UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Quarterly Period Ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ____________ to ____________
Commission file number 000-20793
SMITHWAY MOTOR XPRESS CORP.
(Exact name of registrant as specified in its charter)
Nevada 42-1433844
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2031 Quail Avenue
Fort Dodge, Iowa 50501
- ---------------------------------------- ----------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 515/576-7418
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES [ ] NO [X]
As of April 28, 2003, the registrant had 3,846,821 shares of Class A Common
Stock and 1,000,000 shares of Class B Common Stock outstanding.
1
PART I
FINANCIAL INFORMATION
PAGE
NUMBER
Item 1 Financial Statements..................................................... 3-9
Condensed Consolidated Balance Sheets as of December 31, 2002 and
March 31, 2003 (unaudited).......................................... 3-4
Condensed Consolidated Statements of Operations for the three months
ended March 31, 2002 and 2003 (unaudited)............................ 5
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2002 and 2003 (unaudited)............................ 6-7
Notes to Condensed Consolidated Financial Statements (unaudited)......... 8-9
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 10-16
Item 3 Quantitative and Qualitative Disclosures About Market Risks.............. 16
Item 4 Controls and Procedures.................................................. 16
PART II
OTHER INFORMATION
Item 1 Legal Proceedings........................................................ 17
Item 2 Changes in Securities and Use of Proceeds................................ 17
Item 3 Defaults Upon Senior Securities.......................................... 17
Item 4 Submission of Matters to a Vote of Security Holders...................... 17
Item 5 Other Information........................................................ 17
Item 6 Exhibits and Reports on Form 8-K......................................... 17
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
------------------------------------------
December 31, March 31,
2002 2003
--------------------- -------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents..............................$ 105 $ 118
Receivables:
Trade............................................... 13,496 15,359
Other............................................... 629 1,480
Inventories............................................ 868 904
Deposits, primarily with insurers...................... 753 831
Prepaid expenses....................................... 1,492 2,662
Deferred income taxes.................................. 2,263 2,435
--------------------- -------------------
Total current assets......................... 19,606 23,789
--------------------- -------------------
Property and equipment:
Land................................................... 1,548 1,548
Buildings and improvements............................. 8,210 8,210
Tractors............................................... 71,221 71,239
Trailers............................................... 42,517 40,787
Other equipment........................................ 8,105 5,773
--------------------- -------------------
131,601 127,557
Less accumulated depreciation.......................... 64,031 64,802
Net property and equipment................... 67,570 62,755
--------------------- -------------------
Goodwill................................................. 1,745 1,745
Other assets............................................. 488 443
--------------------- -------------------
$ 89,409 $ 88,732
===================== ===================
See accompanying notes to condensed consolidated financial statements.
3
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
---------------------------------------------
December 31, March 31,
2002 2003
---------------------- ----------------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.....................................$ 11,595 $ 11,942
Accounts payable......................................................... 4,556 5,989
Accrued loss reserves.................................................... 3,882 4,222
Accrued compensation..................................................... 2,152 2,681
Checks in excess of cash balances........................................ 1,086 1,010
Other accrued expenses................................................... 463 620
---------------------- ----------------------
Total current liabilities...................................... 23,734 26,464
Long-term debt, less current maturities.................................... 30,533 28,051
Deferred income taxes...................................................... 10,257 9,510
Line of credit............................................................. 1,692 3,072
---------------------- ----------------------
Total liabilities.............................................. 66,216 67,097
---------------------- ----------------------
Stockholders' equity:
Preferred stock.......................................................... - -
Common stock:
Class A............................................................... 40 40
Class B............................................................... 10 10
Additional paid-in capital............................................... 11,393 11,393
Retained earnings........................................................ 12,164 10,606
Reacquired shares, at cost............................................... (414) (414)
---------------------- ----------------------
Total stockholders' equity..................................... 23,193 21,635
Commitments
---------------------- ----------------------
$ 89,409 $ 88,732
====================== ======================
See accompanying notes to condensed consolidated financial statements.
