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 (FEE REQUIRED) For the Fiscal Year Ended September
30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED).
For the transition period from to
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Commission file number 0-27208
SIMON TRANSPORTATION SERVICES INC.
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(Exact name of registrant as specified in its charter)
Nevada 87-0545608
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State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
5175 West 2100 South
West Valley City, Utah 84120
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 801/924-7000
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Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: $0.01 Par Value
Class A Common Stock
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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $5,382,066 as of December 31, 2001 (based upon the $2.90 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 December 31, 2001, the registrant had 6,115,109 shares of Class A Common
Stock, no shares of Class B Common Stock, 162,401 shares of Series I
Convertible Preferred Stock and 130,042 shares of Series II Convertible
Preferred 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 annual meeting of stockholders
following the year ended September 30, 2001 or an amendment hereto that will be
filed no later than January 28, 2002.
Cross Reference Index
The following cross reference index indicates the document and location of the
information contained herein and incorporated by reference into this Form 10-K.
Document and Location
Part I
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Item 1 Business Pages 3-9 herein
Item 2 Properties Page 10 herein
Item 3 Legal Proceedings Page 10-11 herein
Item 4 Submission of Matters to a Vote of Security Holders Page 11 herein
Part II
Item 5 Market for Registrant's Common Equity and
Related Stockholder Matters Page 12 herein
Item 6 Selected Financial and Operating Data Pages 13-14 herein
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations Pages 14-23 herein
Item 7A Quantitative and Qualitative Disclosures
About Market Risk Page 24 herein
Item 8 Financial Statements and Supplementary Data Pages 24-25 herein
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure Page 25 herein
Part III
Item 10 Directors and Executive Officers of the Registrant Proxy Statement
Item 11 Executive Compensation Proxy Statement
Item 12 Security Ownership of Certain Beneficial Owners and
Management Proxy Statement
Item 13 Certain Relationships and Related Transactions Proxy Statement
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K Pages 26-53 herein
PART I
Item 1: BUSINESS
The Company
Simon Transportation is a truckload carrier that specializes in
temperature-controlled transportation services for major shippers. Simon
Transportation operates nationwide and in eight Canadian provinces from its
strategically located headquarters in Salt Lake City, Utah, and terminals in
Fontana, California; Denver, Colorado; and Atlanta, Georgia.
Simon Transportation Services Inc., a Nevada corporation, is a holding
company organized in 1995, the sole business of which is to own 100% of the
capital stock of Dick Simon Trucking, Inc., a Utah corporation and Simon
Terminal LLC, an Arizona limited liability company, which was formed in 2001 in
connection with the Company mortgaging its Salt Lake City headquarters and
terminal. References to the "Company" herein refer to the consolidated
operations of Simon Transportation Services Inc., Dick Simon Trucking, Inc. and
Simon Terminal LLC. See "Selected Financial and Operating Data", "Management's
Discussion and Analysis of Financial Condition and Results of Operations", and
the consolidated financial statements.
Recent Developments
The Company has incurred net losses of $44.3 million, $11.1 million and
$3.2 million and its operating activities have used $19.7 million, $7.6 million
and $1.6 million of cash during the fiscal years ended September 30, 2001, 2000
and 1999, respectively. As of September 30, 2001, the Company had a working
capital deficit of $80.2 million (after classification of $69.0 million of
long-term debt and capital lease obligations as current liabilities) and was in
default under its lease and debt agreements. The Company has faced and continues
to face several operating challenges, including, among others, a reduced
shipping demand given unfavorable domestic economic conditions, unseated
tractors, decreased market values for used tractors and trailers, increased
claims, challenges in assimilating two acquisitions, high fuel costs and
increased driver payroll costs. These factors have significantly and negatively
impacted the Company's results of operations and liquidity.
During August 2001, the Company's continued losses from operations and
negative cash flows forced it to defer making payments on most of its equipment
leases with total obligations outstanding of approximately $183.1 million and
related monthly payments of approximately $3.7 million (the "Equipment Leases").
The lack of payment on the Equipment Leases constitutes an event of default
under the related lease agreements. In addition, the default on the Equipment
Leases resulted in defaults on effectively all of the Company's outstanding
secured debt, which consisted principally of its line of credit facility, the
mortgage on its Salt Lake City headquarters and terminal, and all other lease
obligations.
The Company's $30 million line of credit is secured by accounts
receivable, inventories of operating supplies, and office furniture and fixtures
and the personal guarantee of the Company's majority stockholder. As a result of
recurring losses, the Company's net worth has fallen below $25 million, which
will decrease the advance rate on the line of credit, unless renegotiated.
The Company has guaranteed a substantial portion of the residual values
on all of its leased tractors and trailers. These residual guarantees total
approximately $126.1 million at September 30, 2001. Based upon current market
prices for used tractors and trailers, management estimates that the difference
between the residual guarantees and the projected market value of the equipment
at the termination of the leases is approximately $25.0 million. Effective
August 1, 2001, the Company began accruing this potential liability over the
remaining life of the leases in accordance with the EITF 96-21. As of September
30, 2001, the Company has recorded an accrued liability and a valuation
allowance for guaranteed lease residuals totaling $6.4 million. Prior to August
1, 2001, it was not probable that any residual guarantee payments would be
required. At September 30, 2001, the Company had residual guarantees due (net of
the estimated fair value of related equipment) on matured equipment leases
amounting to $3.1 million. The Company does not have the cash to pay these
residual guarantees and currently is seeking an extension as discussed below.
During December 2001, the Company met with representatives from most of
its equipment lessors. In connection with these meetings, the Company requested
a restructure of the Equipment Leases and most of the lessors expressed their
willingness to negotiate a restructure. The proposed restructuring of the
Equipment Leases includes a period of rent moratorium, an extension of the
leases, waiver of outstanding late fees and penalties and revised guaranteed
residual values. The Company and its equipment lessors continue to evaluate
restructuring of the Equipment Leases in light of the negotiations with the
Company's tractor manufacturer discussed below.
Dime Commercial Credit ("Dime"), one of the Company's equipment lessors
with total lease obligations outstanding of approximately $6.4 million has
expressed an unwillingness to renegotiate the terms of its leases. On December
27, 2001, the Company was served with a lawsuit by Dime. The lawsuit asserts
that the Company is in default under the lease agreements held by Dime and seeks
judgments against the Company. The requested judgments include the return to
Dime of all equipment under the lease agreements, payment of delinquent monthly
payments, payment of the stipulated loss value as defined and payment of other
fees and costs. The Company is currently preparing its response to the lawsuit.
Management estimates the range of potential exposure related to this obligation
is $1.5 to $3.0 million.
The Company is in the process of working through the negotiation and
approval process related to the above restructuring with the remainder of the
equipment lessors and the Company's tractor manufacturer. Management expects
that, if accomplished, this restructuring will be completed during the first
calendar quarter of 2002. If the Company is successful in restructuring the
Equipment Leases, it is probable that the restructured leases will be accounted
for as capitalized lease obligations in the Company's financial statements (as
opposed to the historic accounting treatment as operating leases for most of the
Equipment Leases).
The Company has also met with its line of credit lender regarding a
decrease in the advance rate, which is based upon the Company's net worth. The
line of credit lender has stated a willingness to consider a waiver of the
tangible net worth requirement and maintain the current advance rate for a
period of approximately nine months, at which time the Company's progress will
be reassessed. If finalized, approval of this waiver of the tangible net worth
requirement is expected during the first calendar quarter of 2002.
A substantial portion of the Company's tractor fleet is covered by
trade-in and repurchase agreements with the manufacturer. The trade-in and
repurchase agreements require the Company to purchase additional tractors in
connection with the trade-ins or repurchases. These trade-in and repurchase
agreements have been structured in alignment with the Company's historical
tractor life cycles. During December 2001, the Company commenced discussions
with the manufacturer of its tractors regarding extension of the trade-in or
repurchase periods, as well as the revised trade-in or repurchase values and
related provisions.
Subject to acceptable restructuring of the Equipment Leases, line of
credit, and tractor trade-in and repurchase terms, the Company's majority
stockholder has been requested and agreed to provide a $15 million line of
credit ("Stockholder Line of Credit"). The Stockholder Line of Credit would be
secured by, and limited with respect to a percentage of the value of, a second
priority position in the Company's accounts receivable, inventories of operating
supplies, office furniture and fixtures and the Company's Fontana, California
and Atlanta, Georgia terminals.
On December 19, 2001, the Company entered into a $3 million secured
short-term loan with its majority stockholder. The proceeds of this loan were
used to meet the annual permitting and licensing requirements for a majority of
the Company's fleet. The loan will either be repaid from cash to be released
from a cash secured letter of credit (once the Company is able to secure a
surety bond) or will be rolled over into the Stockholder Line of Credit.
Even if the restructuring of the equipment leases and line of credit is
successful, the Company's liquidity position and existing credit facilities may
not be sufficient to cover liquidity requirements for the next twelve months and
the Company is facing the prospect of not having adequate funds to operate its
business. As a result, there is substantial doubt as to the Company's ability to
continue as a going concern. In the event the Company's liquidity position is
insufficient to cover its liquidity requirements, the Company may be compelled
to file for bankruptcy protection.
The Company's consolidated financial statements for the year ended
September 30, 2001 included in this Annual Report have been prepared assuming
that the Company will continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
the uncertainties described above. See the Report of Independent Public
Accountants on such financial statements included elsewhere in this Report.
Strategy
The Company has grown in recent years by adding revenue equipment to
meet the service demands of new and existing customers and expanding core
carrier partnerships. As a result of current and anticipated unfavorable
economic conditions in the transportation industry, management plans to decrease
the size of its fleet and to focus on building core carrier relationships with
service-oriented shippers. In connection with its focus on core shippers, the
Company plans to reduce its fleet size by at least 120 tractors during fiscal
2002. Additionally, the Company is extending the period it holds its revenue
equipment by up to 12 to 24 months. The key elements of the Company's strategy
are:
Food Industry Focus. The Company focuses on providing specialized
service to sophisticated, high-volume customers in the food industry such as
Albertson's, Anheuser Busch, ConAgra, Coors, Excel Corporation, Hersey Foods,
I.B.P., Kraft, MBX Services, Nestle, Pillsbury, Schreiber Foods, and Walmart.
These customers seek nationwide transportation partners that understand the
specialized needs of food industry shippers. Many of the Company's customers
seek carriers that offer late-model equipment, experienced personnel, advanced
technology, and broad geographic coverage. Management believes the food industry
is an attractive niche because consumers require food throughout all economic
cycles.
Core Carrier Partnerships. The Company has grown by establishing core
carrier partnerships with high-volume, service sensitive shippers. Core carriers
provide customers with consistent equipment availability and premium service
such as time-definite pick-up and delivery, express time-in-transit, multiple
delivery stops, and real-time access to load information through satellite-based
tracking and communication systems and Electronic Data Interchange ("EDI")
capability. The Company also meets specialized customer requests for access to
terminal facilities, stationing employees at customer locations, and dedicating
equipment to specific traffic lanes. Management believes major shippers favor
their core carrier "partners" during periods of reduced demand for truck
service, and that the trend among major shippers to reduce the number of
carriers used in favor of core carriers will continue.
Dedicated Fleets. The Company emphasizes dedicated fleet operations in
which it offers round trip or continuous movement service to a shipper (or a
shipper and one or more of its suppliers) by dedicating certain tractors and
trailers exclusively to that shipper's needs. Dedicated service is desirable
because the customers typically pay a round-trip rate per mile assuming that the
truck will return empty and cover all loading, unloading, and pallet costs. The
Company frequently is able to further enhance revenue per mile by locating a
profitable load to cover unloaded segments. In addition, drivers prefer the
predictable runs and priority treatment at shipping and receiving locations.
Management intends to grow its dedicated fleet operations and expects this
service niche to expand as shippers outsource transportation needs presently
served by private carriage.
Modern Fleet. The Company intends to maintain modern tractor and
trailer fleets. Reliable, late-model equipment promotes customer service and
driver recruitment and retention by minimizing the delays caused by breakdowns
and excessive maintenance. Management believes that extending holding periods
for revenue equipment is consistent with industry trends and will not be a
competitive disadvantage, nor will it result in significantly higher driver
turnover or excessive maintenance costs.
Technology. The Company uses the Qualcomm satellite-based tracking and
communication system in all of its tractors. This system and EDI capability
improve customer service and operating efficiency by offering the Company and
customers real time access to load locations and advance warning of potential
delivery delays. The Company's document imaging system allows prompt and
simultaneous processing of payroll and billing in a paperless work environment.
Management believes shippers will continue to demand advanced technology of
their core carriers and plans to respond to such requirements.
Operations
The Company conducts a centralized dispatch and customer service
operation at its Salt Lake City headquarters. The operations center features a
fully integrated, computerized network of dispatch, customer service, and driver
liaison personnel. Customer service representatives solicit and accept freight,
quote rates, and serve as the primary contact with customers. After accepting a
load, customer service representatives transfer the pick-up and delivery
information to the computer screen of the appropriate load planner, who assigns
the load to an available driver based upon the proximity of the trucks,
scheduled "home time," and available hours-in-service. Dispatchers then use the
Qualcomm satellite-based tracking and communication system to locate the
position and availability status of equipment and notify the driver of pick-up
and delivery requirements, route and fueling instructions, and other
information. Upon the assignment of a load, the Company's proprietary software
calculates the projected travel time from origin to destination and uses
satellite position updates and driver communications to provide load progress
reports at 50 minute intervals. The system automatically advises the appropriate
dispatcher and customer service representative if a load is behind schedule, and
customers are able to use EDI to access information about load locations at any
time. Management believes that these satellite and computer systems are crucial
to satisfying the stringent service standards, such as 30-minute pick-up and
delivery windows, demanded by shippers of their core carriers.
Management measures the Company's efficiency through miles per tractor,
empty miles percentage, revenue per mile, revenue per tractor, and on-time
deliveries. Fleet productivity is tracked daily in the operations center, with
actual progress matched against a monthly goal. All operations personnel have
access to these statistics on a real time basis.
Customers and Marketing
The Company's sales and marketing function is led by senior management
and other sales professionals based in its Salt Lake City headquarters and near
key customers. These sales personnel aggressively market the Company to major
shippers as a customer-oriented provider of dependable, on-time service. The
Company targets customers that seek long-term transportation partners offering
dependable equipment, satellite and EDI technologies, and premium service. This
customer service philosophy has contributed to continuing demands for added
equipment to expand service for existing shippers and establishing core carrier
relationships with Albertson's, Anheuser Busch, ConAgra, Coors, Excel
Corporation, Hersey Foods, I.B.P., Kraft, MBX Services, Nestle, Pillsbury,
Schreiber Foods, and Walmart and other major customers. Management intends to
continue developing business with existing customers and by adding new core
carrier relationships. The Company's top 5, 10, and 25 customers accounted for
21.3%, 37.8%, and 47.0% of revenue, respectively, during fiscal 2001. No single
customer accounted for more than 10% of revenue during fiscal 2001.
The Company is a North American truck line that provides service to and
from customer locations throughout the United States and in several Canadian
provinces. The Company does not maintain any foreign currency positions and
therefore does not engage in any hedging transactions to manage foreign currency
exposure. The Company's operations are strongest in the western United States
and between points in the West to and from points in the East and Southeast. In
addition to traditional for-hire service, management emphasizes the marketing of
dedicated fleet and regional distribution services. Dedicated fleets generally
receive compensation for all miles, and regional operations provide a stronger
presence for driver recruiting. Management believes that these services offer
consistent equipment utilization and predictable home-time for drivers.
The Company has written contracts with substantially all of its
customers. These contracts generally specify service standards and rates,
eliminating the need for negotiating the rate for individual shipments. Although
a contract typically runs for a specified term of at least one year, it
generally may be terminated by either party upon 30 days' notice.
Technology
The Company uses computer and satellite technology to enhance
efficiency and customer service in all aspects of its operations, and management
believes the Company is among the industry leaders in applying advanced
technology to improve transportation service. The Qualcomm OmniTRACSTM
satellite-based tracking and communication system provides hourly updates of the
position of each tractor and permits real time communication between operations
personnel and every driver. As a result, dispatchers relay pick-up and delivery
times, weather and road information, route and fueling directions, and other
instructions without waiting for a driver to stop and call the Company. The
Company's entire fleet has been equipped with the Qualcomm systems. The
Company's proprietary software also monitors load progress against projected
delivery time every half-hour and warns the appropriate dispatcher and customer
service representative if a load is behind schedule. This software also
facilitates early routing toward each driver's home base by signaling
dispatchers several days in advance of drivers' requested home-time dates.
The Company's EDI capability permits customers to communicate directly
with the Company via computer link to tender loads, receive load confirmation,
check load status, and receive billing information. The Company's largest
customers require EDI service from their core carriers, and more than 50% of the
Company's revenue is generated by customers that actively use EDI. EDI not only
improves customer service and communication, but also benefits the Company's
cash flow through accelerated accounts receivable collection. The Company
further enhances its operations through its document imaging technology, which
provides customer service representatives and other personnel (all of whom have
computers) real-time access to freight bills, supplier invoices, and other
information. Management believes that advanced technology will be required by an
increasing number of large shippers as they reduce the number of carriers they
use in favor of core carriers.
The Company's maintenance shops are fully computerized and paperless,
and all maintenance, repair, and inspection records for each vehicle are
instantly accessible. Drivers are able to monitor maintenance progress on
computer screens located in the driver lounge.
