,329 $ 3,926
----------------- ----------------- ------------------
Basic weighted-average shares outstanding 5,000,860 5,012,450 5,030,959
Effect of dilutive stock options 18,011 24,069 1,394
Effect of dilutive stock awards 376 221 -
----------------- ----------------- ------------------
Diluted weighted-average shares outstanding 5,019,247 5,036,740 5,032,353
================= ================= ==================
Basic earnings per share $ 1.13 $ 1.06 $ 0.78
================= ================= ==================
Diluted earnings per share $ 1.13 $ 1.06 $ 0.78
================= ================= ==================
Note 9: Employees' Profit Sharing and Savings Plan
The Company has an Employees' Profit Sharing and Savings Plan, which is
a qualified plan under the provisions of Sections 401(a) and 501(a) of the
Internal Revenue Code. Eligible employees are allowed to contribute up to a
maximum of 15 percent of pretax compensation into the plan. Employers may make
savings, matching, and discretionary contributions, subject to certain
restrictions. During the years ended December 31, 1997, 1998, and 1999, Company
contributions totaled $150, $152, and $330, respectively. The plan owns 450,852
shares of the Company's Class A common stock at December 31, 1999.
Note 10: Lease Commitments
The Company has entered into various noncancelable operating leases for
transportation equipment and buildings which will expire over the next four
years. Under the leases for transportation equipment, the Company is responsible
for all repairs, maintenance, insurance, and all other operating expenses.
Certain leases on transportation equipment require the Company to guarantee the
residual value at the maturity of the lease at amounts varying from 10 percent
to 20 percent of the original equipment cost. The maximum contingent liability
under such leases is approximately $163 through 2001.
Approximate future minimum lease payments under noncancelable operating
leases as of December 31, 1999, totaled $197 and are payable as follows: 2000,
$169 and 2001, $28.
Rent charged to expense on the above leases, expired leases, and
short-term rentals was $1,740 in 1997; $974 in 1998; and $389 in 1999.
Note 11: Commitments and Contingent Liabilities
The Company's insurance program for personal liability, physical
damage, workers' compensation, and cargo losses and damage involves
self-insurance for losses up to $50 per claim, $50 per claim, $100 per claim,
and $50 per claim, respectively. At December 31, 1998 and 1999, the Company had
approximately $1,204 and $2,540, respectively, accrued for its estimated
liability for incurred losses related to these programs. Losses in excess of the
self-insured amount per claim are covered by insurance companies.
33
The insurance companies require the Company to provide letters of
credit to provide funds for payment of the self-insured amounts. At December 31,
1998 and 1999, the Company had a $2,000 and $3,000 letter of credit issued under
the credit agreement described in note 4. In addition, funds totaling $201 and
$256 were held by the insurance companies as deposits at December 31, 1998 and
1999, respectively.
The Company's health insurance program is provided as an employee
benefit for all eligible employees and contractors. The plan is self funded for
losses up to $60 per covered member and has an aggregate excess loss cap of 125%
of expected claims. At December 31, 1998 and 1999, the Company had approximately
$325 and $730, respectively, accrued for its estimated liability related to
these claims.
The Company is also involved in certain legal actions and proceedings
arising from the normal course of operations. Management believes that
liability, if any, arising from such legal actions and proceedings will not have
a material adverse effect on the financial position of the Company.
Note 12: Transactions with Related Parties
During the year ended December 31, 1998, the Company paid $150 for
financial advisory services to an investment banking firm whose president is a
member of the board of directors of the Company.
Note 13: Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for the Company for 1998 and 1999
is as follows:
March 31 June 30 September 30 December 31
----------------- ----------------- ------------------ ------------------
1998
Operating revenue $ 33,391 $ 40,835 $ 42,424 $ 44,725
Earnings from operations 2,493 2,396 3,528 3,651
Net earnings 1,143 1,021 1,604 1,561
Basic and diluted earnings per share 0.23 0.20 0.32 0.31
1999
Operating revenue $ 47,295 $ 51,117 $ 50,043 $ 48,490
Earnings from operations 3,150 3,883 1,959 1,471
Net earnings 1,304 1,722 610 290
Basic and diluted earnings per share 0.26 0.34 0.12 0.06
As a result of rounding, the total of the four quarters may not equal
the Company's results for the year.
34