4
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(Unaudited)
Three months ended
March 31,
--------------------------------------
2002 2003
------------------ -------------------
Operating revenue:
Freight..............................................$ 41,059 $ 39,879
Other................................................ 161 7
------------------ -------------------
Operating revenue.............................. 41,220 39,886
------------------ -------------------
Operating expenses:
Purchased transportation............................. 15,291 14,355
Compensation and employee benefits................... 13,404 12,374
Fuel, supplies, and maintenance...................... 6,484 7,837
Insurance and claims................................. 1,813 1,022
Taxes and licenses................................... 836 841
General and administrative........................... 1,809 1,358
Communications and utilities......................... 507 412
Depreciation and amortization........................ 3,776 3,710
------------------ -------------------
Total operating expenses....................... 43,920 41,909
------------------ -------------------
Loss from operations............................. (2,700) (2,023)
Financial (expense) income
Interest expense..................................... (561) (450)
Interest income...................................... 7 2
------------------ -------------------
Loss before income taxes......................... (3,254) (2,471)
Income tax benefit........................................ (1,217) (913)
------------------ -------------------
Net loss.........................................$ (2,037) $ (1,558)
================== ===================
Basic and diluted loss per share..........................$ (0.42) $ (0.32)
================== ===================
Basic and diluted weighted average shares outstanding..... 4,844,524 4,846,021
================== ===================
See accompanying notes to condensed consolidated financial statements.
5
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)
Three months ended
March 31,
------------------------------
2002 2003
-------------- --------------
Cash flows from operating activities:
Net loss.........................................................$ (2,037) $ (1,558)
-------------- --------------
Adjustments to reconcile net loss to cash used by operating
activities:
Depreciation and amortization................................ 3,776 3,710
Deferred income tax benefit.................................. (1,224) (919)
Change in:
Receivables............................................. (2,740) (2,714)
Inventories............................................. 2 (36)
Deposits, primarily with insurers....................... 31 (78)
Prepaid expenses........................................ (1,187) (1,170)
Accounts payable and other accrued liabilities.......... 2,739 2,459
-------------- --------------
Total adjustments................................... 1,397 1,252
-------------- --------------
Net cash used in operating activities............. (640) (306)
-------------- --------------
Cash flows from investing activities:
Purchase of property and equipment............................... (273) (192)
Proceeds from sale of property and equipment..................... 1,311 2,011
Other............................................................ 11 45
-------------- --------------
Net cash provided by investing activities............. 1,049 1,864
-------------- --------------
Cash flows from financing activities:
Net borrowings on line of credit................................ 2,395 1,380
Principal payments on long-term debt............................ (3,891) (2,847)
Change in checks issued in excess of cash balances.............. 385 (76)
Treasury stock reissued......................................... 5 -
-------------- --------------
Net cash used in financing activities.................. (1,106) (1,543)
-------------- --------------
Net (decrease) increase in cash and cash equivalents... (697) 13
Cash and cash equivalents at beginning of period................... 722 105
-------------- --------------
Cash and cash equivalents at end of period......................... $ 25 $ 118
============== ==============
See accompanying notes to condensed consolidated financial statements.
6
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows, continued
(Dollars in thousands)
(unaudited)
Three months ended
March 31,
------------------------------
2002 2003
-------------- --------------
Supplemental disclosure of cash flow information:
Cash paid (received) during period for:
Interest................................................. $ 582 $ 365
Income taxes............................................. (27) 15
============== ==============
Supplemental schedules of noncash investing and financing
activities:
Notes payable issued for tractors and trailers.................. $ 500 $ 712
Treasury stock reissued......................................... 5 -
============== ==============
See accompanying notes to condensed consolidated financial statements.
7
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The condensed consolidated financial statements include the accounts of
Smithway Motor Xpress Corp., a Nevada holding company, and its four wholly
owned subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
The condensed consolidated financial statements have been prepared, without
audit, in accordance with accounting principles generally accepted in the
United States of America, pursuant to the published rules and regulations
of the Securities and Exchange Commission. In the opinion of management,
the accompanying condensed consolidated financial statements include all
adjustments which are necessary for a fair presentation of the results for
the interim periods presented, such adjustments being of a normal recurring
nature. Certain information and footnote disclosures have been condensed or
omitted pursuant to such rules and regulations. The December 31, 2002,
Condensed Consolidated Balance Sheet was derived from the audited balance
sheet of the Company for the year then ended. It is suggested that these
condensed consolidated financial statements and notes thereto be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K for the year ended December 31, 2002.
Results of operations in interim periods are not necessarily indicative of
results to be expected for a full year.
Note 2. Net earnings per common share
Basic earnings per share have been computed by dividing net earnings by the
weighted-average outstanding Class A and Class B common shares during each
of the quarters. Diluted earnings per share have been calculated by also
including in the computation the effect of employee stock options,
nonvested stock, and similar equity instruments granted to employees as
potential common shares. Because the Company suffered a net loss for the
quarters ended March 31, 2002, and 2003, the effects of potential common
shares were not included in the calculation as their effects would be
anti-dilutive. Stock options outstanding at March 31, 2002, and 2003,
totaled 647,525 and 422,025, respectively.