Revenue Equipment
The Company's equipment strategy is to operate modern tractors and
trailers that help reduce parts, maintenance, and fuel costs, promote the
reliable service customers demand from core carriers, and attract and retain
drivers. The Company operates conventional tractors (engine-forward) equipped
with electronic engines and Eaton transmissions. Most of the tractors are
covered by three-year, 500,000-mile engine warranties and lifetime transmission
warranties. Additionally, most of the tractors also are equipped with the
"condo" sleeper cabs preferred by drivers. During fiscal 2001, the Company
changed its policy for equipment service lives from three to four years on
tractors and from five to seven years on trailers as a result of current
unfavorable economic conditions and in connection with the proposed restructure
of debt and lease obligations. Management is negotiating with its equipment
providers and lessors to extend lease terms, to modify trade or repurchase
commitments, and to adjust mileage penalties to accommodate this change (see
"Recent Developments").
Drivers and Other Personnel
Driver hiring and retention are critical to the success of all trucking
companies. The Company emphasizes driver satisfaction and has made significant
investments to improve driver retention. Drivers are selected in accordance with
specific Company quality guidelines relating primarily to safety history,
driving experience, road test evaluations, and other personnel evaluations,
including physical examinations and mandatory drug testing. The Company offers
competitive compensation, including mileage pay, and full participation in all
employee benefit and profit-sharing plans for its company drivers. The Company
uses proprietary software to warn dispatchers in advance of a driver's requested
home time. Management believes it promotes driver loyalty by assigning drivers
to a single dispatcher, regardless of geographic area, awarding dedicated routes
and regional distribution positions to senior, top-performing drivers, and
educating customers concerning the need to treat drivers with respect.
The truckload industry has experienced a shortage of qualified drivers.
Strict Department of Transportation (the "DOT") enforcement of hours-in-service
limitations, mandatory drug and alcohol testing, and other safety measures have
shrunk the available pool of drivers and increased the cost of recruiting and
retention. The industry-wide driver shortage adversely affected the Company's
operations during the 2001 fiscal year resulting in an unusually high number of
tractors without drivers. The Company's driver turnover was 183% in fiscal 2001,
measuring drivers after they are assigned a tractor. The Company started an
owner-operator program in mid-October of 2000. As of September 30, 2001, the
Company had approximately 312 seated tractors in its owner-operator program.
Management believes that owner-operator drivers are generally more efficient,
have lower turnover, drive safer and are ultimately more cost effective for the
Company. Accordingly, the Company anticipates continuing to emphasize and grow
the use of owner-operators in its fleet.
At September 30, 2001, the Company employed approximately 570
non-driver employees and approximately 2,350 drivers. The Company's employees
have never been represented by or attempted to organize a union, and management
believes it has a good relationship with the Company's employees.
Safety and Insurance
The Company emphasizes safety in all aspects of its operations. Its
safety program includes: (i) initial orientation; (ii) a three-week to six-week,
on-the-road training program; and (iii) progressive penalties for excessive
speed and log violations. The Company has earned the highest DOT safety and
fitness rating of "satisfactory," which most recently was extended on July 6,
2000.
The Company carried primary and excess auto and general liability
insurance coverage of $50 million, with a $250,000 basket deductible for
personal injury and property damage. Effective November 1, 2001, the Company
increased its deductible for auto and general liability insurance to $1 million
(while retaining the policy limit of $50 million), and obtained cargo insurance
for claims up to $250,000 with a $25,000 deductible. On December 13, 2001, the
Company increased its cargo insurance coverage to $1 million. Through December
31, 2001, the Company's workers' compensation coverage carried a $350,000
deductible, with no coverage limit. Effective January 1, 2002, the Company's
workers' compensation coverage carries a $500,000 deductible, with no coverage
limit. Management believes these coverages are adequate to cover reasonably
anticipated claims.
The tragedy of September 11, 2001, as well as already existing
conditions in the insurance market and the Company's incidence of claims in the
last year significantly increased the cost of the Company's auto and general
liability insurance. Management believes that all transportation companies are
experiencing or will experience similar market conditions as they renew their
insurance coverage.
The Company had outstanding letters of credit related to insurance
coverage totaling $3,335,000 at September 30, 2001. Subsequent to September 30,
2001, two of the Company's former insurance carriers drew against letters of
credit in the total amount of $2,825,000. The amounts drawn against the letters
of credit are held in deposit by the insurance carriers and will be released to
the Company as outstanding claims are paid down. The Company's current auto and
general liability insurer requires $6,000,000 of collateral to cover any
contingency related to the Company's ability to cover its self-insurance
retention. As of December 19, 2001, the Company provided a cash secured
$3,000,000 letter of credit. The Company has also signed a commitment letter for
a $6,000,000 surety bond that will be secured by the Company's Atlanta, Georgia
and Fontana, California terminals and a $1,000,000 cash deposit. This bond is
expected to be put in place during the Company's second quarter of fiscal 2002.
If the Company is unsuccessful in obtaining the surety bond, it might be
required to obtain a cash secured letter of credit for the full $6,000,000.
Competition
The truckload segment of the trucking industry is highly competitive
and fragmented, and no carrier or group of carriers dominates the
temperature-controlled or dry van market. According to the September 2001 issue
of Refrigerated Transporter, the five largest temperature-controlled carriers by
revenue are C. R. England, Prime, Inc., Frozen Food Express Industries, Rocor
International, and Marten Transport Ltd. The combined revenue reported for these
five carriers comprises approximately 37% of the estimated $4.5 billion
for-hire, temperature-controlled market. The proprietary fleet portion of the
temperature-controlled market has been estimated at an additional $3 billion.
The Company's 2001 fiscal year revenue constituted approximately four percent of
the total market for temperature-controlled services and approximately six
percent of the for-hire market. Higher operating costs as well as the reduced
shipping demand under the present domestic economic conditions have resulted in
many smaller carriers going out of business during 2000 and 2001. The Company
competes with a number of other trucking companies, as well as private truck
fleets used by shippers to transport their own products. 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. There are other
trucking companies, including diversified carriers with large
temperature-controlled fleets, possessing substantially greater financial
resources and operating more equipment than the Company.
Fuel Availability and Cost
The Company actively manages its fuel costs by requiring drivers to
fuel at Company terminals or, whenever possible en route, at service centers
with which the Company has established volume purchasing arrangements. The
Company controls fuel purchases by using its proprietary software and Qualcomm
communications ability to schedule fueling stops and amounts purchased based
upon fuel prices at locations on drivers' routes. The Company historically has
been able to pass through most increases in fuel prices and taxes to customers
in the form of higher rates or fuel surcharges. The Company has fuel surcharge
agreements with a majority of its customers. However, not all increases in fuel
prices will be fully offset by these surcharges.
On December 18, 2001, the Company entered into an agreement with Swift
Transportation Services, Inc. ("Swift") which will allow the Company's tractors
to fuel at five of Swift's terminals that have excess fueling capacity. The
Company's majority stockholder is also the Chief Executive Officer and a
significant stockholder of Swift. The Company will purchase and deliver fuel to
these sites (similar to what is done for Company operated terminals) and pay a
per gallon fee to Swift for pumping and storage services. The Company will
benefit to the extent it is able to fuel at Swift's sites as fuel at bulk
fueling locations is generally less expensive than that purchased over the road.
Regulation
The Company is a common and contract motor carrier of general
commodities. Historically, the Interstate Commerce Commission (the "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 (the "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 employee and independent contractor drivers also 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
Environmental Protection Agency ("EPA") and similar state regulatory agencies,
governing the management of hazardous wastes, other discharge of pollutants into
the air and surface and underground waters, and the disposal of certain
substances. These regulations extend to the above ground and underground fuel
storage tanks located at each of the Company's terminal facilities. All of the
Company's tanks are of double hull construction in accordance with EPA
requirements and equipped with monitoring devices that constantly monitor for
leakage. Management is not aware of any fuel spills or hazardous substance
contamination on its properties and believes that its operations are in material
compliance with current laws and regulations.
Item 2. PROPERTIES
The Company operates terminals and driver recruitment offices at four
locations. The Company's headquarters and primary terminal is located on 55
acres near the intersection of Interstates 15 and 80 in Salt Lake City, Utah.
This facility includes a 60,000 square foot office building housing all
operations and administrative personnel and maintenance facilities and a driver
center covering approximately 97,000 square feet. The Company's additional
terminal and driver recruitment facilities include owned locations in Fontana,
California; and Atlanta, Georgia; and a leased location in Denver, Colorado. The
Company leases trailer drop yards at Tulare, California and various other
locations. All terminals have modern fuel facilities with environmental
monitoring equipment. During fiscal 2001, the Company also operated terminals in
Albuquerque, New Mexico; Phoenix, Arizona; Katy, Texas and New London,
Wisconsin. The Albuquerque, New London and Katy terminals were leased terminals
that were closed at various times during fiscal 2001 and all operations were
transferred to other terminals. The Phoenix terminal was closed during fiscal
2001 and sold in November 2001.
The available acreage at the Company's headquarters will accommodate
future expansion, and the facility has been designed so that additions can be
constructed to serve the Company's foreseeable future needs. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
Item 3. LEGAL PROCEEDINGS
The Company and one of its officers and directors, and certain of its
former officers and directors have been named as defendants in a securities
class action filed in the United States District Court for the District of Utah,
Caprin v. Simon Transportation Services, Inc., et al., No. 2:98CV 863K (filed
December 3, 1998). Plaintiffs in this action allege that defendants made
material misrepresentations and omissions during the period February 13, 1997
through April 2, 1998 in violation of Sections 11, 12(2) and 15 of the
Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 and Rule 10b-5 promulgated thereunder. On September 27, 2000, the
District Court dismissed the case with prejudice. Plaintiffs have appealed the
dismissal of this action to the United States Court of Appeal for the Tenth
Circuit, which will hear oral arguments on the matter on January 15, 2002. The
Company intends to vigorously defend this action.
On March 13, 2001, a Company-owned tractor-trailer collided with a
pickup truck in an intersection in Dumas, Texas. A lawsuit has been filed on
behalf of an injured passenger in the pickup truck and her family in the United
States District Court for the Northern District of Texas (Case No.
2-01CV-0194J), seeking actual and punitive damages from the Company and its
former employee/driver. The Company is cooperating with its outside counsel and
insurance carriers in an effort to resolve this matter. Discovery is ongoing in
the case. Unless this matter is resolved through mediation, the parties are
expected to proceed to trial in February 2002. Although the alleged damages in
this matter are very substantial and a risk of punitive damage exposure does
exist, the Company and its counsel believe the facts surrounding the accident do
not warrant punitive damages and that the Company will be able to resolve this
matter within the limits of its insurance policies. Accordingly, the Company
does not expect this litigation to have a material impact on the Company's
results of operations or financial position.
On August 17, 2001, the State of California filed suit against the
Company in the Superior Court of California, County of Sacramento (Case No.
01AS04951) in relation to damage to the state capitol of California arising from
an accident involving a Company driver and truck. The lawsuit requests both
compensatory and punitive damages. Two of the Company's insurers have already
paid their policy limits of $5.75 million in partial satisfaction of the State's
property damage. The State's complaint represents an attempt to collect the
balance of property damage, estimated to be between $6 and $10 million. The
Company is cooperating with its insurance carrier in defense of action, which is
at a very preliminary stage. Management believes that it is unlikely that the
Company will be held liable for punitive damages in this action and further
believes that the Company will resolve the matter within the limits of insurance
policies. Accordingly, the Company does not expect this litigation to have a
material impact on the Company's results of operations or financial position.
On December 27, 2001, Dime Commercial Credit ("Dime"), one of the
Company's lessors, filed a suit against the Company in the Third Judicial
District Court of Salt Lake County, State of Utah (Civil No. 010911262). The
lawsuit asserts that the Company is in default under the lease agreements held
by Dime and seeks judgments against the Company. The requested judgments include
the return to Dime of all equipment under the lease agreements, payment of
delinquent monthly payments, payment of the stipulated loss value as defined and
payment of other fees and costs. The Company is currently preparing its response
to the lawsuit. Management estimates the potential range of exposure related to
this obligation is $1.5 to $3.0 million.
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.
Management is not aware of any claims or threatened claims that reasonably would
be expected to exceed insurance limits or have a materially adverse effect upon
the Company's results of operations or financial position.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended September 30, 2001,
no matters were submitted to a vote of security holders.
PART II
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 NASDAQ symbol SIMN. The following
table sets forth for the calendar periods indicated the range of high and low
bid quotations for the Company's Class A Common Stock as reported by NASDAQ for
the fiscal years ended September 30, 2000 and 2001.
Period High Low
- ---------------------------- ------------- -------------
Calendar Year 1999
4th Quarter $6.750 $4.500
Calendar Year 2000
1st Quarter $6.125 $4.453
2nd Quarter $6.438 $4.875
3rd Quarter $7.375 $4.938
4th Quarter $6.500 $4.563
Calendar Year 2001
1st Quarter $6.016 $4.750
2nd Quarter $5.900 $3.220
3rd Quarter $5.000 $1.600
The prices reported reflect interdealer quotations without retail
mark-ups, mark-downs or commissions, and may not represent actual transactions.
As of December 31, 2001, the Company had 86 stockholders of record of its common
stock. However, the Company believes that it has approximately 1,500 beneficial
holders of common stock including shares 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 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.
Item 6. SELECTED FINANCIAL AND OPERATING DATA
The selected consolidated financial data presented below reflect the
consolidated financial position and results of operations of Simon
Transportation Services Inc. and its subsidiaries. The selected consolidated
financial data are derived from the Company's consolidated financial statements
and should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's consolidated
financial statements and notes thereto included elsewhere herein.
Fiscal Years Ended September 30,
--------------------------------------------------------------
(In thousands, except share, per share amounts & 2001 2000 1999 1998 1997
operating data) ---- ---- ---- ---- ----
Statement of Operations Data:
Operating revenue................................. $278,818 $231,397 $209,143 $193,507 $155,296
--------------------------------------------------------------
Operating expenses:
Salaries, wages, and benefits................... 109,805 94,240 90,876 80,500 60,504
Fuel and fuel taxes............................. 59,686 51,190 37,262 35,281 30,069
Operating supplies and expenses................. 39,418 31,576 27,872 26,156 19,289
Taxes and licenses.............................. 9,400 7,830 7,319 6,557 5,197
Insurance and claims............................ 16,725 10,352 6,591 5,217 3,404
Communications and utilities.................... 5,621 4,039 4,239 3,946 2,550
Depreciation and amortization................... 10,283 4,122 4,466 4,728 5,396
Purchased transportation........................ 18,234 -- -- -- --
Rent............................................ 42,910 37,947 34,363 28,987 17,143
Loss on lease residual guarantees............... 6,357 -- -- -- --
--------------------------------------------------------------
Total operating expenses...................... 318,439 241,296 212,988 191,372 143,552
--------------------------------------------------------------
Operating earnings (loss)..................... (39,621) (9,899) (3,845 2,135 11,744
Gain on sale of real property..................... -- -- -- -- 1,896
Interest expense.................................. (4,420) (1,505) (1,471) (1,818) (1,762)
Other income (expense), net....................... (285) 83 118 318 628
--------------------------------------------------------------
Earnings (loss) before income taxes and
cumulative effect of accounting change........... (44,326) (11,321) (5,198) 635 12,506
(Provision) benefit for income taxes.............. -- 4,075 1,965 (297) (4,727)
--------------------------------------------------------------
Earnings (loss) before cumulative effect
of accounting change............................. (44,326) (7,246) (3,233) 338 7,779
Cumulative effect of accounting change for
accrued claims payable, net of tax
benefit of $2,173................................ -- (3,862) -- -- --
--------------------------------------------------------------
Net earnings (loss)............................... (44,326) (11,108) (3,233) 338 7,779
Dividends related to convertible preferred stock.. (3,727) -- -- -- --
--------------------------------------------------------------
Net earnings (loss) attributable to
common stockholders.............................. $(48,053) $(11,108) $ (3,233) $ 388 $ 7,779
==============================================================
Diluted cumulative effect of accounting
change per common share....................... -- (0.63) -- -- --
==============================================================
Diluted net earnings (loss) per common share...... $ (7.86) $ (1.82) $ (0.53) $ 0.05 $ 1.33
==============================================================
Diluted weighted average shares outstanding....... 6,114,986 6,110,213 6,116,815 6,270,734 5,864,043
==============================================================
Balance Sheet Data (at end of period):
Net property and equipment........................ $ 83,796 $ 49,404 $ 57,648 $ 64,618 $ 71,154
Total assets...................................... 129,696 91,107 96,730 99,526 107,704
Debt and capitalized lease obligations, including
current portion................................. 74,538 19,814 21,623 21,206 32,791
Stockholders' equity*............................. 9,126 44,844 55,944 59,699 59,849
[* includes preferred stock]
Fiscal Years Ended September 30,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Operating Data:
Operating ratio1.................................. 114.2% 104.3% 101.8% 98.9% 92.4%
Average revenue per loaded mile................... $1.34 $1.30 $1.26 $1.25 $1.25
Average revenue per total mile.................... $1.18 $1.16 $1.11 $1.11 $1.10
Average revenue per tractor per week.............. $2,455 $2,493 $2,478 $2,510 $2,627
Empty miles percentage............................ 11.9% 10.6% 12.0% 11.8% 11.9%
Average length of haul in miles................... 1,131 1,067 1,017 1,026 1,001
Weighted average tractors during period........... 2,204 1,785 1,635 1,494 1,142
Tractors at end of period......................... 2,330 1,932 1,693 1,655 1,344
Trailers at end of period......................... 3,346 2,468 2,424 2,455 1,998
- ----------------------------
1Operating expenses as a percentage of revenue.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Except for the historical information contained herein, the discussion
in this annual report on Form 10-K contains forward-looking statements that
involve risk, assumptions, and uncertainties that are difficult to predict.
