SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-1004
-----------------------------------------------------
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-20793
Smithway Motor Xpress Corp.
(Exact name of registrant as specified in its charter)
Nevada 42-143384
(State or other jurisdiction (I.R.S. employer identification number)
of incorporation or organization)
2031 Quail Avenue
Fort Dodge, Iowa 50501
(515) 576-7418
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive office)
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 the filing
requirements for at least the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date (November 9, 1998 ).
Class A Common Stock, $.01 par value: 4,015,143 shares
Class B Common Stock, $.01 par value: 1,000,000 shares
Exhibit Index is on Page 19.
Page Number 1 of 21
PART I
FINANCIAL INFORMATION
PAGE
NUMBER
Item 1. Financial Statements.......................................... 3-10
Condensed Consolidated Balance Sheets as of
December 31, 1997 and September 30, 1998 (unaudited)......... 3-4
Condensed Consolidated Statements of Earnings for the
three and nine months ended September 30, 1998
and 1997(unaudited).......................................... 5
Condensed Consolidated Statements of Stockholders' Equity for
the year ended December 31, 1997, and the nine months
ended September 30, 1998 (unaudited)......................... 6
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998 and 1997 (unaudited).... 7-8
Notes to Condensed Consolidated Financial
Statements (unaudited)....................................... 9-10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................ 11-17
PART II
OTHER INFORMATION
Item 1. Legal Proceedings............................................... 18
Item 2. Changes in Securities........................................... 18
Item 3. Defaults Upon Senior Securities................................. 18
Item 4. Submission of Matters to a Vote of Security Holders............. 18
Item 5. Other Information............................................... 18
Item 6. Exhibits and Reports on Form 8-K................................ 18-20
FORWARD LOOKING STATEMENTS
This document contains forward-looking statements in paragraphs that
are marked with an asterisk. Statements by the Company in press releases, public
filings, and stockholder reports, as well as oral public statements by Company
representatives, also may contain certain forward-looking information.
Forward-looking information is subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected. Without
limitation, these risks and uncertainties include economic factors such as
recessions, downturns in customers' business cycles, surplus inventories,
inflation, higher interest rates, and fuel price increases; the resale value of
the Company's used revenue equipment; the availability and compensation of
qualified drivers and owner-operators; competition from trucking, rail, and
intermodal competitors; and the availability of desirable target companies and
financing for acquisitions. Readers should review and consider the various
disclosures made by the Company in its press releases, stockholder reports, and
public filings, as well as the factors explained in greater detail in the
Company's annual report on Form 10-K.
Page Number 2 of 21
PART I
FINANCIAL INFORMATION
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
1998 1997
------------------ ------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 1,436 $ 4,082
Receivables:
Trade..................................................................... 15,431 11,040
Other..................................................................... 1,831 1,261
Recoverable income taxes.................................................. 5 -
Inventories................................................................. 1,348 1,064
Deposits, primarily with insurers........................................... 305 770
Prepaid expenses and other.................................................. 912 1,160
Deferred income taxes....................................................... 440 350
------------------ ------------------
Total current assets................................................. 21,708 19,727
------------------ ------------------
Property and equipment:
Land........................................................................ 881 531
Buildings and improvements.................................................. 6,067 5,100
Tractors.................................................................... 54,662 38,217
Trailers.................................................................... 33,992 24,233
Other equipment............................................................. 5,875 5,308
------------------ ------------------
101,477 73,389
Less accumulated depreciation............................................... 24,944 20,257
------------------ ------------------
Net property and equipment........................................... 76,533 53,132
------------------ ------------------
Other assets, net............................................................. 5,138 2,019
------------------ ------------------
$ 103,379 $ 74,878
================== ==================
Page Number 3 of 21
See accompanying notes to condensed consolidated financial statements.