Note 3. Stock Option Plans
The Company has three stock-based employee compensation plans:
(1) The Company has reserved 25,000 shares of Class A common stock for
issuance pursuant to an outside director stock option plan. The term
of each option shall be six years from the grant date. Options vest on
the first anniversary of the grant date. The exercise price of each
stock option is 85 percent of the fair market value of the common
stock on the date of grant. In July 2000 the Company granted outside
directors 12,000 stock options in the aggregate not covered by this
plan.
(2) The Company has reserved 500,000 shares of Class A common stock
for issuance pursuant to an incentive stock option plan. Any shares
which expire unexercised or are forfeited become available again for
issuance under the plan. Under this plan, no awards of incentive stock
options may be made after December 31, 2004.
(3) The Company has reserved 400,000 shares of Class A common stock
for issuance pursuant to a new employee incentive stock option plan
adopted during 2001. Any shares which expire unexercised or are
forfeited become available again for issuance under the plan. Under
this plan, no award of incentive stock options may be made after
August 6, 2011.
The Company accounts for these plans under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations. No stock-based
employee compensation cost is reflected in the statement of operations, as
all options granted under these plans had an exercise price equal to the
market value of the common stock on the date of the grant. The following
table illustrates the effect on net loss and loss per share if the Company
had applied the fair value
8
recognition provisions of FASB Statement No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation.
Three months ended
March 31,
-----------------------------
2002 2003
------------ ------------
Net loss, as reported (2,037) (1,558)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (1) (5)
------------ ------------
Pro forma net loss (2,038) (1,563)
============ ============
Loss per share
Basic and Diluted - as reported (0.42) (0.32)
Basic and Diluted - pro forma (0.42) (0.32)
Note 4. Long-Term Debt
During March and April 2003, the Company amended its financing arrangement
with LaSalle Bank. These amendments included provisions which waive a
covenant violation at March 31, 2003, adjust the covenant requirements
going forward, increase the interest rate from LaSalle's prime rate to
prime rate plus two percent, and accelerate the expiration date of the
agreement to April 1, 2004. In addition, the Company amended its equipment
financing arrangement to provide for a waiver of a covenant violation at
March 31, 2003, and the adjustment of the covenant requirement going
forward. The Company believes the covenant compliance requirements for both
agreements are reasonably achievable, although there can be no assurance
that the required financial performance will be achieved.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Except for the historical information contained herein, the discussion in
this quarterly report on Form 10-K contains forward-looking statements that
involve risk, assumptions, and uncertainties that are difficult to predict.
Words such as "anticipates," "believes," "estimates," "projects," "expects,"
variations of these words, and similar expressions, are intended to identify
such forward-looking statements. These statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Such
statements are based upon the current beliefs and expectations of the Company's
management and are subject to significant risks and uncertainties. Actual
results may differ from those set forth in forward-looking statements. The
following factors, among others, could cause actual results to differ materially
from those in forward-looking statements: failure to turn around continued
operating losses, which could result in further violation of bank covenants and
acceleration of indebtedness at several financial institutions; the ability to
obtain financing on acceptable terms, and obtain waivers and amendments to
current financing in the event of default; 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, or changes in excess coverage, relating to
accident, cargo, workers' compensation, health, and other claims; the resale
value of used equipment and prices of new equipment; seasonal factors such as
harsh weather conditions that increase operating costs; regulatory requirements
that increase costs and decrease efficiency, including new emissions standards
and hours-of-service regulations; changes in management; and the ability to
negotiate, consummate, and integrate acquisitions. Readers should review and
consider the various disclosures made by the Company in its press releases,
stockholder reports, and public filings, as well as the factors explained in
greater detail in the Company's annual report on Form 10-K.
The Company's fiscal year ends on December 31 of each year. Thus, this
report discusses the first quarter of the Company's 2002 and 2003 fiscal years.
For the three months ended March 31, 2003, operating revenue decreased 3.2%
to $39.9 million from $41.2 million during the same quarter in 2002. Net loss
was $1.6 million, or ($0.32) per diluted share, compared with net loss of $2.0
million, or ($0.42) per diluted share, during the 2002 quarter.
The Company operates a tractor-trailer fleet comprised of both
Company-owned vehicles and vehicles obtained under leases from independent
contractors and third-party finance companies. Fluctuations among expense
categories may occur as a result of changes in the relative percentage of the
fleet obtained through equipment that is owned versus equipment that is leased
from independent contractors or financing sources. Costs associated with revenue
equipment acquired under operating leases or through agreements with independent
contractors are expensed as "purchased transportation." For these categories of
equipment the Company does not incur costs such as interest and depreciation as
it might with owned equipment. In addition, independent contractor tractors,
driver compensation, fuel, communications, and certain other expenses are borne
by the independent contractors and are not incurred by the Company. Obtaining
equipment from independent contractors and under operating leases reduces
capital expenditures and on-balance sheet leverage and effectively shifts
expenses from interest to "above the line" operating expenses. The fleet profile
of acquired companies and the Company's relative recruiting and retention
success with Company-employed drivers and independent contractors will cause
fluctuations from time-to-time in the percentage of the Company's fleet that is
owned versus obtained from independent contractors and under operating leases.