Words such as "anticipate," "believe," "estimate," "project," "may," "could,"
"expects," "likely," variations of these words, and similar expressions, are
intended to identify such forward-looking statements. Such statements are based
upon the current beliefs and expectations of the Company's management and are
subject to significant risks and uncertainties. The Company claims the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995 for all forward-looking
statements. The Company's actual results could differ materially from those
discussed herein. Without limitation, factors that could cause or contribute to
such differences include economic recessions or downturns in customers' business
cycles, excessive increases in capacity within truckload markets, surplus
inventories, decreased demand for transportation services offered by the
Company, increases or rapid fluctuations in inflation, interest rates, fuel
prices and fuel hedging, the availability and costs of attracting and retaining
qualified drivers and owner-operators, increases in insurance premiums and
deductible amounts relating to accident, cargo, workers' compensation, health,
and other claims, seasonal factors such as harsh weather conditions that
increase operating costs, the resale value of used equipment, the Company's
ability to access adequate sources of capital, and the ability to negotiate,
consummate, and integrate acquisitions.
The Company provides nationwide, predominantly temperature-controlled
truckload transportation for numerous major shippers. In recent years, much of
the Company's growth has resulted from earning core carrier status with major
shippers and meeting the demands of these shippers for additional equipment. The
Company has grown to $278.8 million in revenue for its fiscal year ended
September 30, 2001, from $155.3 million in revenue for fiscal 1997, a compounded
annual growth rate of 15.8%.
During fiscal year 1999, management deferred deliveries of new tractors
to better match the anticipated availability of drivers. This reduced revenue
growth for the year to 8%. The Company experienced financial and operating
difficulties due to driver turnover rates far in excess of historical averages
and the fact that driver pay increases effective in fiscal 1998 were not offset
by increases in the freight rates charged by the Company. In July 1999, the
Company reduced its shop and administrative personnel by approximately 25%.
During fiscal year 2000, revenue growth was 11%. Despite this growth,
the Company did not achieve profitability because of high fuel prices and
increased driver turnover. Accident claims, repair expenses, recruiting costs,
and low miles per tractor increased the Company's losses and the Company
experienced the highest driver turnover in the Company's history.
During fiscal year 2000, in connection with a change in controlling
ownership and management, the Company changed its method of accounting for its
accrual for accident and workers' compensation claims. Effective October 1,
1999, the Company adopted a fully-developed claims expense estimate based on an
actuarial computation of the ultimate liability. Both the method formerly used
by the Company and the fully-developed method are acceptable under generally
accepted accounting principles (GAAP), although the fully-developed method is
preferable. The cumulative effect of the accounting change was $3.9 million, net
of an income tax benefit of $2.2 million.
During fiscal year 2001, revenue growth was 21%. This growth was
achieved primarily through the acquisition of a portion of the trucking related
assets of Westway Express, Inc. ("Westway") on January 22, 2001 and a portion of
the trucking related assets of Gerald E. Ort Trucking, Inc. ("Ort") on March 1,
2001. While the Company acquired significant customer relationships, the
integration of these acquisitions proved to be problematic. The Company's
deadhead percentage was higher than historically experienced for much of fiscal
2001. Additionally, the Company suffered from high fuel costs for most of fiscal
2001 as well as high levels of driver turnover and negative claims experience.
During the latter part of fiscal 2001, the Company started to benefit from
falling fuel prices, reduced driver turnover and deadhead percentages. However
the weakness in the freight market and the issues referenced above resulted in a
significant loss from operations in fiscal 2001.
Results of Operations
The following table sets forth the percentage relationship of certain
items to operating revenue for the years indicated:
Fiscal Years Ended
September 30,
----------------------------------
2001 2000 1999
---------- ----------- ----------
Operating revenue.............................................................. 100.0% 100.0% 100.0%
---------- ----------- ----------
Operating expenses:
Salaries, wages, and benefits................................................ 39.4 40.7 43.5
Fuel and fuel taxes.......................................................... 21.4 22.1 17.8
Operating supplies and expenses.............................................. 14.1 13.6 13.3
Taxes and licenses........................................................... 3.4 3.4 3.5
Insurance and claims......................................................... 6.0 4.5 3.2
Communications and utilities................................................. 2.0 1.7 2.0
Depreciation and amortization................................................ 3.7 1.8 2.1
Purchased transportation..................................................... 6.5 -- --
Rent......................................................................... 15.4 16.4 16.4
Loss on lease residual guarantees............................................ 2.3 -- --
---------- ----------- ----------
Total operating expenses.................................................... 114.2 104.3 101.8
---------- ----------- ----------
Operating loss................................................................. (14.2) (4.3) (1.8)
Interest expense............................................................... (1.6) (0.7) (0.7)
Other income (expense), net.................................................... (0.1) 0.1 0.1
---------- ----------- ----------
Loss before income taxes and
cumulative effect of accounting change..................................... (15.9) (4.9) (2.4)
Benefit for income taxes....................................................... -- 1.8 0.9
---------- ----------- ----------
Loss before cumulative effect of accounting change............................. (15.9) (3.1) (1.5)
Cumulative effect of accounting change, net of income tax benefit.............. -- (1.7) --
---------- ----------- ----------
Net loss....................................................................... (15.9) (4.8) (1.5)
Dividends related to convertible preferred stock............................... (1.3) -- --
---------- ----------- ----------
Net loss attributable to common shareholders................................... (17.2)% (4.8)% (1.5)%
========== =========== ==========
Comparison of fiscal year ended September 30, 2001, with fiscal year ended
September 30, 2000.
Operating revenue increased $47.4 million (20.5%), to $278.8 million
during the 2001 fiscal year from $231.4 million during the 2000 fiscal year. The
increase in revenue was primarily attributable to a 23.5% increase in the
weighted average number of tractors to 2,204 during the 2001 fiscal year from
1,785 during the 2000 fiscal year. Average revenue per tractor per week
decreased to $2,455 during the 2001 fiscal year from $2,493 during the 2000
fiscal year. Average revenue per loaded mile increased to $1.34, $1.27 excluding
fuel surcharge, during the 2001 fiscal year from $1.30, $1.26 excluding fuel
surcharge, in the 2000 fiscal year. However average miles per tractor per week
decreased to 2,081 in fiscal 2001 from 2,149 in fiscal 2000, which more that
offset the increase in revenue per loaded mile. The increase in the weighted
average number of tractors during fiscal 2001 was primarily the result of a
purchase of a portion of the trucking related assets of Westway and Ort and
growth in the Company's owner-operator fleet. The Company plans to adjust its
fleet size to better reflect current market conditions during fiscal 2002 by not
replacing certain tractors which will be returned to the lessor upon lease
maturity. As a result, the Company expects to reduce its tractor fleet by at
least 120 tractors during fiscal 2002.
Salaries, wages and benefits increased $15.6 million (16.6%), to $109.8
million in the 2001 fiscal year from $94.2 million in the 2000 fiscal year. As a
percentage of revenue, salaries, wages, and benefits decreased to 39.4% during
the 2001 fiscal year from 40.7% during the 2000 fiscal year. Management
announced a driver wage increase of two cents per mile effective November 1,
2000. One cent of the increase applies to all drivers at all levels and another
cent can be attained based upon a monthly mileage target. Additionally,
management announced a five cent per mile increase in driver wages effective
April 1, 2001. In response to continued operating losses, the Company reduced
its headcount by approximately 50 administrative and shop personnel in September
2001. The Company also reduced wages for all remaining salaried administrative,
office and shop personnel by 10% effective September 1, 2001. The
administrative, office and shop personnel can earn the 10% and more back as a
bonus, conditional upon the Company achieving certain operational and financial
objectives. Additionally, effective September 1, 2001 the Company adjusted its
driver pay structure to reward longer term drivers.
In early fiscal 2001, the Company implemented an owner-operator driver
program. As of September 30, 2001, the Company had 312 owner-operator tractors
under this program. Owner-operators are paid a flat rate per mile and are
responsible for all associated expenses, including financing costs, fuel,
maintenance, insurance and certain taxes. Amounts paid to owner-operators are
classified as "Purchased Transportation" in the accompanying Consolidated
Statements of Operations. Accordingly, a portion of the costs that would have
been classified as wages are now classified as purchased transportation. This
increase in the number of owner-operator tractors in the fleet more than offset
the driver wage increases and contributed to the decrease in salaries, wages and
benefits.
Fuel and fuel taxes increased $8.5 million (16.6%), to $59.7 million in
the 2001 fiscal year from $51.2 million in the 2000 fiscal year. As a percentage
of revenue, fuel and fuel taxes decreased to 21.4% during the 2001 fiscal year
from 22.1% during the 2000 fiscal year, principally as a result of the increase
in the Company's owner-operator fleet. This was partially offset by higher fuel
prices in most of the 2001 period as compared with the 2000 period. The Company
has agreements in place with a substantial number of customers who have agreed
to pay fuel surcharges to help offset the escalation in fuel prices. However,
increased fuel prices were not fully offset by these surcharges.
Operating supplies and expenses increased $7.8 million (24.7%), to
$39.4 million in the 2001 fiscal year from $31.6 million in the 2000 fiscal
year. As a percentage of revenue, operating supplies and expenses increased to
14.1% during the 2001 fiscal year from 13.6% during the 2000 fiscal year. The
increase is primarily attributable to the increased recruiting and other costs
associated with driver turnover.
Taxes and licenses increased $1.6 million (20.5%), to $9.4 million in
the 2001 fiscal year from $7.8 million in the 2000 fiscal year. As a percentage
of revenue, taxes and licenses remained essentially constant at 3.4% during both
the 2001 and 2000 fiscal years. The Company provides base licensing for each of
the owner-operator tractors.
Insurance and claims increased $6.3 million (60.6%), to $16.7 million
in the 2001 fiscal year from $10.4 million in the 2000 fiscal year. As a
percentage of revenue, insurance and claims increased to 6.0% for the 2001
fiscal year compared to 4.5% during the 2000 fiscal year, primarily as a result
of increased claims associated with driver turnover.
Communications and utilities increased $1.6 million (40.0%), to $5.6
million in the 2001 fiscal year from $4.0 million in the 2000 fiscal year. As a
percentage of revenue, communications and utilities increased to 2.0% for the
2001 fiscal year compared to 1.7% during the 2000 fiscal year. The Company pays
a fixed base charge per tractor for its satellite communications. The Company
increased its fleet size with the Westway and Ort acquisitions, but experienced
lower utilization of its equipment. Therefore, revenue did not increase
proportionately with the increase in fixed satellite communication charges
associated with a larger fleet. In addition, the Company incurred higher
communication charges associated with the operation of new terminal facilities
acquired in the Westway and Ort acquisitions.
Depreciation and amortization increased $6.2 million (151.2%), to $10.3
million in the 2001 fiscal year from $4.1 million in the 2000 fiscal year. As a
percentage of revenue, depreciation and amortization (adjusted for the net loss
on sale of equipment) increased to 3.7% during the 2001 fiscal year from 1.8%
during the 2000 fiscal year primarily because of amortization expense on revenue
equipment acquired under capitalized lease obligations during fiscal 2001.
Depreciation and amortization (unadjusted for the net loss on disposition of
equipment) remained constant at 2.6% ($7.2 million) during the 2001 fiscal year
compared to 2.6% of revenue ($6.0 million) during the 2000 fiscal year.
Depreciation and amortization was adjusted for a $3.0 million net loss on the
disposition of revenue equipment during the 2001 fiscal year compared with a
$1.9 million net gain during the 2000 fiscal year.
Purchased transportation increased to $18.2 million in the 2001 fiscal
year from zero in the 2000 fiscal year. As a percentage of revenue, purchased
transportation increased to 6.5% during the 2001 fiscal year from 0% during the
2000 fiscal year primarily as a result of the Company's new emphasis on building
its owner-operator fleet. The Company had 312 owner-operator tractors in its
fleet at September 30, 2001.
Rent increased $4.9 million (12.9%), to $42.9 million in the 2001
fiscal year from $38.0 million in the 2000 fiscal year. As a percentage of
revenue, rent decreased to 15.4% during the 2001 fiscal year from 16.4% during
the 2000 fiscal year. This decrease was primarily attributable to the shift from
Company owned tractors to tractors supplied by owner-operators, and the use of
capitalized leases as a financing source during fiscal 2001. Prior to fiscal
2001, the Company primarily utilized operating leases because of more favorable
terms. However, most of the revenue equipment additions in fiscal 2001 were
financed under capitalized leases.
The Company has guaranteed a substantial portion of the residual values
on all of its leased tractors and trailers. These residual guarantees total
approximately $126.1 million at September 30, 2001. Based upon current market
prices for used tractors and trailers, management estimates that the difference
between the residual guarantees and the projected value of the equipment at the
termination of the leases is approximately $25.0 million. Effective August 1,
2001, the Company began accruing this potential liability over the remaining
life of the leases in accordance with EITF 96-21. As of September 30, 2001, the
Company has recorded an accrued liability for guaranteed lease residuals of $6.4
million. Prior to August 1, 2001, it was not probable that any residual
guarantee payments would be required. The remainder of the estimated loss (as
adjusted for future market conditions) will be accrued over the remaining terms
of the related leases. Assuming the used equipment markets maintain their
current levels, management expects it will accrue additional liability for
guaranteed residuals of $12.5 million in fiscal 2002.
As a result of the foregoing, the Company's operating ratio increased
to 114.2% during the 2001 fiscal year from 104.3% during the 2000 fiscal year.
Interest expense increased $2.9 million (193.3%), to $4.4 million in
the 2001 fiscal year from $1.5 million in the 2000 fiscal year. As a percentage
of revenue, interest expense increased to 1.6% during the 2001 fiscal year from
0.7% during the 2000 fiscal year primarily as a result of a majority of the
Company's new leases during fiscal 2001 being capitalized for financial
reporting purposes and higher average debt balances.
Other income (expense) changed to expense of $0.3 million in fiscal
2001 from income of $0.1 million in fiscal 2000 primarily as a result of the
Company accruing late fees and penalties on past due operating lease payments.
In fiscal 2000, other income consisted primarily of interest income.
The Company's effective combined federal and state income tax rate for
the 2001 and 2000 fiscal years was 36.0%. However, because of the Company's
current financial condition, the Company has recorded a valuation allowance to
reduce the 2001 tax benefit to zero.
During the year ended September 30, 2001, the Company recorded a
non-cash dividend related to the issuance of Series I and II preferred stock in
the amount of approximately $3.6 million representing the value of the
beneficial conversion feature. The beneficial conversion feature was calculated
for financial reporting purposes based on the difference between the portion of
the total proceeds allocated to the Series I and II preferred shares and the
closing market price of the Company's common stock on the date the transaction
was consummated. Additionally, the Series I and II preferred stock carry a
dividend rate of 10 percent per annum.
As a result of the factors described above, the Company's net loss
attributable to common stockholders increased $36.9 million to a net loss of
$48.1 million during the 2001 fiscal year, or $7.86 per share, from a net loss
attributable to common stockholders of $11.1 million during the 2000 fiscal
year, or $1.82 per share. As a percentage of revenue, net loss attributable to
common stockholders was 17.2% in the 2001 fiscal year compared with net loss
attributable to common stockholders of 4.8% in the 2000 fiscal year.
Comparison of fiscal year ended September 30, 2000, with fiscal year ended
September 30, 1999.
Operating revenue increased $22.3 million (10.6%), to $231.4 million
during the 2000 fiscal year from $209.1 million during the 1999 fiscal year. The
increase in revenue was primarily attributable to a 9.2% increase in the
weighted average number of tractors to 1,785 during the 2000 fiscal year from
1,635 during the 1999 fiscal year. Average revenue per tractor per week
increased to $2,493 during the 2000 fiscal year from $2,478 during the 1999
fiscal year due to an increase in average revenue per loaded mile to $1.30,
$1.26 excluding fuel surcharge, during the 2000 fiscal year from $1.26 in the
1999 fiscal year.
Salaries, wages and benefits increased $3.3 million (3.7%), to $94.2
million in the 2000 fiscal year from $90.9 million in the 1999 fiscal year. As a
percentage of revenue, salaries, wages and benefits decreased to 40.7% during
the 2000 fiscal year from 43.5% during the 1999 fiscal year. The decrease is
primarily attributable to a reduction in the Company's shop and administrative
personnel in July 1999, as the Company reduced its non-driver personnel, mostly
from the shop area, by approximately 25%. Management announced a driver wage
increase of two cents per mile effective November 1, 2000. One cent of the
increase applies to all drivers at all levels and another cent can be attained
based upon a monthly mileage target.
Fuel and fuel taxes increased $13.9 million (37.4%), to $51.2 million
in the 2000 fiscal year from $37.3 million in the 1999 fiscal year. As a
percentage of revenue, fuel and fuel taxes increased to 22.1% during the 2000
fiscal year from 17.8% during the 1999 fiscal year, principally as a result of
higher fuel prices in the 2000 period as compared with the 1999 period. The
Company has agreements in place with a substantial number of customers who have
agreed to pay fuel surcharges to help offset the escalation in fuel prices.
However, increased fuel prices will not be fully offset by these surcharges.