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
1998 1997
------------------ ------------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ....................................... $ 5,730 $ 3,971
Accounts payable............................................................ 4,615 2,277
Accrued compensation........................................................ 2,194 1,278
Income taxes payables....................................................... - 275
Accrued loss reserves....................................................... 1,144 905
Other accrued expenses...................................................... 349 921
---------------- -----------------
Total current liabilities............................................ 14,032 9,627
Long-term debt, less current maturities....................................... 45,271 27,005
Deferred income taxes......................................................... 10,238 8,340
---------------- -----------------
Total liabilities.................................................... 69,541 44,972
---------------- -----------------
Stockholders' equity:
Preferred stock............................................................. - -
Common stock:
Class A................................................................... 40 40
Class B................................................................... 10 10
Additional paid-in capital.................................................. 11,308 11,144
Retained earnings........................................................... 22,557 18,789
Reacquired shares, at cost.................................................. (77) (77)
---------------- ------------------
Total stockholders' equity........................................... 33,838 29,906
---------------- ------------------
$ 103,379 $ 74,878
================ ==================
Page Number 4 of 21
See accompanying notes to condensed consolidated financial statements.
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except share and per share data)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
--------------- ---------------- ------------- ---------------
Operating revenue:
Freight................................ $ 42,203 $ 31,739 $ 116,259 $ 89,106
Other.................................. 221 95 391 250
--------------- ---------------- ------------- ---------------
Operating revenue................ 42,424 31,834 116,650 89,356
--------------- ---------------- ------------- ---------------
Operating expenses:
Purchased transportation............... 17,911 12,716 48,553 35,022
Compensation and employee benefits..... 9,679 7,082 27,464 19,943
Fuel, supplies, and maintenance........ 4,934 3,951 14,254 11,837
Insurance and claims................... 620 585 1,940 1,599
Taxes and licenses..................... 799 616 2,150 1,699
General and administrative............. 1,576 1,351 4,506 4,043
Communication and utilities............ 469 343 1,311 1,037
Depreciation and amortization.......... 2,908 1,821 8,055 5,746
--------------- ---------------- ------------- ---------------
Total operating expenses.......... 38,896 28,465 108,233 80,926
--------------- ---------------- ------------- ---------------
Earnings from operations........ 3,528 3,369 8,417 8,430
Financial (expense) income
Interest expense....................... (831) (507) (2,148) (1,286)
Interest income........................ 46 37 181 43
--------------- ---------------- ------------- ---------------
Earnings before income taxes... 2,743 2,899 6,450 7,187
Income taxes................................ 1,139 1,204 2,682 3,006
--------------- ---------------- ------------- ---------------
Net earnings................... $ 1,604 $ 1,695 $ 3,768 $ 4,181
=============== ================ ============= ===============
Basic and diluted earnings per common
share....................................... $ 0.32 $ 0.34 $ 0.75 $ 0.84
=============== ================ ============= ===============
Basic weighted average common shares
outstanding................................. 5,015,082 5,001,913 5,011,523 5,000,163
Common stock options and awards........ 1,365 29,840 32,119 5,978
--------------- ---------------- ------------- ---------------
Diluted weighted average common
shares outstanding.......................... 5,016,447 5,031,753 5,043,642 5,006,141
=============== ================ ============= ===============
Page Number 5 of 21
See accompanying notes to condensed consolidated financial statements.
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
(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(unaudited)..................... - - 3,768 - 3,768
Issuance of stock bonuses(unaudited)........ - 164 - - 164
------------- ------------ ------------- ------------- -------------
Balance at September 30,
1998(unaudited).............................$ 50 $ 11,308 $ 22,557 $ (77) $ 33,838
============== ============ ============= ============= =============
Page Number 6 of 21
See accompanying notes to condensed consolidated financial statements.
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine Months Ended
September 30,
------------------------------
1998 1997
------------ ---------------
Cash flows from operating activities:
Net earnings....................................................................... $ 3,768 $ 4,181
------------ ---------------
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization.................................................... 8,055 5,746
Deferred income taxes............................................................ 1,808 1,500
Provision for bad debts.......................................................... 37 -
Stock bonuses.................................................................... 164 37
Changes in:
Receivables.................................................................... (4,998) (4,036)
Inventories.................................................................... (101) (65)
Deposits, primarily with insurers.............................................. 465 186
Prepaid expenses............................................................... 459 (886)
Accounts payable and other accrued liabilities................................. 2,657 2,148
------------ ---------------
Total adjustments....................................................... 8,546 4,630
------------ ---------------
Net cash provided by operating activities............................... 12,314 8,811
------------ ---------------
Cash flows from investing activities:
Payments for acquisitions.......................................................... (14,255) (2,533)
Purchase of property and equipment................................................. (10,295) (4,376)
Proceeds from the sale of property and equipment................................... 1,414 6,080
Purchase of other assets........................................................... (162) (128)
------------ ---------------
Net cash used in investing activities................................... (23,298) (957)
------------ ---------------
Cash flows from financing activities:
Proceeds from long-term debt....................................................... 14,000 14,300
Principal payments on long-term debt............................................... (5,662) (17,461)
Borrowings on line of credit agreement............................................. - 95,017
Payments on line of credit agreement............................................... - (99,507)
------------ ---------------
Net cash provided by(used in) financing activities.......................... 8,338 (7,651)
------------ ---------------
Net (decrease)increase in cash and cash equivalents......................... (2,646) 203
Cash and cash equivalents at beginning of period..................................... 4,082 940
------------ ---------------
Cash and cash equivalents at end of period........................................... $ 1,436 $ 1,143
============ ===============
Page Number 7 of 21
See accompanying notes to condensed consolidated financial statements.