10
Results of Operations
The following table sets forth the percentage relationship of certain items
to revenue for the three months ended March 31, 2002 and 2003:
Three months ended
March 31,
-----------------------------
2002 2003
------------- --------------
Operating revenue................................ 100.0% 100.0%
Operating expenses:
Purchased transportation................ 37.1 36.0
Compensation and employee benefits...... 32.5 31.0
Fuel, supplies, and maintenance......... 15.7 19.6
Insurance and claims.................... 4.4 2.6
Taxes and licenses...................... 2.0 2.1
General and administrative.............. 4.4 3.4
Communication and utilities............. 1.2 1.0
Depreciation and amortization........... 9.2 9.3
-------------- -------------
Total operating expenses................ 106.6 105.1
-------------- -------------
Loss from operations............................. (6.6) (5.1)
Interest expense, net............................ 1.4 1.1
-------------- -------------
Loss before income taxes......................... (7.9) (6.2)
Income tax benefit............................... (3.0) (2.3)
-------------- -------------
Net loss......................................... (4.9)% (3.9)%
============== =============
Comparison of three months ended March 31, 2003, with three months ended March
31, 2002.
Operating revenue decreased $1.3 million (3.2%), to $39.9 million in the
2003 quarter from $41.2 million in the 2002 quarter. Lower weighted-average
tractors, partially offset by increased average revenue per tractor per week and
increased fuel surcharge revenue, were responsible for the decrease in operating
revenue. Weighted-average tractors decreased to 1,285 in the 2003 quarter from
1,517 in the 2002 quarter as the Company disposed of a portion of its unseated
company owned tractors in the last half of 2002 and contracted with fewer
independent contractor providers of equipment. Management expects
weighted-average tractors will remain at current levels as few tractors are
scheduled to be added in 2003. Average revenue per tractor per week (excluding
revenue from brokerage operations and fuel surcharges) increased to $2,183 in
the 2003 quarter from $1,990 in the 2002 quarter, primarily due to a lower
number of unseated company tractors. Revenue per loaded mile, net of surcharges,
remained constant at $1.35 in both quarters. Finally, fuel surcharge revenue
increased $1.5 million to $1.7 million in the 2003 quarter from $220,000 in the
2002 quarter. During the 2003 and 2002 quarters, approximately $1.1 million and
$111,000, respectively, of the fuel surcharge revenue collected helped to offset
Company fuel costs. The remainder was passed through to independent contractors.
Purchased transportation consists primarily of payments to independent
contractor providers of revenue equipment, expenses related to brokerage
activities, and payments under operating leases of revenue equipment. Purchased
transportation decreased $936,000 (6.1%), to $14.4 million in the 2003 quarter
from $15.3 million in the 2002 quarter, as the Company contracted with fewer
independent contractor providers of revenue equipment. As a percentage of
revenue, purchased transportation decreased to 36.0% of revenue in the 2003
quarter compared with 37.1% in the 2002 quarter. This reflects a decrease in the
percentage of the fleet supplied by independent contractors. Management believes
the decline in independent contractors as a percentage of the Company's fleet is
attributable to high fuel costs, high insurance costs, tighter credit standards,
and slow freight demand, which have diminished the pool of drivers interested in
becoming or remaining independent contractors. The percentage of total operating
revenue provided by independent contractors decreased to 38.1% in the 2003
quarter from 41.2% in the 2002 quarter.
Compensation and employee benefits decreased $1.0 million (7.7%), to $12.4
million in the 2003 quarter from $13.4 million in the 2002 quarter. As a
percentage of revenue, compensation and employee benefits decreased to 31.0% in
the 2003 quarter from 32.5% in the 2002 quarter. The decrease was primarily
attributable to a decrease in wages paid to non-driver employees resulting from
staff reductions and a decrease in workers' compensation claims paid and
reserved. These factors were partially offset by additional wages paid to new
drivers for sign-on
11
bonuses implemented to increase driver recruiting and increased health claims
and premiums in the 2003 quarter. Management expects costs for health claims and
premiums will continue to increase in future periods.