Operating supplies and expenses increased $3.7 million (13.3%), to
$31.6 million in the 2000 fiscal year from $27.9 million in the 1999 fiscal
year. As a percentage of revenue, operating supplies and expenses increased to
13.6% during the 2000 fiscal year from 13.3% during the 1999 fiscal year. The
increase is principally attributable to the increased recruiting costs
associated with driver turnover, primarily in the fourth quarter.
Taxes and licenses increased $0.5 million (7.0%), to $7.8 million in
the 2000 fiscal year from $7.3 million in the 1999 fiscal year. As a percentage
of revenue, taxes and licenses remained essentially constant at 3.4% during the
2000 fiscal year compared to 3.5% of revenue during the 1999 fiscal year.
Insurance and claims increased $3.8 million (57.1%), to $10.4 million
in the 2000 fiscal year from $6.6 million in the 1999 fiscal year. As a
percentage of revenue, insurance and claims increased to 4.5% for the 2000
fiscal year compared to 3.2% during the 1999 fiscal year, primarily as a result
of increased claims associated with driver turnover.
Communications and utilities decreased $0.2 million (4.7%), to $4.0
million in the 2000 fiscal year from $4.2 million in the 1999 fiscal year. As a
percentage of revenue, communications and utilities decreased to 1.7% for the
2000 fiscal year compared to 2.0% during the 1999 fiscal year. The decrease was
primarily attributable to more efficient use of the Company's satellite
communication and long distance services. The Company reduced its long distance
phone rates by over 40% from the 1999 fiscal year.
Depreciation and amortization decreased $0.4 million (7.7%), to $4.1
million in the 2000 fiscal year from $4.5 million in the 1999 fiscal year. As a
percentage of revenue, depreciation and amortization (adjusted for the net gain
on sale of equipment) decreased to 1.8% during the 2000 fiscal year from 2.1%
during the 1999 fiscal year primarily because of a decrease in the percentage of
the Company's revenue equipment that was owned or acquired under capitalized
leases. Depreciation and amortization (unadjusted for the net gain on sale of
equipment) decreased to 2.6% of revenue ($6.0 million) during the 2000 fiscal
year from 3.2% of revenue ($6.6 million) during the 1999 fiscal year.
Depreciation and amortization was adjusted for a $1.9 million net gain on the
sale of revenue equipment during the 2000 fiscal year compared with a $2.1
million net gain during the 1999 fiscal year.
Rent increased $3.6 million (10.4%), to $38.0 million in the 2000
fiscal year from $34.4 million in the 1999 fiscal year. As a percentage of
revenue, rent remained constant at 16.4% during both the 2000 and 1999 fiscal
years. Substantially all of the Company's revenue equipment was financed through
operating leases. The Company utilized operating leases in fiscal 2000 and prior
years because of more favorable terms.
As a result of the foregoing, the Company's operating ratio increased
to 104.3% during the 2000 fiscal year from 101.8% during the 1999 fiscal year.
Interest expense, remained constant at $1.5 million in both the 2000
and 1999 fiscal years. As a percentage of revenue, interest expense remained
constant at 0.7% during both the 2000 and 1999 fiscal years.
Other income remained constant at $0.1 million in both the 2000 and
1999 fiscal years. As a percentage of revenue, other income remained constant at
0.1% during both the 2000 and 1999 fiscal years.
The Company's effective combined federal and state income tax rate for
the 2000 fiscal year was 36.0% compared to 37.8% for the 1999 fiscal year. The
Company reduced its effective rate because of state franchise and gross receipts
taxes payable even though the Company experienced a net loss in fiscal 2000. The
Company has utilized all available loss carrybacks in prior years. The 2000 loss
will carry forward.
During fiscal year 2000, the Company changed its method of accounting
for its accrual for accident and workers' compensation claims. Effective October
1, 1999, the Company adopted a fully-developed claims expense based on an
actuarial computation of the ultimate liability. Both the method formerly used
by the Company and the fully-developed method are acceptable under GAAP,
although the fully-developed method is preferable. The cumulative effect of the
accounting change was $3.9 million, net of an income tax benefit of $2.2
million.
As a result of the factors described above, net loss increased $7.9
million to a net loss of $11.1 million during the 2000 fiscal year, or $1.82 per
share, from a net loss of $3.2 million during the 1999 fiscal year, or $0.53 per
share. As a percentage of revenue, net loss was 4.8% of revenue in the 2000
fiscal year compared with net loss of 1.5% of revenue in the 1999 fiscal year.
Liquidity and Capital Resources
The Company's performance during fiscal 2001 was negatively impacted by
difficulties in assimilating two acquisitions, high fuel costs and adverse
claims experience. Additionally, the financial results were affected by
increased costs associated with attracting and retaining qualified drivers and
lower asset productivity. Industry conditions remained severe due to a slowdown
in the freight-moving economy, low used tractor values and increased insurance
costs. The Company's overall liquidity position has been negatively impacted by
the economic environment that prevailed through fiscal 2001 and continues into
fiscal 2002.
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, equipment leases from third-party
lessors, borrowings under its line of credit, and cash flows from operations.
The Company's primary sources of liquidity are borrowings and leases with
financial institutions and equipment manufacturers. During the 2001, 2000, and
1999 fiscal years, the Company financed most of its tractors with capital and
operating leases. During the fourth fiscal quarter of 2001, the Company
reclassified certain of these leases of revenue equipment from operating leases
to capitalized leases, resulting in approximately $42.0 million of equipment
purchases becoming an on-balance sheet liability. If the restructuring of leases
discussed below is successful, additional leases are expected to be reclassified
as capitalized instead of operating leases.
Net cash used in operating activities was $19.7 million, $7.6 million,
and $1.6 million for fiscal years 2001, 2000, and 1999, respectively. Accounts
receivable increased $6.6 million, $7.1 million, and $2.6 million for fiscal
years 2001, 2000, and 1999, respectively. The average age of the Company's
accounts receivable was 45, 42, and 39 days for fiscal years 2001, 2000, and
1999, respectively.
Net cash (used in) provided by investing activities was ($3.6) million,
$4.1 million, and $2.5 million, for fiscal years 2001, 2000, and 1999,
respectively, and consisted of purchases of property and equipment, which were
offset in 2001 by net proceeds from the sale of property and equipment. Because
the Company is extending the trade cycles for its revenue equipment, the Company
expects to decrease its capital expenditures during fiscal 2002. Management
expects that the majority, if not all, of its revenue equipment replacements
during fiscal 2002 will occur through additions to the Company's owner-operator
fleet. The Company does not currently have any commitments to acquire revenue
equipment during fiscal 2002. The Company expects any capital expenditures in
fiscal 2002 will be funded with leases and borrowings. However, there can be no
assurance that the Company will be able to obtain the financing necessary to
acquire replacement equipment or that it will be able to contract with
sufficient owner-operators to replace retired revenue equipment.
Net cash provided by (used in) financing activities was $19.9 million,
($1.8) million, and ($0.1) million, for fiscal years 2001, 2000, and 1999,
respectively. Primary sources of cash were $8.8 million from the sale of
convertible preferred stock in fiscal 2001; borrowings of $13.0 million from a
mortgage on the Company's Salt Lake City headquarters and terminal in fiscal
2001 and $2.3 million, $6.0 million and $10.0 million on the Company's
line-of-credit in fiscal years 2001, 2000 and 1999, respectively. Primary uses
of cash were principal payments on borrowings of $21.3 million, $7.8 million,
and $9.6 million under the Company's line of credit, long-term debt and
capitalized lease agreements for fiscal years 2001, 2000, and 1999,
respectively. During fiscal year 1999, the Company purchased 95,500 shares of
Class A Common Stock at an average market price of $5.46 per share for a total
cash outlay of $522,000.
The maximum amount committed under the Company's line of credit at
September 30, 2001 was $30 million. As of September 30, 2001, the Company had
drawn $18.3 million against the line. Based upon the level of receivables and
the advance rate in place at September 30, 2001, the Company had $5.8 million of
availability on the line of credit. At September 30, 2001, the interest rate on
the line of credit is 0.25 percent above the prime rate, with a minimum rate of
7%. At September 30, 2001, the Company had other outstanding long-term debt and
capitalized lease obligations (including current portions) of approximately
$56.2 million, which is comprised of obligations for the purchase of revenue
equipment and a $13 million mortgage against its Salt Lake City headquarters and
terminal. As of September 30, 2001, the Company's future commitments under
noncancellable operating leases amounted to $51.6 million (excluding guaranteed
residual values). The Company's working capital (deficit) at September 30, 2001,
2000, and 1999 was ($80.2) million (after classification of $69.0 million of
long-term debt and capital lease obligations as current liabilities), $16.0
million, and $17.5 million, respectively.
During August 2001, the Company's continued losses from operations and
negative cash flows forced it to defer making payments on most of its equipment
leases with total obligations outstanding of approximately $183.1 million and
related monthly payments of approximately $3.7 million. The lack of payment on
the Equipment Leases constitutes an event of default under the related lease
agreements. In addition, the default on the Equipment Leases resulted in
defaults on effectively all of the Company's outstanding secured debt, which
consisted principally of its line of credit facility, the mortgage on its Salt
Lake City headquarters and terminal, and all other lease obligations.
The Company's $30 million line of credit is secured by accounts
receivable, inventories of operating supplies, and office furniture and fixtures
and the personal guarantee of the Company's majority stockholder. As a result of
recurring losses, the Company's net worth has fallen below $25 million, which
will decrease the advance rate on the line of credit, unless renegotiated.
During December 2001, the Company met with representatives from most of
its equipment lessors. In connection with these meetings, the Company requested
a restructuring of the Equipment Leases and most of the lessors expressed their
willingness to negotiate a restructure. The proposed restructuring of the
Equipment Leases includes a period of rent moratorium, an extension of the
leases, waiver of outstanding late fees and penalties and revised guaranteed
residual values.
Dime, one of the Company's equipment lessors with total lease
obligations outstanding of approximately $6.4 million has expressed an
unwillingness to renegotiate the terms of its leases. On December 27, 2001, the
Company was served with a lawsuit by Dime. The lawsuit asserts that the Company
is in default under the lease agreements held by Dime and seeks judgments
against the Company. The requested judgments include the return to Dime of all
equipment under the lease agreements, payment of delinquent monthly payments,
payment of the stipulated loss value as defined and payment of other fees and
costs. The Company is currently preparing its response to the lawsuit.
Management estimates the potential range of exposure related to this obligation
is $1.5 to $3.0 million.
The Company is in the process of working through the negotiation and
approval process related to the above restructuring with the remainder of the
equipment lessors and the Company's tractor manufacturer. Management expects
that, if accomplished, this restructuring will be completed during the first
calendar quarter of 2002.
The Company has also met with its line of credit lender regarding a
decrease in the advance rate, which is based upon the Company's net worth. The
line of credit lender has stated a willingness to consider a waiver of the
tangible net worth requirement and maintain the current advance rate for a
period of approximately nine months, at which time the Company's progress will
be reassessed. If finalized, approval of this waiver of the tangible net worth
requirement is expected during the first calendar quarter of 2002.
Subject to acceptable restructuring of the Equipment Leases, line of
credit, and tractor trade-in and repurchase terms, the Company's majority
stockholder has been requested and agreed to provide a $15 million line of
credit ("Stockholder Line of Credit"). The Stockholder Line of Credit would be
secured by, and limited with respect to a percentage of the value of, a second
priority position in the Company's accounts receivable, inventories of operating
supplies, office furniture and fixtures and the Company's Fontana, California
and Atlanta, Georgia terminals.
On December 19, 2001, the Company entered into a $3 million secured
short-term loan with its majority stockholder. The proceeds of this loan were
used to meet the annual permitting and licensing requirements for a majority of
the Company's fleet. The loan will either be repaid from cash to be released
from a cash secured letter of credit (once the Company is able to secure a
surety bond) or will be rolled over into the Stockholder Line of Credit.
Even if the restructuring of the equipment leases and line of credit is
successful, the Company's liquidity position and existing credit facilities may
not be sufficient to cover liquidity requirements for the next twelve months and
the Company is facing the prospect of not having adequate funds to operate its
business. As a result, there is substantial doubt as to the Company's ability to
continue as a going concern. In the event the Company's liquidity position is
insufficient to cover its liquidity requirements, the Company may be compelled
to file for bankruptcy protection.
Capital Requirements
The Company plans to reduce its tractor fleet during fiscal 2002.
Certain tractors coming to the end of their lease cycle will not be replaced.
The Company is currently negotiating to have its other remaining tractor and
trailer leases extended for periods of 12 and 24 months, respectively.
A substantial portion of the Company's tractor fleet is covered by
trade-in and repurchase agreements with the manufacturer. The trade-in and
repurchase agreements require the Company to purchase additional tractors in
connection with the trade-ins or repurchases. These trade-in and repurchase
agreements have been structured in alignment with the Company's historic tractor
life cycles. During December 2001, the Company commenced discussions with the
manufacturer of its tractors regarding extension of the trade-in or repurchase
periods as well as the revised trade-in or repurchase values and related
provisions to match the proposed restructured leases.
The Company has guaranteed a substantial portion of the residual values
on all of its leased tractors and trailers. These residual guarantees total
approximately $126.1 million at September 30, 2001. At September 30, 2001, the
Company had residual guarantees due (net of the estimated fair value of related
equipment) on matured equipment leases amounting to $3.1 million. Based upon
current market prices for used tractors and trailers, management estimates that
the difference between the residual guarantees and the projected value of the
equipment at the termination of the leases is approximately $25.0 million.
Effective August 1, 2001, the Company began accruing this potential liability
over the remaining life of the leases in accordance with the EITF 96-21. As of
September 30, 2001, the Company has recorded an accrued liability and a
valuation allowance for guaranteed lease residuals totaling $6.4 million.
The Company is currently exploring options for funding new equipment
acquisitions for replacement equipment. However, there can be no assurance that
the Company will be successful in its negotiations with the manufacturer of its
tractors in extending the trade-in and repurchase agreements or securing
additional funding to purchase new revenue equipment.
Inflation
Inflation has had a minimal effect upon the Company's operations over
the last three fiscal years. However, most of the Company's operating expenses
are inflation-sensitive, with inflation generally producing increased costs of
operation. The Company expects that inflation will affect its costs no more than
it affects those of other truckload carriers.
Seasonality
The Company experiences some seasonal fluctuations in freight volume,
as shipments have historically decreased during the first calendar quarter. In
addition, the Company's operating expenses historically have been higher in the
winter months due to decreased fuel efficiency and increased maintenance costs
associated with colder weather.
Fuel Availability and Cost
The Company actively manages its fuel costs by requiring drivers to
fuel at Company terminals or, whenever possible en route, at service centers
with which the Company has established volume purchasing arrangements. The
Company controls fuel purchases by using its proprietary software and Qualcomm
communications ability to schedule fueling stops and amounts purchased based
upon fuel prices at locations on drivers' routes. The Company historically has
been able to pass through most increases in fuel prices and taxes to customers
in the form of higher rates and fuel surcharges. The Company has fuel surcharge
agreements with a majority of its customers.
On December 18, 2001, the Company entered into an agreement with Swift
which will allow the Company's tractors to fuel at five of Swift's terminals
that have excess fueling capacity. The Company's majority stockholder is also
the Chief Executive Officer and a significant stockholder of Swift. The Company
will purchase and deliver fuel to these sites (similar to what is done for
Company operated terminals) and pay a per gallon fee to Swift for pumping and
storage services. The Company will benefit to the extent it is able to fuel at
Swift's sites as fuel at bulk fueling locations is generally less expensive than
that purchased over the road.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The principal market risks to which the Company is exposed are
fluctuations in fuel prices, interest rates on debt financing (i.e., the risk of
loss arising from adverse changes in market rates and prices) and market values
for used equipment. The Company has not engaged in any fuel hedging
transactions. Thus, the Company is exposed to fluctuations in fuel prices but is
not exposed to any market risk involving hedging costs.
The variable rate debt consists of a revolving line of credit, carrying
an interest rate tied to the prime rate. The line of credit provides for a
minimum interest rate of 7%. This variable interest rate exposes the Company to
the risk that interest rates may rise. At September 30, 2001, the Company's
interest rate on the line of credit was at the minimum rate of 7%. At September
30, 2001, assuming borrowing equal to the $18.3 million drawn on the line of
credit, a one percentage point increase in the prime rate above the minimum
interest rate in the agreement would increase the annual interest expense by
approximately $0.2 million. The proposed Stockholder Line of Credit will carry
interest rate terms similar to the Company's current revolving line of credit.
The equipment financing carries fixed interest rates and includes term notes
payable and capitalized lease obligations totaling approximately $56.9 million.
These fixed interest rates expose the Company to the risk that interest rates
may fall. A one percentage point decline in interest rates would have the effect
of increasing the premium the Company pays over market interest rates by one
percentage point or approximately $0.6 million annually.
As discussed in "Recent Developments", the Company has repurchase
commitments for a substantial portion of the tractors in its fleet at prices
consistent with the guaranteed residual values on its proposed restructured
leases. However, the Company is exposed to fluctuations in market values for
used trailers, to the extent that they differ materially from the guaranteed
residual values on the related equipment at the termination of the lease.
Assuming a fleet of approximately 3,000 trailers, a shortfall in the market
value for used trailers of $100 below the guaranteed residual value would result
in a loss to the Company of $300,000.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's audited financial statements, including its consolidated
balance sheets and consolidated statements of operations, cash flows, and
stockholders' equity, and notes related thereto, are included at pages 29 to 51
of this report. The supplementary quarterly financial data for fiscal years 2001
and 2000 follows.
