SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Fiscal Year Ended December 31, 1997
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)
SMITHWAY MOTOR XPRESS CORP.
(Exact name of registrant as specified in its charter)
Nevada 42-1433844
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of 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
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. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $_______ as of March 9, 1998, (based upon the $___ per share
closing price on that date as reported by Nasdaq). In making this calculation
the registrant has assumed, without admitting for any purpose, that all
executive officers, directors, and holders of more than 5% of a class of
outstanding common stock, and no other persons, are affiliates.
As of March 9, 1998, the registrant had 4,009,447 shares of Class A Common Stock
and 1,000,000 shares of Class B Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: The information set forth under Part
III, Items 10, 11, 12, and 13 of this Report is incorporated by reference from
the registrant's definitive proxy statement for the 1998 annual meeting of
stockholders that will be filed no later than April 30, 1998.
Explanatory Note
This amendment to Form 10-K for the fiscal year ended December 31, 1997, is
being filed to correct a typographical error under Item 6. Selected Financial
and Operating Data. The Company's basic and diluted earnings per common share
were $1.13 for the fiscal year ended December 31, 1997. The Form 10-K originally
filed by EDGAR incorrectly reflects basic and diluted earnings per common share
of ($1.13). This Form 10-K/A is filed solely to correct that error.
1
Cross Reference Index
The following cross reference index indicates the document and location of the
information contained herein and incorporated by reference into the Form 10-K.
Document and Location
Part I
Item 1 Business Page 3 herein
Item 2 Properties Page 8 herein
Item 3 Legal Proceedings Page 8 herein
Item 4 Submission of Matters to a Vote of Security
Holders Page 8 herein
Part II
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters Page 9 herein
Item 6 Selected Financial Data Page 10 herein
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations Page 11 herein
Item 8 Financial Statements and Supplementary Data Page 16 herein
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure Page 16 herein
Part III
Item 10 Directors and Executive Officers of the
Registrant Page 2 of Proxy Statement
Item 11 Executive Compensation Page 4 of Proxy Statement
Item 12 Security Ownership of Certain Beneficial
Owners and Management Page 7 of Proxy Statement
Item 13 Certain Transactions Page 8 of Proxy Statement
Part IV
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K Pages 17 through 39 herein
-----------------------------
This report contains "forward-looking statements" in paragraphs that are
marked with an asterisk. These statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
anticipated. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations Cautionary Statement Regarding Forward-Looking
Statements" for additional information and factors to be considered concerning
forward-looking statements.
2
PART I
ITEM 1. BUSINESS
The Company
Smithway Motor Xpress Corp. ("Smithway" or the "Company") is a truckload
carrier that provides nationwide transportation of diversified freight,
concentrating primarily on the flatbed segment of the truckload market. The
Company uses its "Smithway Network" of 24 computer-connected field offices,
commission agencies, and Company-owned terminals to offer comprehensive
truckload transportation services to shippers located predominantly between the
Rocky Mountains in the West and the Appalachian Mountains in the East, and in
eight Canadian provinces.
Prior to 1984, the Company specialized in transporting building
materials on flatbed trailers. William G. Smith became President of Smithway in
1984, and led the Company's effort to diversify its customer and freight base,
form the Smithway Network of locations, and implement systems to support
sustained growth and premium service. After establishing an efficient growth
platform, management commenced the Company's acquisition strategy in 1995 to
take advantage of economies of scale, customer relationships, and other
opportunities offered by industry consolidation.
Smithway acquired the operations of five trucking companies between June
1995 and September 1997. In each transaction, Smithway purchased specific assets
for fair market value and paid the selling company's owner a small percentage of
revenue for goodwill or a noncompetition arrangement. The Company acquired the
business of Van Tassel, Inc., a primarily flatbed carrier based in Pittsburg,
Kansas, in June 1995, and Smith Trucking Company, a primarily dry van carrier
based in McPherson, Kansas, in January 1996. Both of these acquisitions
permitted Smithway to expand and solidify existing customer relationships as
well as access new customers. The Smith Trucking location also expanded the
Company's driver recruiting region. In October 1996, the Company acquired the
business of Marquardt Transportation, Inc., a primarily flatbed carrier based in
Yankton, South Dakota, and with a small facility in Stockton, California.