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
(Dollars in thousands)
Nine months ended
September 30,
----------------------------------
1998 1997
--------------- ----------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest...................................................................$ 2,310 $ 1,251
Income taxes............................................................... 1,153 543
============ ==============
Supplemental schedules of noncash investing and financing activities:
Notes payable issued for tractors and trailers...............................$ 10,394 $ 15,831
Issuance of stock bonuses.................................................... 164 37
Liability issued for intangible assets....................................... 1,293 -
============ ==============
Cash payments for acquisitions:
Revenue equipment........................................................... $ 11,188 $ 1,990
Intangible assets........................................................... 1,697 406
Other assets................................................................ 1,370 137
------------- -------------
Total cash paid for acquisitions................................................ $ 14,255 $ 2,533
============= =============
Page Number 8 of 21
See accompanying notes to condensed consolidated financial statements.
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The condensed consolidated financial statements include the
accounts of Smithway Motor Xpress Corp., a Nevada holding
company, and its wholly owned subsidiaries, Smithway Motor
Xpress, Inc. and East West Motor Express, Inc. Unless
otherwise indicated, the companies named in this paragraph are
collectively referred to as the "Company." All significant
intercompany balances and transactions have been eliminated in
consolidation.
The condensed consolidated financial statements have been
prepared, without audit, in accordance with generally accepted
accounting principles, pursuant to the published rules and
regulations of the Securities and Exchange Commission. In the
opinion of management, the accompanying condensed consolidated
financial statements include all adjustments which are
necessary for a fair presentation of the results for the
interim periods presented, such adjustments being of a normal
recurring nature. Certain information and footnote disclosures
have been condensed or omitted pursuant to such rules and
regulations. The December 31, 1997 Condensed Consolidated
Balance Sheet was derived from the audited balance sheet of
the Company for the year then ended. It is suggested that
these condensed consolidated financial statements and notes
thereto be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Form
10-K for the year ended December 31, 1997. Results of
operations in interim periods are not necessarily indicative
of results to be expected for a full year.
Note 2. Acquisitions
In February 1998, the Company acquired tractors, trailers, and
certain other assets of East West Motor Express, Inc. of Black
Hawk, South Dakota. In exchange for these assets, the Company
paid approximately $6.9 million to the previous owners,
assumed and repaid approximately $4.0 million in equipment
financing secured by these assets and agreed to pay $2.3
million in goodwill. East West Motor Express, Inc. had
approximately $31 million in revenue during 1997.
In August 1998, the Company acquired tractors, trailers
and certain other assets of TP Transportation,Inc.of Enid,
Oklahoma. In exchange for the assets, the Company paid
$650,000 to the previous owner, assumed and repaid
approximately $4.3 million in equipment financing secured by
these assets and agreed to pay $150,000 in goodwill. TP
Transportation, Inc. had approximately $4 million in revenue
during 1997.
Note 3. Change in Accounting Estimate
The Company changed its estimate of the useful life of tires
purchased with revenue equipment from two years to the
estimated life of the underlying revenue equipment. This
change was based on the Company's experience with warranties
and tread life of tires and has been accounted for
prospectively beginning January 1, 1998. The effect on net
earnings and basic and diluted earnings per share was not
material for the 1998 periods.
Page Number 9 of 21
Note 4. Effect of New Financial Accounting Standards
SFAS No.130, "Reporting Comprehensive Income", No. 131,
"Disclosures about Segments of an Enterprise and Related
Information", and No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" are effective for
1998. The implementation of these standards had no impact on
the Company.