Quarterly Financial Data:
(in thousands, except per share data)
Fourth Third Second First
Quarter Quarter Quarter Quarter
2001 2001 2001 2001
------------------ ---------------- ------------------- ----------------
Revenue $ 74 508 $ 74,737 $ 64,064 $ 65,509
Operating loss (19,963) (8,716) (8,360) (2,582)
Loss before income
taxes and cumulative effect
of accounting change (22,985) (9,521) (8,827) (2,993)
Net loss attributable to common (26,712) (9,521) (8,827) (2,993)
stockholders
Diluted net loss per share (4.37) (1.56) (1.44) (0.49)
Fourth Third Second First
Quarter Quarter Quarter Quarter
2000 2000 2000 2000
------------------ ---------------- ------------------- ----------------
Revenue $ 61,430 $60,948 $55,159 $53,861
Operating earnings (loss) (10,459) (82) 545 98
Earnings (loss) before income
taxes and cumulative effect
of accounting change (10,805) (418) 122 (221)
Provision (benefit) for income taxes (3,890) (151) 44 (80)
Cumulative effect of
accounting change -- -- -- (3,863)
Net earnings (loss) (6,915) (267) 78 (4,004)
Diluted net earnings (loss) per share $ (1.13) $ (0.04) $ 0.01 $ (0.66)
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
No reports on Form 8-K have been filed within the 24 months prior to
September 30, 2001, 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" and "Section 16(a) Beneficial Ownership Reporting
Compliance" of Registrant's Proxy Statement for the 2001 annual meeting of
stockholders following the fiscal year ended September 30, 2001, 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" 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" of the Proxy Statement is incorporated
herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information respecting certain relationships and transactions of
management set forth under the captions "Compensation Committee Interlocks and
Insider Participation" and "Certain Transactions" 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
Consolidated Statements of Financial Position............................ 29
Consolidated Statements of Operations.................................... 31
Consolidated Statements of Stockholders' Equity.......................... 32
Consolidated Statements of Cash Flows.................................... 33
Notes to Consolidated Financial Statements............................... 34
Report of Independent Public Accountants................................. 52
2. Financial Statement Schedules.
Financial statement schedules are not required because all required information
is included in the financial statements.
(b) Reports on Form 8-K
During the fourth quarter ended September 30, 2001, the Company filed a report
on Form 8-K in connection with the issuance of its Series I Convertible
Preferred Stock and accompanying warrants.
(c) Exhibits
Number Description
------ -----------
3.1 + Articles of Incorporation.
3.2 * Amended and Restated Bylaws.
4.1 + Articles of Incorporation.
4.2 * Amended and Restated Bylaws.
4.3 ^ Certificate of Designation
10.1 + Outside Director Stock Option Plan.
10.2 * Amendment to Outside Director Stock Option Plan
10.3 + Incentive Stock Plan.
10.4 # Amendment No. 2 to the Simon Transportation Services Inc. Incentive
Stock Plan
10.5 * Revised Amendment No. 3 to the Simon Transportation Services
Incentive Stock Plan
10.6 @ Warrant to Purchase Shares of Class A Common Stock dated
September 19, 2000, between Jerry Moyes and Simon Transportation
Services Inc.
10.7 + 401(k) Plan.
10.8 ^ Subscription Agreement for Series I Preferred Shares between the
Company and the Moyes Children's Limited Partnership dated
June 30, 2001
10.9 !! Amended Warrant to Purchase Series I Preferred Shares between the
Company and the Moyes Children's Limited Partnership
dated June 30, 2001
10.10 ^ Transportation Accounts Financing and Security Agreement dated
April 25, 2001, between Associates Transcapital Services and Dick
Simon Trucking, Inc.
10.11 ^ Loan Agreement dated June 21, 2001, between National Life Insurance
Company and Simon Terminal, LLC
10.12 !! Subscription Agreement for Series II Preferred Shares between the
Company and Interstate Equipment Leasing, Inc. dated September 30,
2001
10.13 !! Warrant to Purchase Series II Preferred Shares between the Company
and Interstate Equipment Leasing dated September 30, 2001
21 ^ List of subsidiaries
23 ++ Consent of Arthur Andersen LLP, independent public accountants.
- -------------------------------------------
+ Filed as an exhibit to the registrant's Registration Statement on
Form S-1, Registration No. 33-96876, effective November 17, 1995, and
incorporated herein by reference.
# Filed as an exhibit to the registrant's Definitive Proxy Statement for
the annual meeting held December 19, 1997, Commission File No. 0-27208,
and incorporated herein by reference.
@ Filed as an exhibit to the registrant's Current Report on Form 8-K,
Commission File No. 0-27208, dated October 4, 2000, and incorporated
herein by reference.
* Filed as an exhibit to the registrant's Annual Report on Form 10-K for
the period ended September 30, 2000, Commission File No. 0-27208, dated
January 12, 2001 and incorporated herein by reference.
^ Filed as an exhibit to the registrant's Quarterly Report on Form 10-Q
for the period ended June 30, 2001, Commission File No. 0-27208, dated
August 20, 2001, and incorporated herein by reference.
!! Filed as an exhibit to the registrants Preliminary Proxy
Statement for a special meeting, Commission File No. 0-27208,
and incorporated herein by reference.
++ Filed herewith
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.
SIMON TRANSPORTATION SERVICES INC.
Date: January 14, 2002
-----------------------
By: /s/ Robert T. Goates
-----------------------------
Robert T. Goates
Chief Financial Officer
Date: January 14, 2002
-----------------------
By: /s/ William J. Baker, Jr.
-----------------------------
William J. Baker, Jr.
Controller
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/ Jerry Moyes Chairman of the Board January 14, 2002
- --------------------------------------
Jerry Moyes
/s/ Jon Isaacson Chief Executive Officer (principal operating January 14, 2002
- -------------------------------------- officer); Director
Jon Isaacson
/s/ Kelle A. Simon President; Director January 14, 2002
- --------------------------------------
Kelle A. Simon
/s/ Lou Edwards Director January 14, 2002
- --------------------------------------
Lou Edwards
/s/ Gordon Holladay Director January 14, 2002
- --------------------------------------
Gordon Holladay
SIMON TRANSPORTATION SERVICES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
ASSETS
September 30,
-----------------------------------
2001 2000
-----------------------------------
Current Assets:
Cash $ -- $ 3,331,119
Receivables, net of allowance for doubtful accounts
of $607,000 and $586,000, respectively 36,495,339 29,932,630
Operating supplies 1,302,067 1,330,462
Prepaid expenses and other 2,528,675 2,325,199
Current deferred income tax asset -- 4,332,445
-----------------------------------
Total current assets 40,326,081 41,251,855
-----------------------------------
Property and Equipment, at cost:
Land 8,884,752 8,884,752
Revenue equipment 73,409,529 37,114,744
Buildings and improvements 18,650,478 18,525,612
Office furniture and equipment 9,906,788 9,262,994
-----------------------------------
110,851,547 73,788,102
Less accumulated depreciation and amortization (27,056,006) (24,384,568)
-----------------------------------
83,795,541 49,403,534
-----------------------------------
Other Assets 5,574,182 451,603
-----------------------------------
$ 129,695,804 $ 91,106,992
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 32,164,357 $ 1,841,735
Current portion of capitalized lease obligations 42,373,463 1,595,385
Accounts payable 11,329,148 7,721,099
Accrued liabilities 12,324,242 5,242,894
Accrued operating lease payments 6,809,609 --
Accrued liability for guaranteed lease residuals 6,047,868 --
Accrued claims payable 9,520,721 8,880,638
-----------------------------------
Total current liabilities 120,569,408 25,281,751
-----------------------------------
Long-Term Debt, net of current portion -- 16,376,791
-----------------------------------
Capitalized Lease Obligations, net of current portion -- --
-----------------------------------
Deferred Income Tax Liability -- 4,604,318
-----------------------------------
Commitments and Contingencies (Notes 2, 3 and 8)
Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized:
Series I convertible preferred stock, 162,401 shares issued, with a 4,000,499 --
liquidation preference of $6,841,549
Series II convertible preferred stock, 130,042 shares issued, with a 1,194,935 --
liquidation preference of $2,080,670
Class A common stock, $.01 par value, 20,000,000 shares authorized, 6,291,709 62,917 62,877
and 6,287,709 shares issued, respectively
Class B common stock, $.01 par value, 5,000,000 shares authorized, none issued -- --
Additional paid-in capital 51,865,007 48,285,578
Treasury stock, 176,600 shares at cost (1,053,147) (1,053,147)
Preferred stock warrants 3,559,918 --
Retained deficit (50,503,733) (2,451,176)
-----------------------------------
Total stockholders' equity 9,126,396 44,844,132
-----------------------------------
$ 129,695,804 $ 91,106,992
===================================
<FN>
The accompanying notes to consolidated financial statements are
an integral part of these consolidated financial statements.
</FN>
SIMON TRANSPORTATION SERVICES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30,
----------------------------------------------------------
2001 2000 1999
----------------------------------------------------------
Operating revenue $278,818,242 $231,396,894 $209,143,336
----------------------------------------------------------
Operating expenses:
Salaries, wages, and benefits 109,804,773 94,240,163 90,875,731
Fuel and fuel taxes 59,686,529 51,189,390 37,261,969
Operating supplies and expenses 39,417,911 31,575,822 27,872,046
Taxes and licenses 9,400,414 7,829,742 7,318,915
Insurance and claims 16,724,677 10,352,274 6,591,246
Communications and utilities 5,621,371 4,039,162 4,239,479
Depreciation and amortization 10,282,869 4,121,893 4,466,114
Purchased transportation 18,234,158 -- --
Rent 42,909,852 37,947,272 34,362,746
Loss on lease residual guarantees 6,356,846 -- --
----------------------------------------------------------
Total operating expenses 318,439,400 241,295,718 212,988,246
----------------------------------------------------------
Operating loss (39,621,158) (9,898,824) (3,844,910)
Other income (expense):
Interest expense (4,420,177) (1,505,160) (1,471,426)
Other income (expense) (284,436) 82,652 117,794
----------------------------------------------------------
Loss before income taxes and
cumulative effect of accounting change (44,325,771) (11,321,332) (5,198,542)
Benefit for income taxes -- 4,075,680 1,965,049
----------------------------------------------------------
Loss before cumulative
effect of accounting change (44,325,771) (7,245,652) (3,233,493)
Cumulative effect of accounting change
for accrued claims payable, net of
income tax benefit of $2,172,598 -- (3,862,397) --
----------------------------------------------------------
Net loss $(44,325,771) $(11,108,049) $ (3,233,493)
Dividends related to convertible preferred stock $ (3,726,786) $ -- $ --
----------------------------------------------------------
Net loss attributable to common stockholders $(48,052,557) $(11,108,049) $ (3,233,493)
==========================================================
Basic and diluted cumulative effect of
accounting change per common share $ -- $ (0.63) $ --
==========================================================
Basic and diluted net
loss per common share $ (7.86) $ (1.82) $ (0.53)
==========================================================
Basic and diluted weighted average
common shares outstanding 6,114,986 6,110,213 6,116,815
==========================================================
<FN>
The accompanying notes to consolidated financial statements are
an integral part of these consolidated financial statements.
</FN>
SIMON TRANSPORTATION SERVICES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Series I Series II
Convertible Convertible Class A Class B Additional Preferred Retained Total
Preferred Preferred Common Common Paid-in Treasury Stock Earnings Stockholders'
Stock Stock Stock Stock Capital Stock Warrants (Deficit) Equity
-------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 $ -- $ -- $53,727 $ 9,138 $48,277,256 $ (531,547) $ -- $ 11,890,366 $ 59,698,940
Purchase of 95,500 shares
of Class A Common Stock (521,600) (521,600)
Net loss (3,233,493) (3,233,493)
-------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 -- -- 53,727 9,138 48,277,256 (1,053,147) -- 8,656,873 55,943,847
Issuance of 1,275 shares
of Class A Common Stock
upon exercise of stock
options 12 8,322 8,334
Sale of 913,751 shares of
Class B Common Stock by
major stockholder 9,138 (9,138) --
Net loss (11,108,049) (11,108,049)
-------------------------------------------------------------------------------------------------------
Balance, September 30, 2000 -- -- 62,877 -- 48,285,578 (1,053,147) -- (2,451,176) 44,844,132
Sale of 162,401 shares of
Series I Convertible
Preferred Stock 4,000,499 2,674,183 6,674,682
Sale of 130,042 shares of
Series II Convertible
Preferred Stock 1,194,935 885,735 2,080,670
Series I Convertible
Preferred Stock
beneficial conversion
dividend 2,674,184 (2,674,184) --
Series II Convertible
Preferred Stock
beneficial conversion
dividend 885,735 (885,735) --
Issuance of 4,000 shares
of Class A Common Stock
upon exercise of stock
options 40 19,510 19,550
Preferred stock dividends (166,867) (166,867)
Net loss (44,325,771) (44,325,771)
-------------------------------------------------------------------------------------------------------
Balance, September 30, 2001 $4,000,499 $1,194,935 $62,917 $ -- $51,865,007 $(1,053,147) $3,559,918 $(50,503,733) $ 9,126,396
=======================================================================================================
<FN>
The accompanying notes to consolidated financial statements are
an integral part of these consolidated financial statements.
</FN>
SIMON TRANSPORTATION SERVICES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30,
-------------------------------------------------------
2001 2000 1999
-------------------------------------------------------
Cash Flows From Operating Activities:
Net loss $ (44,325,771) $ (11,108,049) $ (3,233,493)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 10,282,869 4,121,893 4,466,114
Changes in operating assets and liabilities:
Receivables, net (6,562,709) (7,069,945) (2,611,754)
Operating supplies 28,395 137,754 (399,121)
Income taxes receivable -- 1,656,338 936,767
Prepaid expenses and other (203,476) 318,794 (462,013)
Current deferred income tax asset 4,332,445 (3,265,659) (304,323)
Other assets (2,640,159) 274,537 140,981
Accounts payable 3,608,049 1,612,981 1,093,069
Accrued liabilities 6,914,481 1,823,266 231,224
Accrued operating lease payments 6,809,609 -- --
Accrued liability for guaranteed lease residuals 6,047,868 -- --
Accrued claims payable 640,083 6,910,302 66,211
Deferred income tax liability (4,604,318) (3,060,745) (1,491,780)
-------------------------------------------------------
Net cash used in operating activities (19,672,634) (7,648,533) (1,568,118)
-------------------------------------------------------
Cash Flows From Investing Activities:
Purchase of property and equipment (9,971,555) (16,318,070) (10,385,759)
Proceeds from the sale of property and equipment 8,866,525 20,440,223 12,890,002
Payments for acquired assets of Westway and Ort (2,482,420) -- --
-------------------------------------------------------
Net cash (used in) provided by investing activities (3,587,450) 4,122,153 2,504,243
-------------------------------------------------------
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt 30,091,009 -- --
Principal payments on long-term debt (18,459,337) (6,959,631) (7,551,634)
Net borrowings under line-of-credit agreement 2,314,159 6,000,000 10,000,000
Principal payments under capitalized lease obligations (2,791,768) (849,472) (2,030,988)
Net proceeds from issuance of common stock 19,550 8,334 --
Purchase of treasury stock -- -- (521,600)
Net proceeds from issuance of Series I and Series II
preferred stock and warrants 8,755,352 -- --
-------------------------------------------------------
Net cash provided by (used in) financing activities 19,928,965 (1,800,769) (104,222)
-------------------------------------------------------
Net Increase (Decrease) In Cash (3,331,119) (5,327,149) 831,903
Cash at Beginning of Year 3,331,119 8,658,268 7,826,365
-------------------------------------------------------
Cash at End of Year $ -- $ 3,331,119 $ 8,658,268
=======================================================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $ 4,379,611 $ 1,422,508 $ 1,471,426
Cash paid during the year for income taxes 48,578 55,505 32,486
Supplemental Schedule of Noncash Investing and
Financing Activities:
Equipment acquired through capitalized lease obligations 43,569,846 -- --
Preferred stock dividends accrued but not paid 166,867 -- --
<FN>
The accompanying notes to consolidated financial statements are
an integral part of these consolidated financial statements.
</FN>
SIMON TRANSPORTATION SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF THE COMPANY
Simon Transportation Services Inc. was incorporated in Nevada on August
15, 1995 to acquire all of the outstanding capital stock of Dick Simon Trucking,
Inc., a Utah corporation. During 2001, Simon Terminal LLC, an Arizona limited
liability company, was formed as a wholly owned subsidiary of Simon
Transportation Services Inc. for the purpose of holding the real estate assets
related to the Salt Lake City headquarters and terminal and in connection with a
debt financing on the Salt Lake City headquarters and terminal. The accompanying
consolidated financial statements present the consolidated financial position
and results of operations of Simon Transportation Services Inc. and its wholly
owned subsidiaries, Dick Simon Trucking, Inc. and Simon Terminal LLC
(collectively, the "Company"). All intercompany accounts and transactions have
been eliminated in consolidation.
The Company is a truckload carrier that specializes in premium service,
primarily through temperature-controlled transportation predominantly for major
shippers in the U.S. food industry.