Fuel, supplies, and maintenance increased $1.4 million (20.9%), to $7.8
million in the 2003 quarter from $6.5 million in the 2002 quarter. As a
percentage of revenue, fuel, supplies, and maintenance increased to 19.6% of
revenue in the 2003 quarter compared with 15.7% in the 2002 quarter. This
increase was attributable primarily to higher fuel prices, which increased
approximately 37% to an average of $1.53 per gallon in the 2003 quarter from
$1.12 per gallon in the 2002 quarter. The increase in fuel prices was partially
offset by a $1.0 million increase in fuel surcharge revenue which is included in
operating revenue.
Insurance and claims decreased $791,000 (43.6%), to $1.0 million in the
2003 quarter from $1.8 million in the 2002 quarter. As a percentage of revenue,
insurance and claims decreased to 2.6% of revenue in the 2003 quarter compared
with 4.4% in the 2002 quarter, primarily due to a net premium refund of $467,000
for the policy year ended June 30, 2002, upon accepting a $75,000 increase in
self-insured retention for such policy year. The cost of insurance and claims
increased substantially on July 1, 2002, when the Company increased its
self-insured retention from $50,000 to $250,000 per occurrence, without a
premium reduction that fully offset the increase in retention. The higher
self-insured retention increases the Company's risk associated with frequency
and severity of accidents and could increase the Company's expenses or make them
more volatile from period to period. The insurance policies are scheduled for
renewal on July 1, 2003. If the Company is unable to renew the policies on their
current terms, the Company may modify the self-insured retention, and/or excess
coverage, or evaluate other alternatives.
Taxes and licenses increased $5,000 (0.6%), to $841,000 in the 2003 quarter
from $836,000 in the 2002 quarter. As a percentage of revenue, taxes and
licenses remained relatively constant at 2.1% of revenue in the 2003 quarter
compared with 2.0% of revenue in the 2002 quarter.
General and administrative expenses decreased $451,000 (24.9%), to $1.4
million in the 2003 quarter from $1.8 million in the 2002 quarter. As a
percentage of revenue, general and administrative expenses decreased to 3.4% of
revenue in the 2003 quarter compared with 4.4% of revenue in the 2002 quarter.
This decrease was attributable to successful cost cutting measures and the
elimination of commissioned agents at two locations.
Communications and utilities decreased $95,000 (18.7%), to $412,000 in the
2003 quarter from $507,000 in the 2002 quarter. As a percentage of revenue,
communications and utilities remained relatively constant at 1.0% of revenue in
the 2003 quarter compared with 1.2% of revenue in the 2002 quarter.
Depreciation and amortization decreased $66,000 (1.7%), to $3.7 million in
the 2003 quarter from $3.8 million in the 2002 quarter. The gain or loss on
retirement, sale, or write-down of equipment is included in depreciation and
amortization. In the 2003 and 2002 quarter, depreciation and amortization
included net gains from the sale of equipment of $210,000 and $649,000,
respectively. As a percentage of revenue, depreciation and amortization remained
relatively constant at 9.3% of revenue in the 2003 quarter compared with 9.2% of
revenue in the 2002 quarter.
Interest expense, net, decreased $106,000 (19.1%), to $448,000 in the 2003
quarter from $554,000 in the 2002 quarter. As a percentage of revenue, interest
expense, net, decreased to 1.1% of revenue in the 2003 quarter compared with
1.4% in the 2002 quarter. These decreases were attributable to lower average
debt outstanding.
As a result of the foregoing, the Company's pre-tax margin was (6.2%) in
the 2003 quarter versus (7.9%) in the 2002 quarter.
The Company's income tax benefit was $913,000, or 36.9% of loss before
income taxes. The Company's income tax benefit in the 2002 quarter was $1.2
million, or 37.4% of loss before income taxes. In both quarters, the effective
tax rate is different from the expected combined tax rate for a company
headquartered in Iowa because of the cost of nondeductible driver per diem
expense absorbed by the Company. The impact of the Company's paying per diem
travel expenses varies depending upon the ratio of drivers to independent
contractors and the level of the Company's pre-tax earnings.
As a result of the factors described above, net loss was $1.6 million in
the 2003 quarter (3.9% of revenue), compared with net loss of $2.0 million in
the 2002 quarter (4.9% of revenue).
12
Liquidity and Capital Resources
Uses and Sources of Cash
The Company requires cash to fund working capital requirements and to
service its debt. The Company has historically financed acquisitions of new
equipment with borrowings under installment notes payable to commercial lending
institutions and equipment manufacturers, borrowings under lines of credit, cash
flow from operations, and equipment leases from third-party lessors. The Company
also has obtained a portion of its revenue equipment fleet from independent
contractors who own and operate the equipment, which reduces overall capital
expenditure requirements compared with providing a fleet of entirely
company-owned equipment.