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," effective for fiscal years beginning
after June 15, 1999. The adoption of SFAS No. 133 is not
expected to have a significant impact on the Company's
financial statements.
Page Number 10 of 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company's fiscal year ends on December 31 of each year. Thus, this
report discusses the third quarter and first nine months of the Company's 1998
and 1997 fiscal years, respectively.
The Company has expanded its operations substantially over the past
three years through a combination of internal growth and acquisitions. In the
quarter ended September 30,1998, revenue increased 33.3% and net earnings
decreased 5.4%, compared with the same quarter in 1997. For the nine months
ended September 30, 1998, revenue increased 30.5% and net earnings decreased
9.9% compared with the same period in 1997.
The Company operates a tractor-trailer fleet comprised of Company-owned
vehicles and vehicles obtained under leases from independent contractors.
Fluctuations among expense categories may occur primarily as a result of two
factors: (I) the percentage of the Company's tractor fleet being obtained
through independent contractors, and (ii) the use of operating leases to finance
revenue equipment. 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, for independent contractors, 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. Accordingly,
management intends to evaluate the Company's efficiency using pretax margin and
net margin rather than operating ratio(*).
Subsequent Event
The Company closed the acquisition of certain assets of JHT, Inc. and
related entities (the "Sellers") on October 30, 1998. The Sellers had combined
revenue of approximately $24 million in 1997. The Company paid approximately
$2.3 million to the Sellers for the acquired assets, repaid approximately $10.2
million in financing secured by the acquired assets, and agreed to pay $1.5
million in goodwill.
- --------
(*) May contain "forward-looking" statements.
Page Number 11 of 21
Results of Operations
The following table sets forth the percentage relationship of certain
items to operating revenue for the three and nine months ended September 30,
1998 and 1997:
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------- ------------ ------------ ---------------
Operating revenue................................ 100.0% 100.0% 100.0% 100.0%
Operating expenses
Purchased transportation....................... 42.2 39.9 41.6 39.2
Compensation and employee benefits............. 22.8 22.2 23.5 22.3
Fuel, supplies, and maintenance................ 11.6 12.4 12.2 13.2
Insurance and claims........................... 1.5 1.8 1.7 1.8
Taxes and licenses............................. 1.9 1.9 1.8 1.9
General and administrative..................... 3.7 4.2 3.9 4.5
Communications and utilities................... 1.1 1.1 1.1 1.2
Depreciation and amortization.................. 6.9 5.7 6.9 6.4
------------- ------------ ------------ ---------------
Total operating expenses..................... 91.7 89.4 92.8 90.6
------------- ------------ ------------ ---------------
Earnings from operations......................... 8.3 10.6 7.2 9.4
Interest expense (net)........................... (1.8) (1.5) (1.7) (1.4)
------------- ------------ ------------ ---------------
Earnings before income taxes..................... 6.5 9.1 5.5 8.0
Income taxes..................................... 2.7 3.8 2.3 3.4
------------- ------------ ------------ ---------------
Net earnings..................................... 3.8% 5.3% 3.2% 4.7%
============= ============ ============ ===============
Comparison of three months ended September 30, 1998 with three months ended
September 30, 1997
Operating revenue increased $10.6 million (33.3%) to $42.4 million
during the 1998 quarter from $31.8 million during the 1997 quarter. Expanded
business with existing customers and revenue from the acquired operations of
Royal Transport in September 1997, East West Motor Express in February 1998, and
TP Transportation in August 1998 contributed to the Company's revenue growth.
Weighted average tractors increased 37.4% to 1,263 during the 1998 quarter from
919 during the 1997 quarter. This was offset by a decrease in revenue per loaded
mile to $1.33 in the 1998 quarter from $1.37 in the 1997 quarter. This decrease
in rate per mile is a result of the increase in van freight associated with the
acquisition of East West Motor Express.