(2) OPERATING RESULTS
The Company has incurred net losses of $44.3 million, $11.1 million and
$3.2 million and its operating activities have used $19.7 million, $7.6 million
and $1.6 million of cash during the fiscal years ended September 30, 2001, 2000
and 1999, respectively. As of September 30, 2001, the Company had a working
capital deficit of $80.2 million (after classification of $69.0 million of
long-term debt and capital lease obligations as current liabilities) and was in
default under its lease and debt agreements. The Company has faced and continues
to face several operating challenges, including, among others, a reduced
shipping demand given unfavorable domestic economic conditions, unseated
tractors, decreased market values for used tractors and trailers, increased
claims, challenges in assimilating two acquisitions, high fuel costs and
increased driver payroll costs. These factors have significantly and negatively
impacted the Company's results of operations and liquidity.
During August 2001, the Company's continued losses from operations and
negative cash flows forced it to defer making payments on most of its equipment
leases with total obligations outstanding of approximately $183.1 million and
related monthly payments of approximately $3.7 million (the "Equipment Leases").
The lack of payment on the Equipment Leases constitutes an event of default
under the related lease agreements. In addition, the default on the Equipment
Leases resulted in defaults on effectively all of the Company's outstanding
secured debt, which consisted principally of its line of credit facility, the
mortgage on its Salt Lake City headquarters and terminal, and all other lease
obligations.
The Company's $30 million line of credit is secured by accounts
receivable, inventories of operating supplies, and office furniture and fixtures
and the personal guarantee of the Company's majority stockholder. As a result of
recurring losses, the Company's net worth has fallen below $25 million, which
will decrease the advance rate on the line of credit, unless renegotiated.
The Company has guaranteed a substantial portion of the residual values
on all of its leased tractors and trailers. These residual guarantees total
approximately $126.1 million at September 30, 2001. Based upon current market
prices for used tractors and trailers, management estimates that the difference
between the residual guarantees and the projected market value of the equipment
at the termination of the leases is approximately $25.0 million. Effective
August 1, 2001, the Company began accruing this potential liability over the
remaining life of the leases in accordance with EITF 96-21. As of September 30,
2001, the Company has recorded an accrued liability and a valuation allowance
for guaranteed lease residuals totaling $6.4 million. Prior to August 1, 2001,
it was not probable that any residual guarantee payments would be required. At
September 30, 2001, the Company had residual guarantees due (net of the
estimated fair value of related equipment) on matured equipment leases amounting
to $3.1 million. The Company does not have the cash to pay these residual
guarantees and currently is seeking an extension as discussed below.
During December 2001, the Company met with representatives from most of
its equipment lessors. In connection with these meetings, the Company requested
a restructuring of the Equipment Leases and most of the lessors expressed their
willingness to negotiate a restructure. The proposed restructuring of the
Equipment Leases included a period of rent moratorium, an extension of the
leases, waiver of outstanding late fees and penalties and revised guaranteed
residual values. The Company and its equipment lessors continue to evaluate
restructuring of the Equipment Leases in light of the negotiations with the
Company's tractor manufacturer discussed below.
Dime Commercial Credit ("Dime"), one of the Company's equipment lessors
with total lease obligations outstanding of approximately $6.4 million has
expressed an unwillingness to renegotiate the terms of its leases. On December
27, 2001, the Company was served with a lawsuit by Dime. The lawsuit asserts
that the Company is in default under the lease agreements held by Dime and seeks
judgments against the Company. The requested judgments include the return to
Dime of all equipment under the lease agreements, payment of delinquent monthly
payments, payment of the stipulated loss value as defined and payment of other
fees and costs. The Company is currently preparing its response to the lawsuit.
Management estimates the potential range of exposure related to this obligation
is $1.5 to $3.0 million.
The Company is in the process of working through the negotiation and
approval process related to the above restructuring with the remainder of the
equipment lessors and the Company's tractor manufacturer. Management expects
that, if accomplished, this restructuring will be completed during the first
calendar quarter of 2002. If the Company is successful in restructuring the
Equipment Leases, it is probable that the restructured leases will be accounted
for as capitalized lease obligations in the Company's financial statements (as
opposed to the historic accounting treatment as operating leases for most of the
Equipment Leases).
The Company has also met with its line of credit lender regarding a
decrease in the advance rate, which is based upon the Company's net worth. The
line of credit lender has stated a willingness to consider a waiver of the
tangible net worth requirement and maintain the current advance rate for a
period of approximately nine months, at which time the Company's progress will
be reassessed. Final approval of this waiver of the tangible net worth
requirement is expected during the first calendar quarter of 2002.
A substantial portion of the Company's tractor fleet is covered by
trade-in and repurchase agreements with the manufacturer. The trade-in and
repurchase agreements require the Company to purchase additional tractors in
connection with the trade-ins or repurchases. These trade-in and repurchase
agreements have been structured in alignment with the Company's historic tractor
life cycles. During December 2001, the Company commenced discussions with the
manufacturer of its tractors regarding extension of the trade-in or repurchase
periods, as well as the revised trade-in or repurchase values and related
provisions.
Subject to acceptable restructuring of the Equipment Leases, line of
credit, and tractor trade-in and repurchase terms, the Company's majority
stockholder has been requested and agreed to provide a $15 million line of
credit ("Stockholder Line of Credit"). The Stockholder Line of Credit would be
secured by, and limited with respect to a percentage of the value of, a second
priority position in the Company's accounts receivable, inventories of operating
supplies, office furniture and fixtures and the Company's Fontana, California
and Atlanta, Georgia terminals.
On December 19, 2001, the Company entered into a $3 million secured
short-term loan with its majority stockholder. The proceeds of this loan were
used to meet the annual permitting and licensing requirements for a majority of
the Company's fleet. The loan will either be repaid from cash to be released
from a cash secured letter of credit (once the Company is able to secure a
surety bond) or will be rolled over into the Stockholder Line of Credit.
Even if the restructuring of the equipment leases and line of credit is
successful, the Company's liquidity position and existing credit facilities may
not be sufficient to cover liquidity requirements for the next twelve months and
the Company is facing the prospect of not having adequate funds to operate its
business. As a result, there is substantial doubt as to the Company's ability to
continue as a going concern. In the event the Company's liquidity position is
insufficient to cover its liquidity requirements, the Company may be compelled
to file for bankruptcy protection.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset-carrying
amounts or the amounts and classification of liabilities should the Company be
unable to continue as a going concern.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
Revenue Recognition and Significant Customers
Freight charges and related direct freight expenses are recognized as
revenue and operating expense when freight is delivered at a destination point.
No customer accounted for more than 10 percent of operating revenue in the
fiscal years ended September 30, 2001 and 2000. One customer accounted for
approximately 11 percent of operating revenue in fiscal year 1999.
Concentration of Credit Risk
Concentration of credit risk with respect to customer receivables are
limited due to the large number of entities comprising the Company's customer
base and their dispersion across many different geographic locations. However,
the majority of the Company's customers operate in the food industry. The
Company performs ongoing credit evaluations and generally does not require
collateral. The Company maintains an allowance for doubtful accounts receivable
based upon the expected collectibility of all accounts receivable. As of
September 30, 2001, the Company's five largest customers had accounts receivable
balances outstanding of $3.5 million.
Operating Supplies
Operating supplies consist primarily of tires, fuel and maintenance
parts for revenue equipment which are stated at the lower of first-in, first-out
(FIFO) cost or market value.
Property and Equipment
Property and equipment are recorded at cost and depreciated based on
the straight-line method over their estimated useful lives, taking into
consideration salvage values for purchased property and residual values for
equipment held under capitalized leases. Leasehold improvements are amortized
over the terms of the respective lease or the lives of the assets, whichever is
shorter.
Expenditures for routine maintenance and repairs are charged to
operating expense as incurred. Major renewals and improvements are capitalized
and depreciated over their estimated useful lives. Upon retirement or other
disposition of property and equipment, the cost and accumulated depreciation are
removed from the accounts, and any gain or loss is recorded as an adjustment to
depreciation and amortization. Net (losses) gains from the disposition of
equipment in the amounts of $(3,046,046), $1,858,535, and $2,131,460 for fiscal
years 2001, 2000 and 1999, respectively, have been included in depreciation and
amortization in the accompanying statements of operations and cash flows. The
estimated useful lives of property and equipment are as follows:
Revenue equipment 3 - 7 years
Buildings and improvements 30 years
Office furniture and equipment 5 - 10 years
Tires purchased as part of revenue equipment are capitalized as a cost
of the equipment. Replacement tires are expensed when placed in service.
Intangible Assets
Intangible assets consist of the value assigned to driver recruitment
assistance and customer lists in connection with the acquisition of certain
assets of Westway and Ort (see Note 4) which amounted to approximately $2.5
million. The intangible assets are being amortized on a straight-line basis over
periods ranging from two to five years. The Company continually evaluates
whether events and circumstances have occurred that indicate that the remaining
estimated lives of the intangible assets may warrant revision or that the
remaining balance may not be recoverable. As of September 30, 2001, management
determined that the intangibles associated with driver recruitment recorded in
connection with these acquisitions had been impaired. The impairment resulted
from higher than expected driver turnover. Accordingly, the Company recorded an
additional charge of approximately $387,000 to reduce the carrying value of the
recruitment assistance intangible. As of September 30, 2001, the remaining
unamortized balance was $1.8 million.
Accrued Liability for Guaranteed Lease Residuals
During fiscal year 2001, the Company determined that the carrying value
of its revenue equipment had been impaired. Additionally, the guaranteed lease
residual values for off-balance sheet leases were in excess of the value
expected to be realized from the disposition of the revenue equipment at the
termination of the leases. Management estimates, based upon the current market
for used tractors and trailers, the potential loss to the Company as of
September 30, 2001 is approximately $25 million. Approximately $6.4 million of
this loss has been recorded in the accompanying 2001 consolidated statement of
operations in accordance with EITF 96-21. Approximately $0.4 million of this
loss was recorded as an offset to the net book value of the capitalized revenue
equipment and $6.0 million has been recorded as an accrued liability related to
residual guarantees on revenue equipment financed under off-balance sheet
leases. The balance of the estimated loss will be accrued over the remainder of
the related lease lives, which is estimated to be over a maximum period of 56
months. Assuming the used equipment markets maintain their current levels,
management expects it will accrue additional liability for guaranteed lease
residuals of $12.5 million in fiscal 2002.
Fair Value of Financial Instruments
The carrying amounts reported in the accompanying consolidated
statements of financial position for cash, accounts receivable, and accounts
payable approximate fair values because of the immediate or short-term
maturities of these financial instruments. The carrying amounts of the Company's
long-term debt also approximate fair values based on current rates for similar
debt.
Quantitative and Qualitative Disclosures About Market Risk
The principal market risks to which the Company is exposed are
fluctuations in fuel prices, interest rates on debt financing (i.e., the risk of
loss arising from adverse changes in market rates and prices)and market values
for used equipment. The Company has not engaged in any fuel hedging
transactions. Thus, the Company is exposed to fluctuations in fuel prices but is
not exposed to any market risk involving hedging costs.
The variable rate debt consists of a revolving line of credit, carrying
an interest rate tied to the prime rate. The line of credit provides for a
minimum interest rate of 7%. This variable interest rate exposes the Company to
the risk that interest rates may rise. At September 30, 2001, the Company's
interest rate on the line of credit was at the minimum rate of 7%. At September
30, 2001, assuming borrowing equal to the $18.3 million drawn on the line of
credit, a one percentage point increase in the prime rate above the minimum
interest rate in the agreement would increase the annual interest expense by
approximately $0.2 million. The proposed Stockholder Line of Credit will carry
interest rate terms similar to the Company's current revolving line of credit.
The equipment financing carries fixed interest rates and includes term notes
payable and capitalized lease obligations totaling approximately $56.2 million.
These fixed interest rates expose the Company to the risk that interest rates
may fall. A one percentage point decline in interest rates would have the effect
of increasing the premium the Company pays over market interest rates by one
percentage point or approximately $0.6 million annually.
As discussed in Note 2, the Company has repurchase commitments for a substantial
portion of the tractors in its fleet at prices consistent with the guaranteed
residual values on its proposed restructured leases. However, the Company is
exposed to fluctuations in market values for used trailers, to the extent that
they differ materially from the guaranteed residual values on the related
equipment at the termination of the lease. Assuming a fleet of approximately
3,000 trailers, a shortfall in the market value for used trailers of $100 below
the guaranteed residual value would result in a loss to the Company of $300,000.
Insurance Coverage and Accrued Claims Payable
For fiscal 2001, the Company was self-insured for auto liability,
tractor and trailer physical damage, and cargo damage claims subject to a
"basket deductible" of $250,000 per occurrence. The Company was self-insured for
workers' compensation claims up to $350,000 per single occurrence. Liability in
excess of these amounts has been insured by the Company through an insurance
underwriter up to applicable policy limits of $1,000,000 per occurrence.
Subsequent to September 30, 2001, in connection with its annual renewal of
insurance and in response to insurance market conditions, the Company increased
its self-insurance retention for auto liability, tractor and trailer physical
damage to $1,000,000 per occurrence. Additionally, the self-insurance retention
for worker's compensation claims was raised to $500,000 per single occurrence.
The Company also entered into policy coverage for cargo damage and loss claims
with a self-insurance retention of $25,000 up to a policy limit of $1,000,000
per occurrence. The Company also carries excess general liability coverage in
amounts it considers to be sufficient to mitigate the risk of significant
claims. The Company maintains loss prevention programs in an effort to minimize
the risk of its self insurance retention limits.
The Company estimates and accrues a liability for its share of ultimate
settlements using all available information, including the services of a
third-party risk administrator, to assist in establishing reserve levels for
each occurrence based on the facts and circumstances of the occurrence coupled
with the Company's past history of such claims. The Company provides for adverse
loss developments in the period when new information is obtained.
Prior to October 1, 1999, the Company provided a reserve for workers'
compensation and automobile related liabilities for each reported claim on a
case by case basis plus an allowance for the cost of incurred but not reported
claims. Effective October 1, 1999, the Company changed its method of accounting
for workers' compensation and accident claims. The Company adopted a
fully-developed claims expense estimate based on an actuarial computation of the
ultimate liability. Both the method formerly used by the Company and the
fully-developed method are acceptable under accounting principles generally
accepted in the United States (GAAP), although the fully-developed method is
preferred. The cumulative effect of the accounting change was $3,862,397, net of
an income tax benefit of $2,172,598, or $(0.63) per diluted common share for
fiscal 2000.
The Company had outstanding letters of credit related to insurance
coverage totaling $3,335,000 at September 30, 2001. Subsequent to September 30,
2001, two of the Company's former insurance carriers drew against letters of
credit in the total amount of $2,825,000. The amounts drawn against the letters
of credit are held in deposit by the insurance carriers and will be released to
the Company as outstanding claims are paid down. The Company's current general
liability insurer requires $6,000,000 of collateral to cover any contingency
related to the Company's ability to cover its self-insurance retention. To date,
the Company has provided a cash secured $3,000,000 letter of credit. The Company
has also signed a commitment letter for a $6,000,000 surety bond that will be
secured by the Company's Atlanta, Georgia and Fontana, California terminals and
a $1,000,000 cash deposit. This bond is expected to be put in place during the
Company's second quarter of fiscal 2002. If the Company is unsuccessful in
obtaining the surety bond, it might be required to obtain a cash secured letter
of credit for the full $6,000,000.
Accrued Operating Lease Payments
During August 2001, the Company's continued losses from operations and
negative cash flows forced it to defer making payments on most of its equipment
leases with total obligations outstanding of approximately $183.1 million and
related monthly payments of approximately $3.7 million. As of September 30,
2001, the Company had accrued operating lease payments (including estimated late
fees and penalties) of $6.8 million. If the Company is successful in
restructuring its lease obligations (as discussed in Note 2), the accrued
operating lease obligation will be amortized against rent expense over the
remaining term of the restructured leases.
Income Taxes
The Company recognizes a liability or asset for the deferred tax
consequences of all temporary differences between the tax bases of assets and
liabilities and their reported amounts in the consolidated financial statements
that will result in taxable or deductible amounts in future years when the
reported amounts of the assets and liabilities are recovered or settled.
Net Loss Per Common Share
Basic net loss per common share ("Basic EPS") excludes dilution and is
computed by dividing net loss attributable to common shareholders by the
weighted average number of common shares outstanding during the fiscal year.
Diluted net loss per common share ("Diluted EPS") is computed by dividing the
net loss attributable to common shareholders by the weighted average number of
common shares and the dilutive potential common share equivalents then
outstanding. Potential common share equivalents consist of shares issuable upon
the exercise of stock options, warrants and shares issuable upon the conversion
of the Series I and Series II convertible preferred stock.
Options to purchase 920,595, 1,342,555, and 1,008,350 shares of common
stock at weighted average exercise prices of $9.52, $12.51, and $14.34 were
outstanding as of September 30, 2001, 2000, and 1999, respectively, and were not
included in the computation of Diluted EPS. Additionally, 2,924,430 shares of
common stock issuable upon the conversion of the Series I and II convertible
preferred stock, 2,924,430 shares of common stock issuable upon the exercise of
warrants to purchase preferred stock and 300,000 shares of common stock issuable
upon the exercise of warrants to purchase common stock were not included in the
computation of Diluted EPS. The inclusion of the options, the shares issuable
upon the conversion of the preferred stock and the shares issuable upon the
exercise of the warrants would have been antidilutive, thereby decreasing net
loss per common share.