The Company's primary sources of liquidity have been funds provided by
operations and borrowings under credit arrangements with financial institutions
and equipment manufacturers. The Company is experiencing a period of negative
cash flow as continuing losses and declining revenue have resulted in lower cash
generated from operations and reduced borrowing capacity. As of the date of this
report, the Company has little borrowing availability on its line of credit.
Accordingly, the Company expects minimal capital expenditures during the
remainder of 2003. The Company's ability to fund its cash requirements in future
periods will depend on its ability to comply with covenants contained in
financing arrangements and improve its operating results and cash flow. The
Company's ability to achieve the required improvements will depend on general
shipping demand by the Company's customers, fuel prices, the availability of
drivers and independent contractors, insurance and claims experience, and other
factors. Management is in the process of implementing several steps that are
intended to improve the Company's operating results and achieve compliance with
the financial covenants. These steps include: expanding the size of the
Company's tractor fleet through the addition of two identified dedicated fleet
operations and recruiting approximately 20 owner-operators over the remainder of
the year; improving the utilization per tractor through a full-time production
manager and expected increases in general freight levels; implementing a yield
management program in which the Company seeks additional favorable freight while
ceasing to haul less favorable freight; and identifying additional areas for
cost containment, including, personnel costs and liability insurance and claims.
In addition to these steps, management is working with a consulting firm to
identify and evaluate additional measures to achieve and enhance profitability
over the longer term. Although management believes that seasonal improvements in
shipping demand and the actions being evaluated should generate the required
improvements, there is no assurance that the improvements will occur as planned.
Although there can be no assurance, management believes that cash generated
by operations and available sources of financing for acquisitions of revenue
equipment, although such sources are limited, will be adequate to meet its
currently anticipated working capital requirements and other cash needs through
2003. To the extent that actual results or events differ from management's
financial projections or business plans, the Company's liquidity may be
adversely affected. Specifically, the Company's liquidity may be adversely
affected by one or more of the following factors: continuing weak freight demand
or a loss in customer relationships or volume; the ability to attract and retain
sufficient numbers of qualified drivers and owner-operators; elevated fuel
prices and the ability to collect fuel surcharges; costs associated with
insurance and claims; inability to maintain compliance with, or negotiate
amendments to, loan covenants; and the possibility of shortened payment terms by
the Company's suppliers and vendors worried about the Company's ability to meet
payment obligations. The Company expects to fund its cash requirements primarily
with cash generated from operations and revolving borrowings under its bank
financing.
Net cash used by operating activities was $306,000 for the three months
ended March 31, 2003. Historically, the Company's principal use of cash from
operations is to service debt and to internally finance acquisitions of revenue
equipment. Total receivables increased $2.7 million for the three months ended
March 31, 2003. The average age of the Company's trade accounts receivable was
approximately 33.3 days in the 2002 period and 34.5 days in the 2003 period.
Net cash provided by investing activities was $1.9 million for the three
months ended March 31, 2003. Such amounts related primarily to sales of revenue
equipment and other fixed assets.
Net cash used in financing activities was $1.5 million for the three months
ended March 31, 2003, consisted primarily of net payments of principal under the
Company's long-term debt agreements.
13
The Company has a financing arrangement with LaSalle Bank, which expires on
April 1, 2004, and provides for automatic month-to-month renewals under certain
conditions. LaSalle may terminate the arrangement prior to April 1, 2004, in the
event of default, and may terminate at anytime during the renewal terms. Prior
to recent amendments, the arrangement expired on December 31, 2004. The
arrangement provides for a term loan, a revolving line of credit, a capital
expenditure loan, and financing for letters of credit. The combination of all
loans with LaSalle Bank cannot exceed the lesser of $32.5 million or a specified
borrowing base.
At March 31, 2003, the term loan had a principal balance of $12.1 million,
payable in 57 remaining equal monthly principal installments of $212,000. The
revolving line of credit allows for borrowings up to 85 percent of eligible
receivables. At March 31, 2003, total borrowings under the revolving line were
$3.1 million. The capital expenditure loan allows for borrowing up to 80 percent
of the purchase price of revenue equipment purchased with such advances,
provided borrowings under the capital expenditure loan are limited to $2.0
million annually, and $4.0 million over the term of the arrangement. At March
31, 2003, the amount owed under capital expenditure notes was $1.1 million. At
March 31, 2002, the Company had outstanding letters of credit totaling $7.4
million for self-insured amounts under its insurance programs. These letters of
credit directly reduce the amount of potential borrowings available under the
financing arrangement. Any increase in self-insured retention, as well as
increases in claim reserves, may require additional letters of credit to be
posted, which would negatively affect the Company's liquidity. At March 31,
2003, the Company's borrowing limit under the financing arrangement was $24.7
million, leaving approximately $1.1 million in remaining availability at such
date.