Purchased transportation increased $5.2 million (40.9%) to $17.9
million in the 1998 quarter from $12.7 million in the 1997 quarter 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 42.2% of revenue in the 1998 quarter from 39.9% in
the 1997 quarter. 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 $2.6 million (36.7%) to
$9.7 million in the 1998 quarter from $7.1 million in the 1997 quarter. As a
percentage of revenue, compensation and employee benefits increased to 22.8% of
revenue in the 1998 quarter from 22.2% in the 1997 quarter. The increase was
attributable to (I) an increase in the per-mile wage paid to van division
drivers (ii) an increase in the number of driver trainers and trainees, which
increases compensation expense with little additional revenue and, (iii) an
increase in the amount of worker's compensation claims paid and reserved.
Page Number 12 of 21
Fuel, supplies, and maintenance increased $983,000 (24.9%) to $4.9
million in the 1998 quarter from $4.0 million in the 1997 quarter. As a
percentage of revenue, fuel, supplies, and maintenance decreased to 11.6% of
revenue for the 1998 quarter compared with 12.4% for the 1997 quarter reflecting
a 13% decrease in fuel costs to $1.00 during the 1998 quarter from $1.15 per
gallon during the 1997 quarter. The decrease was partially offset by an increase
in the cost of parts, tires, tarps, supplies, and binders used in the Company's
tractor fleet.
Insurance and claims increased $35,000 (6.0%) to $620,000 in the 1998
quarter from $585,000 in the 1997 quarter. As a percentage of revenue, insurance
and claims decreased to 1.5% of revenue in the 1998 quarter from 1.8% in the
1997 period as a result of lower liability insurance premiums and decreased
physical damage expenses.
Taxes and licenses increased $183,000 (29.7%) to $799,000 in the 1998
quarter from $616,000 in the 1997 quarter reflecting an increase the number of
tractors licensed by the Company. As a percentage of revenue, taxes and licenses
remained constant at 1.9% of revenue.
General and administrative expenses increased $225,000 (16.7%) to $1.6
million in the 1998 quarter from $1.4 million in the 1997 quarter. As a
percentage of revenue, general and administrative expenses decreased to 3.7% of
revenue in the 1998 quarter from 4.2% in the 1997 quarter as a result of a
decrease in freight revenue being dispatched by terminal agents, resulting in
less commissions paid during the 1998 quarter. This was partially offset by a
slight increase in advertising cost. Additionally, certain fixed costs are being
spread over a larger revenue base.
Communications and utilities increased $126,000 (36.7%) to $469,000 in
the 1998 quarter from $343,000 in the 1997 quarter. As a percentage of revenue,
communications and utilities remained essentially constant at 1.1% of revenue.
Depreciation and amortization increased $1.1 million (59.7%) to $2.9
million in the 1998 quarter from $1.8 million in the 1997 quarter. As a
percentage of revenue, depreciation and amortization increased to 6.9% of
revenue in the 1998 quarter from 5.7% in the 1997 quarter. The effects of
acquisition goodwill and lower revenue per tractor less efficiently spreading
this fixed cost more than offset a decrease in the percent of the Company's
fleet being comprised of Company-owned tractors and trailers.
Interest expense (net) increased $315,000 (67.0%) to $785,000 in the
1998 quarter from $470,000 in the 1997 quarter. As a percentage of revenue,
interest expense (net) increased to 1.8% of revenue in the 1998 quarter from
1.5% in the 1997 quarter, due to higher average debt balances ($46.6 million in
the 1998 quarter compared with $26.0 million in the 1997 quarter). Most of the
increase in borrowing was to fund the acquisition of East West Motor Express,
Inc. in February 1998, and the acquisition of TP Transportation in August 1998.
As a result of the foregoing, the Company's pretax margin decreased to
6.5% in the 1998 quarter from 9.1% in the 1997 quarter.
The Company's effective tax rate was 41.5% for both the 1998 and 1997
quarter. 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 Company's net earnings.
Primarily as a result of the factors described above, net earnings
decreased $91,000 (5.4%) to $1.6 million (3.8% of revenue) in the 1998 quarter
from $1.7 million (5.3% of revenue) in the 1997 quarter.
Page Number 13 of 21
Comparison of nine months ended September 30, 1998 with nine months ended
September 30, 1997
Operating revenue increased $27.3 million (30.5%) to $116.7 million
during the 1998 period from $89.4 million during the 1997 period. Expanded
business with existing customers and revenue from the acquired operations of
Royal Transport in September 1997, East West Motor Express in February 1998, and
TP Transportation in August 1998 contributed to the Company's revenue growth.