Segment Reporting
Statement of Financial Accounting Standards ("SFAS") No. 131,
"Disclosures About Segments of an Enterprise and Related Information" requires
disclosures related to components of a company for which separate financial
information is available that is evaluated regularly by the Company's chief
operating decision maker in deciding how to allocate resources and assess
performance. Management believes that the Company has only one operating segment
as defined by SFAS No. 131.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other
Intangible Assets", effective for fiscal years beginning after December 15,
2001. Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the statements. Other intangible assets will
continue to be amortized over their useful lives. The Company will adopt SFAS
No. 141 and SFAS No. 142 in the first quarter of fiscal 2003. Upon adoption, the
Company will also perform the first of the required impairment tests of goodwill
and indefinite-lived intangibles as of October 1, 2002. The Company has not yet
determined what impact the adoption of these statements will have on its results
of operations and financial position.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
the asset is placed in service. When the liability is initially recorded,
entities capitalize the cost by increasing the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its present value each
period, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, entities either settle the
obligation for the recorded amount or incur a gain or loss upon settlement. This
statement is effective for fiscal years beginning after June 15, 2002, with
earlier adoption encouraged. The Company does not believe that the adoption of
this statement will have a material impact on its results of operations or
financial position.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which replaces SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed Of." The
accounting model for long-lived assets to be disposed of by sale applies to all
long-lived assets, including discontinued operations, and replaces the
provisions of APB Opinion No. 30, "Reporting Results of Operations--Reporting
the Effects of Disposal of a Segment of a Business," for the disposal of
segments of a business. This statement requires that those long-lived assets be
measured at the lower of the carrying amount or fair value less costs to sell,
whether reported in continuing operations or in discontinued operations. As a
result, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. This
statement also broadens the reporting of discontinued operations to include all
components of an entity with operations that can be distinguished from the rest
of the entity and that will be eliminated from the ongoing operations of the
entity in a disposal transaction. This statement is effective for fiscal years
beginning after December 15, 2001. The Company does not believe that the
adoption of this statement will have a material impact on its results of
operations or financial position.
(4) ASSET ACQUISITIONS
On January 22, 2001, the Company acquired a portion of the trucking assets of
Westway Express, Inc. ("Westway"), consisting of primarily mobile communication
equipment and miscellaneous assets. The Company entered into a lease for a
terminal owned by Westway, refinanced Westway leases for tractors and trailers,
and assumed leases for terminals. The Company also paid Westway for assisting
the Company in hiring drivers and certain of its customer relationships. The
Company refinanced with existing lessors approximately 234 tractors and 264
temperature controlled trailers and assumed leases for certain terminal
facilities. The transaction also included a five-year non-compete agreement. The
cash consideration paid of $2.1 million has been allocated to the assets
acquired as follows:
Description Amount
- ----------- -------------
Licensing and miscellaneous deposits $ 98,000
Qualcomm units 360,000
Miscellaneous assets 56,000
Driver recruitment and customer intangibles 2,060,000
--------------
Total assets acquired 2,574,000
Less: Liability assumed for equipment repair (479,000)
Less: Amounts paid (1,845,000)
--------------
Amount due Westway $ 250,000
==============
On March 1, 2001, the Company completed the acquisition of a portion of
the assets of refrigerated carrier Gerald E. Ort Trucking, Inc. ("Ort"). The
Company entered into a short-term lease for a terminal owned by Ort and
refinanced Ort leases for tractors and trailers. The Company paid Ort for
assisting the Company in hiring drivers and certain of its customer
relationships. The Company refinanced 18 tractors and 60 trailers. The
transaction also included a five-year non-compete agreement. The cash
consideration paid of approximately $0.6 million has been allocated to the
assets acquired as follows:
Description Amount
- ----------- -------------
Noncompete agreement $ 100,000
Qualcomm units 71,000
Miscellaneous assets 66,000
Driver recruitment and customer intangibles 400,000
--------------
Total assets acquired $ 637,000
==============
The following unaudited supplemental pro forma acquisition information
for fiscal years ended 2001 and 2000 presents the results of operations as if
the Westway acquisition had occurred at the beginning of fiscal 2000. Results of
operations for the Ort acquisition are not material to the pro forma results and
are not included.
Unaudited Pro Forma Results of Operations (in
thousands, except per share data)
2001 2000
----------------- -----------------
Operating revenue $ 289,307 $ 265,888
Loss before cumulative effect of accounting change (44,929) (9,228)
Net loss attributable to common shareholders (48,655) (13,090)
Basic and diluted net loss per common share (7.96) (2.14)
(5) INCOME TAXES
------------
The provision (benefit) for income taxes includes the following
components for the years ended September 30, 2001, 2000, and 1999:
2001 2000 1999
------------------ ------------------- ------------------
Current income tax provision (benefit):
Federal $ -- $ -- $ (333,900)
State 37,000 47,000 164,957
------------------ ------------------- ------------------
37,000 47,000 (168,943)
------------------ ------------------- ------------------
Deferred income tax provision (benefit):
Federal (14,008,426) (5,722,329) (1,331,839)
State (1,324,538) (572,949) (464,267)
Valuation allowance 15,295,964 -- --
------------------ ------------------- ------------------
(37,000) (6,295,278) (1,796,106)
------------------ ------------------- ------------------
Benefit for income taxes
(including $2,172,598 of benefit in fiscal
2000 netted against the cumulative
effect of accounting change) $ -- $ (6,248,278) $ (1,965,049)
================== =================== ==================
The following is a reconciliation between the statutory Federal income
tax rate of 34 percent and the effective rate which is derived by dividing the
benefit for income taxes by loss before income taxes for the years ended
September 30, 2001, 2000, and 1999:
2001 2000 1999
------------------ ------------------- ------------------
Computed "expected" provision (benefit)
for income taxes at the statutory rate $(14,505,845) $(5,901,152) $(1,767,504)
Increase (decrease) in income taxes
resulting from:
State income taxes, net of federal income
tax benefit (853,284) (347,126) (197,545)
Valuation allowance 15,295,964 -- --
Other, net 63,165 -- --
------------------ ------------------- ------------------
Benefit for income taxes $ -- $(6,248,278) $(1,965,049)
================== =================== ==================
The significant components of the net deferred income tax
assets and liabilities as of September 30, 2001 and 2000 are as follows:
2001 2000
------------------ -----------------
Deferred income tax assets:
Accrued claims payable $ 3,133,335 $ 2,881,635
Other reserves and accruals 2,139,722 1,450,810
AMT credit carryforward 1,001,786 1,001,786
Federal net operating loss carryforward 12,156,647 1,660,412
State net operating loss carryforward 1,263,826 300,207
------------------ -----------------
Total deferred income tax assets 19,695,316 7,294,850
------------------ -----------------
Valuation allowance (15,295,964) --
------------------ -----------------
Net deferred income tax assets 4,399,352 7,294,850
------------------ -----------------
Deferred income tax liability:
Difference between book and tax basis
of property and equipment (4,399,352) (7,566,723)
------------------ -----------------
Net deferred income tax liability $ -- $ (271,873)
================== =================
The amount of and ultimate realization of the deferred income tax
assets is dependant, in part, upon the tax laws in effect, the Company's future
earnings, and other future events, the effects of which cannot be determined.
The Company has established a full valuation allowance against its deferred
income tax assets. Management believes that as of September 30, 2001, based on a
number of factors, the available objective evidence creates sufficient
uncertainty regarding the realizability of these deferred income tax assets.
In connection with the acquisition of a controlling interest in the
Company by the Company's Chairman and majority stockholder, management believes
that a greater than 50% ownership change has occurred. Accordingly, the
utilization of net operating loss carryforwards and credits is potentially
limited pursuant to Internal Revenue Code Section 382, which imposes an annual
limitation on the utilization of loss carryforwards and credits following an
ownership change. The utilization of the loss carryforwards may be limited to an
annual amount not to exceed the value of the Company on the ownership change
date multiplied by the Federal long-term tax exempt rate (the rate is fixed
monthly and was 5 percent as of September 30, 2001.) If the annual limited
amount is unutilized in any particular year, it remains available on a
cumulative basis through the expiration date of the applicable loss
carryforwards. Management is in the process of calculating the limitations.
(6) LONG-TERM DEBT
--------------
Long-term debt consists of the following as of September 30, 2001 and 2000:
2001 2000
--------------------------------------
Note payable to an insurance company, interest at 8.25 percent, due in $ 12,973,663 $ --
monthly installments of $102,500 with a balloon payment of $12,029,451
in July 2006, secured by real estate and a guarantee from the
Company's majority stockholder
Line of credit payable to a financial institution, interest at prime plus .25 18,314,159 --
percent with a minimum of 7.00 percent (the rate at September 30,
2001), interest payable monthly, principal due in April 2004, secured
by accounts receivable, inventories, office furniture and fixtures,
and a guarantee from the Company's majority stockholder
Note payable to a bank, interest at 9.00 percent, payable in monthly 499,745 --
installments of $17,200 through May 2004, secured by revenue equipment
Note payable to a municipality for a special improvement district 376,790 419,138
Line of credit payable to a bank, repaid in fiscal 2001 -- 16,000,000
Notes payable to a bank, paid in full in fiscal 2001 -- 1,799,388
--------------------------------------
32,164,357 18,218,526
Less current portion (32,164,357) (1,841,735)
--------------------------------------
$ -- $ 16,376,791
======================================
Scheduled principal payments of long-term debt as of September 30, 2001
are as follows:
Years Ending September 30, Amount
- ------------------------------------------------------ -------------------
2002 $ 378,180
2003 409,019
2004 18,708,957
2005 265,684
2006 12,276,764
Thereafter 125,753
-------------------
$32,164,357
===================
In April 2001, the Company refinanced its line of credit and term loan.
The Company's new $13 million term loan is secured by the Company's Salt Lake
City headquarters and terminal and its $30 million line of credit is secured by
accounts receivable, inventories of operating supplies, and office furniture and
fixtures. The term loan matures July 10, 2006 and the line of credit matures
April 25, 2004. In addition, the borrowings under both agreements are guaranteed
by the Company's majority stockholder. Borrowings under the term loan agreement
bear interest at a fixed rate of 8.25%. Borrowings under the line of credit bear
interest based on the prime rate in effect from time-to-time plus .25% (with a
minimum of 7.00%). Amounts available under the line of credit are based on the
level of the Company's net worth.
At September 30, 2001, the Company was in technical default on its debt
obligations as a result of the Equipment Leases discussed in Note 2. The banks
and financial institutions have not waived the defaults under their respective
agreements, nor have they accelerated repayment of the debt obligations. As a
result of these defaults, all of the Company's debt has been classified as
current in the accompanying September 30, 2001 balance sheet.
(7) CAPITALIZED LEASE OBLIGATIONS
Certain revenue equipment is leased under capitalized lease
obligations. The following is a summary of assets held under capital lease
agreements as of September 30, 2001 and 2000:
2001 2000
-----------------------------------
Revenue equipment $45,886,418 $5,987,377
Less accumulated amortization (3,465,848) (2,910,314)
-----------------------------------
$42,420,570 $3,077,063
===================================
The following is a schedule of future minimum lease payments under
capitalized leases together with the present value of the minimum lease payments
at September 30, 2001:
Years Ending September 30, Amount
- --------------------------------------------------- --------------------
2002 $ 8,250,552
2003 7,566,922
2004 9,321,624
2005 5,937,636
2006 22,034,144
--------------------
Total minimum lease payments 53,110,878
Less amount representing interest (10,737,415)
--------------------
Present value of minimum lease payments $42,373,463
====================
In connection with the proposed restructuring of the Company's lease
obligations (see Note 2), the Company will reevaluate each lease to determine
whether the restructured lease should be treated as a capital or operating lease
in accordance with SFAS No. 13 "Accounting for Leases". Based upon the nature of
the modifications, it is probable that the restructured leases will be
classified as capital leases for all periods subsequent to the date of the
restructuring. The capitalization of these leases will result in a significant
change in the Company's financial position. Over the lives of the leases, the
capitalization of the leases should not have a significant impact on the results
of operations. However, the classification of expenses related to the leased
equipment will change significantly as amounts previously classified as rent
expense will be allocated between depreciation and amortization and interest
expense.
At September 30, 2001, the Company was in default on its capitalized
lease obligations as a result of the matters discussed in Note 2. The banks and
financial institutions have not waived the defaults under their respective
agreements and several have accelerated repayment of the debt obligations,
although most entities demanding repayment continue to participate in the
Company's proposed restructuring of its debt and lease obligations. As a result
of these defaults, all of the Company's capitalized lease obligations have been
classified as current in the accompanying September 30, 2001 balance sheet.
(8) COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company is committed under noncancellable operating leases (see
Note 2) involving certain revenue equipment. Rent expense for noncancelable
operating leases was $39,465,772, $35,261,458, and $31,767,339 for fiscal years
2001, 2000 and 1999, respectively. Aggregate future lease commitments are
$31,408,254, $15,554,421, $3,318,865 and $1,303,735 for the years ending
September 30, 2002, 2003, 2004 and 2005, respectively.
Legal Proceedings
The Company and one of its officers and directors, and certain of its
former officers and directors have been named as defendants in a securities
class action filed in the United States District Court for the District of Utah,
Caprin v. Simon Transportation Services, Inc., et al., No. 2:98CV 863K (filed
December 3, 1998). Plaintiffs in this action allege that defendants made
material misrepresentations and omissions during the period February 13, 1997
through April 2, 1998 in violation of Sections 11, 12(2) and 15 of the
Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 and Rule 10b-5 promulgated thereunder. On September 27, 2000, the
District Court dismissed the case with prejudice. Plaintiffs have appealed the
dismissal of this action to the United States Court of Appeal for the Tenth
Circuit, which will hear oral arguments on the matter on January 15, 2002. The
Company intends to vigorously defend this action.
On March 13, 2001, a Company-owned tractor-trailer collided with a
pickup truck in an intersection in Dumas, Texas. A lawsuit has been filed on
behalf of an injured passenger in the pickup truck and her family in the United
States District Court for the Northern District of Texas, seeking actual and
punitive damages from the Company and its former employee/driver. The Company is
cooperating with its outside counsel and insurance carriers in an effort to
resolve this matter. Discovery is ongoing in the case. Unless this matter is
resolved through mediation, the parties are expected to proceed to trial in
February 2002. Although the alleged damages in this matter are very substantial
and a risk of punitive damage exposure does exist, the Company and its counsel
believe the facts surrounding the accident do not warrant punitive damages and
that the Company will be able to resolve this matter within the limits of its
insurance policies. Accordingly, the Company does not expect this litigation to
have a material impact on the Company's results of operations or financial
position.
On August 17, 2001, the State of California filed suit against the
Company in relation to damage to the state capitol of California arising from an
accident involving a Company driver and truck. The lawsuit requests both
compensatory and punitive damages. Two of the Company's insurers have already
paid their policy limits of $5.75 million in partial satisfaction of the State's
property damage. The State's complaint represents an attempt to collect the
balance of property damage, estimated to be between $6 and $10 million. The
Company is cooperating with its insurance carrier in defense of action, which is
at a very preliminary stage. Management believes that it is unlikely that the
Company will be held liable for punitive damages in this action and further
believes that the Company will resolve the matter within the limits of insurance
policies. Accordingly, the Company does not expect this litigation to have a
material impact on the Company's results of operations or financial position.
On December 27, 2001, Dime Commercial Credit ("Dime"), one of the
Company's lessors, served the Company with a lawsuit. The lawsuit asserts that
the Company is in default under the lease agreements held by Dime and seeks
judgments against the Company. The requested judgments include the return to
Dime of all equipment under the lease agreements, payment of delinquent monthly
payments, payment of the stipulated loss value as defined and payment of other
fees and costs. The Company is currently preparing its response to the lawsuit.
Management estimates the potential range of loss exposure related to this
obligation is $1.5 to $3.0 million.
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.
Management is not aware of any claims or threatened claims that reasonably would
be expected to exceed insurance limits or existing accruals or have a materially
adverse effect upon the Company's results of operations or financial position.
However, it is possible that a material change in the Company's estimate of
probable liability could occur.
Consulting and Noncompetition Agreement
Effective September 19, 2000, the Company entered into a consulting and
noncompetition agreement with its former Chairman of the Board, Chief Executive
Officer and President. For a period of three years, the Company is obligated to
pay a consulting fee of $259,000 per year, provide executive level medical and
dental coverage, reimburse ordinary and necessary business expenses and provide
continuing directors' and officers' liability insurance for the consultant. The
consultant agrees to not compete with the Company for the term of the agreement.
Employment and Noncompetition Agreements
On September 19, 2000, the Company entered into at-will employment and
noncompetition agreements with five of its then executive officers. During
fiscal 2001, the Company terminated the employment of three of these executive
officers - two with cause and one without cause. Subsequent to year end, another
executive was terminated with cause. The Company is obligated to pay a salary to
the remaining individual of not less than $156,000 per year. The remaining
individual is eligible to receive an annual performance bonus based on the
operating ratio of the Company. The bonus is equal to $10,000 for each
percentage point or portion thereof that the operating ratio is less than 97%.
In addition, during the period of an executive's employment, the Company
provides executive level medical and dental coverage, disability insurance,
directors' and officers' liability insurance and reimburses ordinary and
necessary business expenses. If an executive's employment is terminated by the
executive for "Good Reason" or by the Company without "Cause", the Company is
obligated to continue payment of compensation for a period of three years. If an
executive's employment is terminated by the executive without "Good Reason" or
by the Company with "Cause", the Company is obligated to continue payment of
compensation for a period of one year. Each executive agreed to not compete with
the Company for any term covered by compensation. During fiscal 2001, the
Company recorded charges related to these agreements in the amount of $780,000,
discounted to a present value using a rate of 7%. The Company will record a
charge in fiscal year 2002 in the amount of $156,000 discounted using the same
7% rate.