The Company is required to pay a facility fee on the LaSalle financing
arrangement of .25% of the maximum loan limit ($32.5 million). Borrowings under
the arrangement are secured by liens on revenue equipment, accounts receivable,
and certain other assets. In connection with an early March 2003 amendment, the
interest rate on outstanding borrowings under the arrangement was increased from
LaSalle's prime rate to the prime rate plus two percent.
The LaSalle financing arrangement requires compliance with certain
financial covenants, including compliance with a minimum tangible net worth,
capital expenditure limits, and a fixed charge coverage ratio. The Company was
not in compliance with the tangible net worth covenant at March 31, 2003, but a
waiver was received. These covenants were amended on April 15, 2003 to
requirements that management believes are reasonably achievable, although there
can be no assurance that the required financial performance will be achieved. In
addition, equipment financing provided by a manufacturer contains a minimum
tangible net worth requirement. The Company was not in compliance with the
required minimum tangible net worth requirement at March 31, 2003. A waiver was
obtained and this covenant has since been amended. Management expects to remain
in compliance going forward. If the Company fails to maintain compliance with
these financial covenants, or to obtain a waiver of any noncompliance, the
lenders will have the right to declare all sums immediately due and pursue other
remedies. In such an event, the Company's liquidity would be materially and
adversely impacted, and the Company's ability to continue as a going concern
could be called into question if alternative financing could not be found.
Contractual Obligations and Commercial Commitments
The following tables set forth the contractual obligations and other
commercial commitments as of March 31, 2003:
Principal Payments Due by Year
(In Thousands)
Less than After
Contractual Obligations Total One year 2-3 years 4-5 years 5 years
------------------------------------------------------------------------------------------------------------------
Long-term debt $39,993 $11,942 $17,611 $10,416 $ 24
Operating leases 732 444 93 78 117
--------------------------------------------------------------------
Total contractual cash obligations $40,725 $12,386 $17,704 $10,494 $141
====================================================================
The Company had no other commercial commitments at March 31, 2003.
14
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make decisions based upon estimates, assumptions, and factors it
considers as relevant to the circumstances. Such decisions include the selection
of applicable accounting principles and the use of judgment in their
application, the results of which impact reported amounts and disclosures.
Changes in future economic conditions or other business circumstances may affect
the outcomes of management's estimates and assumptions. Accordingly, actual
results could differ from those anticipated. A summary of the significant
accounting policies followed in preparation of the financial statements included
in this Form 10-Q is contained in Note 1 of the consolidated financial
statements included in the Company's Form 10-K for the year ended December 31,
2002. Other footnotes in the Form 10-K describe various elements of the
financial statements included in this Form 10-Q and the assumptions on which
specific amounts were determined.
The Company's critical accounting policies include the following:
Revenue Recognition
The Company generally recognizes operating revenue when the freight to be
transported has been loaded. The Company operates primarily in the
short-to-medium length haul category of the trucking industry; therefore, the
Company's typical customer delivery is completed one day after pickup.
Accordingly, this method of revenue recognition is not materially different from
recognizing revenue based on completion of delivery. The Company recognizes
operating revenue when the freight is delivered for longer haul loads where
delivery is completed more than one day after pickup. Amounts payable to
independent contractors for purchased transportation, to Company drivers for
wages, and other direct expenses are accrued when the related revenue is
recognized.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided by
use of the straight-line and declining-balance methods over lives of 5 to 39
years for buildings and improvements, 5 years for tractors, 7 years for
trailers, and 3 to 10 years for other equipment. Tires purchased as part of
revenue equipment are capitalized as a cost of the equipment. Replacement tires
are expensed when placed in service. Expenditures for maintenance and minor
repairs are charged to operations, and expenditures for major replacements and
betterments are capitalized. The cost and related accumulated depreciation on
property and equipment retired, traded, or sold are eliminated from the property
accounts at the time of retirement, trade, or sale. The gain or loss on
retirement or sale is included in depreciation and amortization in the
consolidated statements of operation. Gains or losses on trade-ins are included
in the basis of the new asset.
Estimated Liability for Insurance Claims
Losses resulting from auto liability, physical damage, workers'
compensation, and cargo loss and damage are covered by insurance subject to
certain deductibles. Losses resulting from uninsured claims are recognized when
such losses are known and can be estimated. The Company estimates and accrues a
liability for its share of ultimate settlements using all available information.