Weighted average tractors increased 31.8% to 1,174 during the 1998 period from
891 during the 1997 period. This was offset by a decrease in loaded revenue per
mile to $1.33 in the 1998 period from $1.36 per loaded mile during the 1997
period. This decrease in rate per mile is a result of the increase in van
freight associated with the acquisition of East West Motor Express.
Purchased transportation increased $13.5 million (38.6%) to $48.6
million in the 1998 period from $35.0 million in the 1997 period 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 41.6% of revenue in the 1998 period from 39.2% in
the 1997 period. 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 $7.5 million (37.7%) to
$27.5 million in the 1998 period from $19.9 million in the 1997 period. As a
percentage of revenue, compensation and employee benefits increased to 23.5% of
revenue in the 1998 period from 22.3% in the 1997 period. The increase was
attributable to (I) an increase in the per-mile wage paid to van division
drivers (ii) an increase in the number driver trainers and trainees, which
increases compensation expense with little additional revenue until the trainees
receive their own truck, and (iii) an increase in the amount of worker's
compensation claims paid and reserved.
Fuel, supplies, and maintenance increased $2.4 million (20.4%) to $14.3
million in the 1998 period from $11.8 million in the 1997 period. As a
percentage of revenue, fuel, supplies, and maintenance decreased to 12.2% of
revenue for the 1998 period compared with 13.2% for the 1997 period reflecting a
12.6% decrease in fuel costs to $1.04 per gallon during the 1998 period from
$1.19 per gallon during the 1997 period. The decrease was partially offset by an
increase in the cost of parts, tires, tarps, supplies, and binders used in the
Company's tractor fleet.
Insurance and claims increased $341,000 (21.3%) to $1.9 million in the
1998 period from $1.6 million in the 1997 period. As a percentage of revenue,
insurance and claims remained essentially constant at 1.7% of revenue in the
1998 period compared with 1.8% in the 1997 quarter.
Taxes and licenses increased $451,000 (26.5%) to $2.2 million in the
1998 period from $1.7 million in the 1997 period reflecting an increase the
number of tractors licensed by the Company. As a percentage of revenue, taxes
and licenses remained essentially constant at 1.8% of revenue in the 1998 period
and 1.9% in the 1997 period.
General and administrative expenses increased $463,000 (11.5%) to $4.5
million in the 1998 period from $4.0 million in the 1997 period. As a percentage
of revenue, general and administrative expenses decreased to 3.9% of revenue in
the 1998 period from 4.5% in the 1997 period predominately 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.
Page Number 14 of 21
Communications and utilities increased $274,000 (26.4%) to $1.3 million
in the 1998 period from $1.0 million in the 1997 period. As a percentage of
revenue, communications and utilities remained essentially constant at 1.1% of
revenue in the 1998 period and 1.2% in the 1997 period.
Depreciation and amortization increased $2.3 million (40.2%) to $8.1
million in the 1998 period from $5.7 million in the 1997 period. As a percentage
of revenue, depreciation and amortization increased to 6.9% of revenue in the
1998 period from 6.4% in the 1997 period. The effects of acquisition goodwill
and lower revenue per tractor less efficiently spreading this fixed cost more
than offset a decrease in the percent of the Company's fleet being comprised of
Company-owned tractors and trailers.
Interest expense (net) increased $724,000 (58.3%) to $2.0 million in
the 1998 period from $1.2 million in the 1997 period. As a percentage of
revenue, interest expense (net) increased to 1.7% of revenue in the 1998 period
from 1.4% in the 1997 period, due to higher average debt balances ($40.5 million
in the 1998 period compared with $24.1 million in the 1997 period). Most of the
increase in borrowing was to fund the acquisition of East West Motor Express,
Inc. in February 1998, and the acquisition of TP Transportation in August 1998.
As a result of the foregoing, the Company's pretax margin decreased to
5.5% in the 1998 period from 8.0% in the 1997 period.
The Company's effective tax rate was 41.6% in the 1998 period compared
with 41.8% in the 1997 period. The decrease in the effective tax rate was due to
a lower expected combined tax rate for the operations of East West Motor
Express, Inc. located in South Dakota. 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 Company's net earnings.
Primarily as a result of the factors described above, net earnings
decreased $413,000 (9.9%) to $3.8 million (3.2% of revenue) in the 1998 period
from $4.2 million (4.7% of revenue) in the 1997 period.