(9) CAPITAL TRANSACTIONS AND STOCK PLANS
Preferred Stock
The Company is authorized to issue 5,000,000 shares of preferred stock
from time to time in one or more series without stockholder approval. As of
September 30, 2001, there are 292,443 shares of preferred stock outstanding. The
Board of Directors is authorized, without any further action by the stockholders
of the Company, to (a) divide the preferred stock into series, (b) designate
each such series, (c) fix and determine dividend rights, (d) determine the
price, terms and conditions on which shares of preferred stock may be redeemed,
(e) determine the amount payable to holders of preferred stock in the event of
voluntary or involuntary liquidation, (f) determine any sinking fund provisions,
and (g) establish any conversion privileges.
Series I Convertible Preferred Stock
Effective June 30, 2001, the Company agreed to issue 162,401 shares of
Series I preferred stock with detachable warrants to purchase an additional
162,401 shares of Series I preferred stock to a major stockholder in exchange
for cancellation of $6.7 million in advances, or $41.10 per preferred share
issued. The warrants are exercisable at a price of $4.11 per share or any lower
price at which the Company issues its preferred or common stock or any options,
rights, warrants, or other securities convertible into common or preferred stock
during the term of the warrant. Dividends accrue at 10% per annum, based on the
$41.10 per share value, and the Series I preferred shares have a liquidation
preference over all other classes or series of capital stock based upon the
$41.10 per share value, plus accrued dividends. The proceeds have been allocated
between the Series I preferred stock and the warrants based on their estimated
relative fair values. For purposes of the allocation, the estimated fair value
of Series I preferred shares was determined to be the $41.10 per share price and
the fair value of the warrants was estimated using the Black-Scholes option
pricing model with the following assumptions: risk free interest rate of 5.29%;
dividend yield of 0%; volatility factor of 48.5% and an expected term of ten
years. Each share of Series I preferred stock is convertible into ten shares of
Class A Common Stock at the earlier of September 30, 2001, a change-in-control
of the Company, or a sale of all or substantially all of the assets of the
Company.
During the quarter ended September 30, 2001, the Company recorded a
non-cash dividend related to the issuance of Series I preferred stock in the
amount of approximately $2.7 million representing the value of the beneficial
conversion feature. The beneficial conversion feature was calculated for
financial reporting purposes based on the difference between the portion of the
total proceeds allocated to the Series I preferred shares of $2.46 per share and
$4.11 per share, the closing market price as of June 29, 2001 of the common
shares into which the Series I preferred shares are convertible.
Series II Convertible Preferred Stock
As of September 30, 2001, an entity owned by the Company's Chairman and
majority stockholder had made advances to the Company of $2,080,670 for
equipment purchases and general corporate purposes. On September 30, 2001, the
Company entered into a subscription agreement with a related entity pursuant to
which the advances would be converted into 130,042 shares of the Company's
Series II preferred stock. The issuance of the Series II preferred shares was
effective September 30, 2001. The $16.00 per share issuance price is equal to
the closing price of the common stock on September 28, 2001, on a conversion
adjusted basis. The Series II preferred shares are convertible into common stock
at the ratio of ten shares of common stock for each Series II preferred share.
Each Series II preferred share carries the right to cast ten votes on all
stockholder proposals, representing equivalent voting rights to the common stock
upon conversion. Dividends on each Series II preferred share accrue at 10% per
annum, based upon a $16.00 per share value. The proceeds have been allocated
between the Series II preferred stock and the warrants based on their estimated
relative fair values. For purposes of the allocation, the estimated fair value
of Series II preferred shares was determined to be $16.00 per share and the fair
value of the warrants was estimated using the Black-Scholes option pricing model
with the following assumptions: risk free interest rate of 4.66%; dividend yield
of 0%; volatility factor of 61.41% and an expected term of ten years. Series II
preferred shares have a liquidation preference over the Common Stock or any
other class or series of capital stock of the Company, other than the Company's
Series I preferred shares, which rank evenly with the Series II preferred
shares, based upon the $16.00 per share value, plus accrued dividends.
During the quarter ended September 30, 2001, the Company recorded a
non-cash dividend related to the issuance of Series I preferred stock in the
amount of approximately $0.9 million representing the value of the beneficial
conversion feature. The beneficial conversion feature was calculated for
financial reporting purposes based on the difference between the portion of the
total proceeds allocated to the Series II preferred shares of $0.92 per share
and $1.60 per share, the closing market price as of September 28, 2001 of the
common shares into which the Series I preferred shares are convertible. In
connection with the preferred stock subscription agreement, the Company and the
stockholder entered into a warrant agreement.
Preferred Stock Warrants
In connection with the issuance of the Series I convertible preferred
stock, the Company issued warrants effective June 30, 2001. Prior to its
amendment, the warrant granted the Series I stockholder the right to purchase up
to 190,705 Series I preferred shares for $35.00 per share, or any lower price at
which the Company issues its Series I preferred shares or common stock or any
options, rights, warrants, or other securities convertible into Series I
preferred shares or common stock during the ten year term of the warrant. On
September 30, 2001, the Company and the Series I stockholder agreed to amend the
exercise price of the warrant from $35.00 per share to $41.10 per share, thereby
reducing the number of warrants issued from 190,705 to 162,401. The current
$41.10 per share exercise price of the warrant is equal to the average closing
bid price of the Company's common stock for the five days prior to and including
June 30, 2001, on a conversion adjusted basis. The anti-dilution provisions of
the warrant will automatically adjust the per share exercise price of the
warrant from $41.10 per share to $16.00 per share if the issuance of the
Company's Series II preferred shares and a warrant to purchase Series II
preferred shares, below, are approved by the Company's stockholders at the
Company's annual stockholders' meeting.
In connection with the issuance of the Series II convertible preferred
stock, the Company issued warrants effective September 30, 2001. The warrants
grant the Series II stockholder the right to purchase up to 130,042 Series II
preferred shares for $16.00 per share or any lower price at which the Company
issues its Series II preferred shares, Series I preferred shares, or common
stock or any options, rights, warrants, or other securities convertible into any
of the foregoing during the ten-year term of the warrant.
Treasury Stock
The Company's Board of Directors authorized a stock repurchase program
under which management may reacquire up to 500,000 shares of the Company's Class
A Common Stock. During fiscal year 1999, the Company repurchased 95,500 shares
of Class A Common Stock at an average price of $5.46 per share, for a total cash
outlay of $521,600. The stock repurchase program expired September 30, 1999.
Incentive Stock Plan
On May 31, 1995, the Company's Board of Directors and stockholders
approved and adopted the Dick Simon Trucking, Inc. Incentive Stock Plan (the
"Plan"). The Plan reserves 2,000,000 shares of Class A Common Stock for issuance
thereunder. The Board of Directors or its designated committee administers the
Plan and has the discretion to determine the employees and officers who will
receive awards, the type of awards (incentive stock options, non-statutory stock
options, restricted stock awards, reload options, other stock based awards, and
other benefits) to be granted and the term, vesting provisions and exercise
prices.
Non-Officer Incentive Stock Plan
On December 18, 1998, the Company's Board of Directors approved and
adopted the Simon Transportation Services Inc. 1998 Non-Officer Incentive Stock
Plan (the "1998 Plan"). The 1998 Plan reserves 400,000 shares of Class A Common
Stock for issuance thereunder. The Board of Directors or its designated
committee administers the Plan and has the discretion to determine the employees
who will receive awards, the type of awards (incentive stock options,
non-statutory stock options, restricted stock awards, reload options, other
stock based awards, and other benefits) to be granted and the term, vesting
provisions and exercise prices.
Warrant Agreement
On September 19, 2000, the Company's Board of Directors adopted and
approved a Warrant Agreement between the Company and the Chairman of the Board.
Under the agreement, the Chairman was granted warrants to purchase 300,000
shares of the Company's Class A Common Stock at $7.00 per share. The warrants
become exercisable at the rate of 100,000 per year on each of September 19,
2001, 2002, and 2003.
Outside Director Stock Plan
The Company adopted an Outside Director Stock Plan (the "Outside
Director Stock Plan"), under which each director who is not an employee of the
Company and not holding a warrant will receive an option to purchase 5,000
shares of the Company's Class A Common Stock at the market price at the grant
date. The options vest 20% at grant and an additional 20% on the first through
fourth anniversaries of the grant date. On the five year anniversary of service
as an outside director, each qualifying director will receive an option to
purchase an additional 5,000 shares of the Company's Class A Common Stock. The
Company has reserved 25,000 shares of Class A Common Stock for issuance under
the Outside Director Stock Plan.
The following table summarizes the combined stock option activity for
all plans for fiscal years 2001, 2000 and 1999:
Weighted Average
Exercise Price
Number of Options Price Range Per Share
------------------ ------------------- ------------------
Outstanding at September 30, 1998 717,130 $9.00 - 23.50 $18.05
Granted 373,000 4.25 - 5.50 5.50
Forfeited (81,780) 5.50 - 16.00 6.74
------------------ ------------------- ------------------
Outstanding at September 30, 1999 1,008,350 4.25 - 23.50 14.34
Granted 408,000 4.50 - 7.00 6.85
Exercised (1,275) 5.50 - 9.00 6.26
Forfeited (72,520) 4.25 - 19.87 6.14
------------------ ------------------- ------------------
Outstanding at September 30, 2000 1,342,555 4.25 - 23.50 12.51
Granted 274,250 4.68 - 5.19 5.04
Exercised (4,000) 4.25 - 5.10 4.89
Forfeited (692,210) 4.94 - 23.50 13.57
------------------ ------------------- ------------------
Outstanding at September 30, 2001 920,595 $4.68 - 23.38 $9.52
==================
The weighted average fair value of options granted during the years
ended September 30, 2001, 2000, and 1999, was $3.40, $2.88, and $3.23,
respectively. A summary of the options outstanding and options exercisable at
September 30, 2001 is as follows:
Options Outstanding Options Exercisable
--------------------------------------------------------------------------- -------------------------------------
Weighted Average
Range of Exercise Options Remaining Weighted Average Options Weighted Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
$4.68 - 5.25 262,250 9.35 years $ 5.04 53,000 $ 5.16
5.26 - 6.99 211,000 7.26 years 5.50 41,700 5.50
7.00 - 9.00 239,845 6.99 years 7.75 209,845 7.86
9.01 - 23.38 207,500 5.95 years 21.32 206,500 21.35
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
$4.68 - 23.38 920,595 7.49 years $ 9.52 511,045 $12.84
================== ===================
Stock-Based Compensation
The Company has elected to continue to apply Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its
stock-based compensation plans as they relate to employees and directors. SFAS
No. 123, "Accounting for Stock-Based Compensation," requires pro forma
information regarding net earnings (loss) as if the Company had accounted for
its stock options granted to employees and directors subsequent to September 30,
1995 under the fair value method of SFAS No. 123. The fair value of these stock
options was estimated at the grant date using the Black-Scholes option pricing
model with the following assumptions: average risk-free interest rates of 5.24%,
5.98%, and 4.79% in fiscal years 2001, 2000, and 1999, respectively, a dividend
yield of 0%; average volatility of the expected common stock price of 49.7%,
50.9%, and 54.9%; for fiscal years 2001, 2000, and 1999, respectively; and
weighted average expected lives for the stock options of approximately 9.8
years, 5.1 years, and 8.0 years for fiscal years 2001, 2000, and 1999,
respectively. For purposes of pro forma disclosures, the estimated fair value of
the stock options is amortized over the vesting period of the respective stock
options. Under the fair value method of SFAS No. 123, pro forma net loss would
have been ($45,701,574), ($11,858,610), and ($3,931,107), and pro forma diluted
net loss per share attributable to common stockholders would have been ($7.47),
($1.94), and ($0.64) for the fiscal years ended September 30, 2001, 2000, and
1999, respectively.
(10) EMPLOYEE BENEFIT PLAN
The Company has adopted a defined contribution plan, the Dick Simon
Trucking, Inc. 401(k) Profit Sharing Plan (the "401(k) Plan"). All employees who
have completed one year of service and have reached age 21 are eligible to
participate in the 401(k) Plan. Under the 401(k) Plan, employees are allowed to
make contributions of up to 15 percent of their annual compensation; the Company
may make matching contributions equal to a discretionary percentage, to be
determined by the Company, of the employee's salary reductions. The Company may
also make additional discretionary contributions to the 401(k) Plan. All amounts
contributed by a participant are fully vested at all times. The participant
becomes 20 percent vested in any matching or discretionary contributions after
two years of service. This vesting percentage increases to 100 percent after six
years of service. During fiscal years 2001, 2000, and 1999, the Company
contributed $132,334, $331,596, and $320,438, respectively, to the 401(k) Plan.
(11) RELATED PARTY TRANSACTIONS
During fiscal 2000, the Company had transactions with entities
affiliated with former members of the Board of Directors. These transactions
totaled $158,000.
During fiscal 2001, the Company provided transportation services to
Swift Transportation, Inc. ("Swift") and Central Freight Lines, Inc. ("Central")
and recognized $46,767 and $851,452 in operating revenue, respectively, related
to these services. The Company's Chairman and majority stockholder is an
executive officer of and, directly and through affiliated entities, owns a
significant portion of Swift and is a director of and, directly and through
affiliated entities, owns a significant portion of Central. At September 30,
2001, $600 and $48,584 was owed to the Company from Swift and Central,
respectively, for these services. The prices were established through
arms'-length negotiations between the parties.
Prior to his appointment as the Company's Chief Executive Officer
("CEO"), the Company's CEO was employed by Swift as Vice President of East Coast
Operations. Swift agreed to lease his services to the Company for an initial
term ending December 28, 2003. During this term, the Company's CEO will continue
to assist Swift in the process of obtaining ISO 9002 certification. He also will
consult with Swift concerning potential acquisition candidates and operations
issues. The Company, which primarily transports products in
temperature-controlled trailers, and Swift, as a nationwide truckload carrier of
dry van and flatbed freight, do not compete with each other in any material
respect. The Company reimburses Swift for all salary and benefit expenses
associated with the Company's CEO's employment by Swift. The Company's CEO
retained options to purchase shares of Swift stock that are outstanding at the
commencement of the lease.
The Company paid approximately $297,850 in fees for legal services for
the fiscal year ended September 30, 2001 to a law firm in which one of the
Company's former board members is a partner.
The majority of the Company's owner-operator fleet is leased to drivers
through Interstate Equipment Leasing ("IEL"). The Company's Chairman and
majority stockholder is the owner of IEL. The owner-operators sign lease
agreements directly with IEL. Amounts due to IEL for monthly lease payments are
withheld from Company payments to owner-operators and remitted directly to IEL
by the Company.
On October 23, 2001, IEL loaned the Company $1.6 million in connection
with the purchase of certain tractors at the termination of their lease. The
loan bears interest at 7.5 percent and is due March 31, 2002.
On December 18, 2001, the Company entered into an agreement with Swift
which will allow the Company's tractors to fuel at five of Swift's terminals
that have excess fueling capacity. The Company will purchase and deliver fuel to
these sites (similar to what is done for Company operated terminals) and pay a
per gallon fee to Swift for pumping and storage services. The Company will
benefit to the extent it is able to fuel at Swift's sites as fuel at bulk
fueling locations is generally less expensive than that purchased over the road.
Management believes that these transactions were completed at fair
market value.
(12) QUARTERLY FINANCIAL DATA (UNAUDITED)
------------------------------------
(Amounts in thousands, except per share data)
Fourth Third Second First
Quarter Quarter Quarter Quarter
2001 2001 2001 2001
------------------ ---------------- ------------------- ----------------
Revenue $ 74 508 $ 74,737 $ 64,064 $ 65,509
Operating loss (19,963) (8,716) (8,360) (2,582)
Loss before income
taxes and cumulative effect
of accounting change (22,985) (9,521) (8,827) (2,993)
Net loss attributable to common (26,712) (9,521) (8,827) (2,993)
stockholders
Diluted net loss per share (4.37) (1.56) (1.44) (0.49)
Fourth Third Second First
Quarter Quarter Quarter Quarter
2000 2000 2000 2000
------------------ ---------------- ------------------- ----------------
Revenue $ 61,430 $60,948 $55,159 $53,861
Operating earnings (loss) (10,459) (82) 545 98
Earnings (loss) before income
taxes and cumulative effect
of accounting change (10,805) (418) 122 (221)
Provision (benefit) for income taxes (3,890) (151) 44 (80)
Cumulative effect of
accounting change -- -- -- (3,863)
Net earnings (loss) (6,915) (267) 78 (4,004)
Diluted net earnings (loss) per share $ (1.13) $ (0.04) $ 0.01 $ (0.66)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Simon Transportation Services Inc.:
We have audited the accompanying consolidated statements of financial
position of Simon Transportation Services Inc. (a Nevada corporation) and
subsidiaries as of September 30, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended September 30, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 financial statements referred to above present
fairly, in all material respects, the financial position of Simon Transportation
Services Inc. and subsidiaries as of September 30, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 2001 in conformity with accounting principles
generally accepted in the United States.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2, the
Company (1) is experiencing difficulty in generating sufficient cash flow to
meet its obligations and sustain its operations; (2) has defaulted in making
certain equipment lease payments; (3) is not in compliance with certain
covenants of its revolving credit facility, revenue equipment lease agreements
and other secured long-term debt; (4) has experienced recurring losses from
operations; and (5) has significant negative working capital. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of asset-carrying amounts or
the amounts and classification of liabilities should the Company be unable to
continue as a going concern.
/s/ Arthur Andersen LLP
Salt Lake City, Utah
January 10, 2002