The Company accrues for claims reported, as well as for claims incurred but not
reported, based upon the Company's past experience. Expenses depend on actual
loss experience and changes in estimates of settlement amounts for open claims
which have not been fully resolved. However, final settlement of these claims
could differ materially from the amounts the Company has accrued at year-end.
Management's judgment concerning the ultimate cost of claims and modification of
initial reserved amounts is an important part of establishing claims reserves,
and is of increasing significance with higher self-insured retention.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net undiscounted cash
flows expected to be generated by the asset. Management's judgment concerning
future cash flows is an important part of this determination. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less the costs to sell. The Company has decided to maintain
its revenue
15
equipment for the foreseeable future and not replace aging tractors. If resale
values remain at current levels or decline, the Company may incur increased
maintenance costs and a lower gain or loss on sale resulting from retaining
equipment even longer.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks from changes in certain interest
rates on its debt. In connection with an early March 2003 amendment, the
Company's financing arrangement with LaSalle Bank was amended to provide a
variable interest rate based on LaSalle's prime rate plus two percent, provided
there has been no default. Prior to the amendment the variable interest rate was
LaSalle's prime rate. In addition, approximately $24.0 million of the Company's
other debt carries variable interest rates. This variable interest exposes the
Company to the risk that interest rates may rise. Assuming borrowing levels at
March 31, 2003, a one-point increase in the prime rate would increase interest
expense by approximately $403,000. The remainder of the Company's other debt
carries fixed interest rates and exposes the Company to the risk that interest
rates may fall. At March 31, 2003, approximately 93% of the Company's debt
carries a variable interest rate and the remainder is fixed.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in its periodic reports
filed with the Securities and Exchange Commission is recorded, processed,
summarized, and reported within the time periods specified in the rules and
forms of the Commission and that such information is accumulated and
communicated to the Company's management. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rules 13a-14 and
15d-14 of the Securities Exchange Act of 1934, as amended). Based upon that
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date the Company carried out its evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
16
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No reportable events or material changes occurred during the quarter for
which this report is filed.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The LaSalle Bank financing arrangement requires compliance with certain
financial covenants, including compliance with a minimum tangible net worth,
capital expenditure limits, and a fixed charge coverage ratio. The Company was
not in compliance with the tangible net worth covenant at March 31, 2003, but a
waiver was received. These covenants were amended on April 15, 2003 to
requirements that management believes are reasonably achievable, although there
can be no assurance that the required financial performance will be achieved. In
addition, equipment financing provided by a manufacturer contains a minimum
tangible net worth requirement. The Company was not in compliance with the
required minimum tangible net worth requirement at March 31, 2003. A waiver was
obtained and this covenant has since been amended. Management expects to remain
in compliance going forward. If the Company fails to maintain compliance with
these financial covenants, or to obtain a waiver of any noncompliance, the
lenders will have the right to declare all sums immediately due and pursue other
remedies. In such an event, the Company's liquidity would be materially and
adversely impacted, and the Company's ability to continue as a going concern
could be called into question if alternative financing could not be found.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
3.1 * Articles of Incorporation.
3.2 * Bylaws.
4.1 * Articles of Incorporation.
4.2 * Bylaws.
10.13 # Third Amendment to Amended and Restated Loan and Security Agreement dated March 5,
2003, between LaSalle Bank National Association, Smithway Motor Xpress, Inc., as
Borrower, and East West Motor Express, Inc., as Borrower.
10.14 # Fourth Amendment to Amended and Restated Loan and Security Agreement dated March 28,
2003, between LaSalle Bank National Association, Smithway Motor Xpress, Inc., as
Borrower, and East West Motor Express, Inc., as Borrower.
- ---------------------
* Incorporated by reference from the Company's Registration Statement on Form S-1, Registration No.
33-90356, effective June 27, 1996.
# Filed herewith.
(b) Reports on Form 8-K. None.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SMITHWAY MOTOR XPRESS CORP.
Date: May 13, 2003 By: /s/ G. Larry Owens
-------------------------------
G. Larry Owens
Executive Vice President, Chief Administrative
Officer, and Chief Financial Officer, in his
capacity as such and on behalf of the issuer
18
CERTIFICATIONS
I, William G. Smith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Smithway Motor Xpress
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003 /s/ William G. Smith
-----------------------------
William G. Smith
Chief Executive Officer
19
I, G. Larry Owens, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Smithway Motor Xpress
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003 /s/ G. Larry Owens
-----------------------------
G. Larry Owens
Chief Financial Officer
20