Liquidity and Capital Resources
The growth of the Company's business has required significant
investment in new revenue equipment that the Company historically has financed
with borrowings under installment notes payable to commercial lending
institutions and equipment manufacturers, borrowings under a revolving credit
agreement, cash flow from operations, equipment leases from third-party lessors,
and, in 1996, proceeds of the Company's initial public offering. 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 current anticipated working
capital requirements, capital expenditures, and other needs at least through
1999(*).
Net cash provided by operating activities was $12.3 million for the
nine months ended September 30, 1998. The primary sources of cash from
operations were net earnings of $3.8 million increased by $8.1 million in
depreciation and amortization, a $2.7 million increase in accounts payable and
other accrued
- --------
(*) May contain "forward-looking" statements.
Page Number 15 of 21
liabilities and a $1.8 million increase in deferred income tax liability. The
Company's principal uses of cash from operations were to service debt and
internally finance accounts receivable associated with growth in the business.
Accounts receivable increased $5.0 million for the nine months ended September
30, 1998. The average age of the Company's accounts receivable was approximately
33.1 days for the 1998 period compared to 34 days at December 31, 1997.
Net cash used in investing activities of $23.3 million in the 1998
period related primarily to payments made for the acquisition of assets of East
West Motor Express and TP Transportation, 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 $5.3 million during the remaining three months of
1998. Such projected capital expenditures are expected to be funded with cash
flow from operations, borrowings, or operating leases(*).
Net cash provided by financing activities of $8.3 million for the nine
months ended September 30, 1998, consisted primarily of borrowings of $14.0
million of principal under the Company's revolving credit agreement and
repayments of $5.7 million of principal under the Company's revolving credit
agreement and other long-term debt agreements.
The maximum amount available under the Company's credit agreement at
September 30, 1998, was $25 million, on which the Company had an outstanding
balance of $22.0 million. The interest rate on the outstanding balance is
defined in the agreement and at September 30, 1998 was 6.86%. At September 30,
1998, the Company had total outstanding long-term debt (including current
maturities) of approximately $51.0 million, most of which was comprised of
installment obligations for the purchase of revenue equipment and borrowings
under the Company's unsecured credit agreement. Interest rates on this debt
range from 5.7% to 7.9%, and the principal amounts mature at various dates
through September 2003.
On October 30, 1998, the Company amended its revolving credit
agreement. The maximum available amount was increased to $45 million and the
agreement was secured by accounts receivable, inventory, certain revenue
equipment, and other assets. The amendment also imposed a maximum borrowing
limit and other financial covenants. The Company used a portion of the increased
availability to fund the acquisition of certain assets of JHT.
Year 2000
The Year 2000 issue, common to most companies, concerns the inability
of information and noninformation systems to recognize and process
date-sensitive information after 1999 due to the use of only the last two digits
to refer to a year. This problem could affect both information systems (software
and hardware) and other equipment that relies on microprocessors. Management has
completed a Company-wide evaluation of this impact on its computer systems,
applications and other date-sensitive equipment. The Company's primary
information technology systems ("IT Systems") include hardware and software for
billing dispatch, electronic data interchange, fueling, payroll and satellite
communications systems. These IT Systems include both Company-developed software
and software designed by third-parties. The primary IT System designed by a
third party is the satellite tracking system, which tracks equipment locations,
provides dispatch and routing information and allows in-cab communication with
drivers. The Company has been informed by this provider that its system is
compliant. Another significant IT System provided by a third party transmits
payroll funds to drivers and allows drivers to purchase fuel and other items
outside the Company's terminal locations. The Company has been informed by this
provider that it expects to be compliant by June 1999.
The IT Systems developed by the Company have been assessed and systems
and equipment that are not Year 2000 compliant have been identified and
remediation efforts are in process. Management estimates
Page Number 16 of 21
that nearly 75 percent of known remediation efforts were completed as of
September 30, 1998. All known remediation efforts and testing of
systems/equipment are expected to be completed by June 30, 1999.
The Company is reviewing its risks associated with microprocessors
embedded in facilities and equipment ("Non-IT Systems"). The primary Non-IT
Systems include microprocessors in tractor engines and other components,
terminal facilities, satellite communication units, and telecommunications and
other office equipment. The Company's assessment of its revenue equipment,
satellite communications units, and office equipment Non-IT Systems has revealed
low risk of material replacement requirements. Such systems are relatively new
and were designed to be Year 2000 compliant. The Company is continuing to assess
its Non-IT Systems included in its terminal facilities, but believes that the
risk of a service-interrupting failure in these systems is low.
The Company is also in the process of monitoring the progress of
material third parties (shippers and suppliers) in their efforts to become Year
2000 compliant. These third parties include, but are not limited to: shippers of
freight, manufacturers of operating equipment, fuel and parts suppliers, the
U.S. Postal Service, financial institutions, and utilities. The Company has
requested copies of the Year 2000 plans of the material third parties and
intends to seek updates from third parties as to their performance against these
plans.
Through September 30, 1998 the Company has spent approximately $80,000
to address Year 2000 issues. Total costs to address Year 2000 issues are
currently estimated not to exceed $150,000 and consist primarily of costs for
the remediation of internal systems and equipment. Funds for these costs are
expected to be provided by the operating cash flows of the Company. The majority
of the internal system remediation efforts relate to staff costs of on-staff
systems programmers, and therefore, are not incremental costs.
The Company's primary risk relating to Year 2000 compliance is the
possibility of service disruption from third-party suppliers of satellite
communication, telephone, fueling, and financial services. The Company could be
faced with severe consequences if Year 2000 issues are not identified and
resolved in a timely manner by the Company and material third parties. A
worst-case scenario would result in the short term inability of the Company to
deliver freight for its shippers. This would result in lost revenues; however
the amount would be dependent on the length and nature of the disruption, which
cannot be predicted or estimated. In light of the possible consequences, the
Company is devoting the resources needed to address Year 2000 issues in a timely
manner. The progress of the Company's Year 2000 efforts are reported to the
audit committee of the board of directors at each quarterly meeting. While
management expects a successful resolution of these issues, there can be no
guarantee that material third parties, on which the Company relies, will address
all Year 2000 issues on a timely basis or that their failure to successfully
address all issues would not have an adverse effect on the Company.
The Company is in the process of developing contingency plans in case
business interruptions do occur. Management expects these plans to be completed
by June 30, 1999.
Page Number 17 of 21
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
No reportable events or material changes occurred
during the quarter for which this report is filed.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Page Number 18 of 21
Exhibit
Number Description
2.1 ++ Second Amendment to Asset Purchase Agreement dated as of
December 27, 1996, among Smithway Motor Xpress, Inc., an
Iowa corporation, Smithway Motor Xpress Corp., a Nevada
corporation, Marquardt Transportation, Inc., a South Dakota
corporation, and Ralph and Lucille Marquardt.
2.2 ++++ Asset Purchase Agreement dated February 20, 1998, by and
among Smithway Motor Xpress, Inc., East West Motor Express,
Inc. and Darwyn and David Stebbins.
2.3 ++++++ 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.
3.1 + Articles of Incorporation.
4.2 + 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 ++ Second Amendment to Asset Purchase Agreement dated as of
December 27, 1996, among Smithway Motor Xpress, Inc., an
Iowa corporation, Smithway Motor Xpress Corp., a Nevada
corporation, Marquardt Transportation, Inc., a South Dakota
corporation, and Ralph and Lucille Marquardt.
10.8 +++ Credit Agreement dated September 3, 1997, between
Smithway Motor Xpress Corp., as Guarantor, Smithway Motor
Xpress, Inc., as Borrower, and LaSalle National Bank.
10.9 ++++ Asset Purchase Agreement dated February 20, 1998, by
and among Smithway Motor Xpress, Inc., East West Motor
Express, Inc., and Darwyn and David Stebbins.
10.10 +++++ 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.
10.11 +++++ 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.
Page Number 19 of 21
Exhibit
Number Description
10.12 ++++++ 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.
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 Yearly Report on
Form 10-K for the fiscal year ended December 31, 1996.
Commission File No. 000-20793, dated March 31, 1997.
+++ 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.
# Filed herewith.
(b) Reports on Form 8-K.
None.
Page Number 20 of 21
SIGNATURE
Pursuant to the requirements of the Securities and Exchange 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.,
a Nevada corporation
Date: November 12, 1998 By:/s/Michael E. Oleson
Michael E. Oleson
Treasurer and Chief Accounting Officer
Page Number 21 of 21