Marquardt further diversified Smithway's freight base by increasing its presence
in hauling large, manufactured items and heavy machinery. In February 1997,
Smithway acquired Fort Dodge, Iowa-based Pirie Motor Freight, Inc. Pirie was a
small flatbed carrier, and its operations were consolidated into Smithway's
headquarters. In September 1997, Smithway acquired the business of Royal
Transport, Ltd. of Grand Rapids, Michigan, primarily a flatbed carrier. The
Royal acquisition provided Smithway a regional niche specializing in heavy loads
hauled primarily on multiple axle trailers. Through acquisitions and internal
growth the Company expanded from $77.3 million revenue in 1995 to $120.1 million
in 1997.
Smithway Motor Xpress Corp. was incorporated in Nevada in January 1995
to serve as a holding company and conduct the Company's initial public offering,
which occurred in June 1996. References to the "Company" or "Smithway" herein
refer to the consolidated operations of Smithway Motor Xpress Corp., a Nevada
corporation ("Smithway-Nevada"), and its wholly owned subsidiary, Smithway Motor
Xpress, Inc., an Iowa corporation ("Smithway-Iowa"). Former subsidiaries
Smithway Transportation Brokerage, Inc., an Iowa corporation, and Wilmar Truck
Leasing, Inc., an Iowa corporation, were merged into Smithway-Iowa in 1996.
Growth Strategy
Management believes that the flatbed and dry van truckload markets offer
growth opportunities because of several identifiable trends. First, many major
shippers are reducing the number of carriers they use in favor of service-based,
ongoing relationships with a limited group of core carriers. These partnerships
and the increasing use of equipment and drivers dedicated to a single shipper's
needs ("dedicated fleets") are designed to ensure higher quality, more
consistent service for shippers and greater equipment utilization and more
predictable revenue for core carriers. Second, some shippers that own
tractor-trailer fleets are outsourcing their transportation requirements to
truckload carriers to lower operating expenses and conserve capital for core
corporate purposes. This outsourcing has resulted in some shippers eliminating
their own trucks in favor of truckload carriers, which frequently can provide
similar service at less cost. Third, deregulation and economies of scale also
promote consolidation. Many truckload carriers have grown rapidly since
deregulation in 1980 and have achieved the size to negotiate lifetime equipment
warranties and obtain equipment, fuel, insurance, financing, and other items for
significantly less than smaller or more leveraged
3
competitors. Management believes that these trends favor large carriers with
modern fleets, excellent service, in-transit communication and load tracking,
good drivers, a strong safety record, adequate insurance, and a strong capital
base.
The Smithway growth strategy contains six key elements:
o Market Leadership. Smithway strives for market prominence by offering
a combination of premium service, equipment availability, and broad geographic
coverage. These factors can differentiate Smithway in a highly fragmented
flatbed market segment characterized primarily by smaller, less diversified, and
less technologically advanced carriers. Management believes the flatbed market
is less developed than the dry van segment, and that the Company's size, service
standards, and financial strength have positioned it to take advantage of market
consolidation.(*)
o Diversified Freight. Smithway targets a diversified mix of freight.
Management believes that diversification can reduce exposure to certain
customers' or industries' business cycles. In addition, certain shipments
outside the construction materials most typically transported by flatbed
carriers can increase profitability. Smithway's diversified operations include
revenue generated by dry van, transportation logistics, brokerage, specialized
railroad service, and dedicated route operations, together with transporting
non-construction freight such as tires, machinery, and irrigation systems.
o Acquisitions. Smithway intends to continue acquisitions of both
flatbed and dry van carriers, focusing primarily on the flatbed sector of the
industry. Management believes that industry trends will further the Company's
acquisition strategy because smaller carriers will find it difficult to compete
with larger, better capitalized carriers such as Smithway. Management believes
that acquisitions can promote the Company's growth by providing access to
drivers, customer relationships, and diversified freight. Management believes
that consolidation in the truckload industry will accelerate in future years.(*)
o Return on Equity. Smithway emphasizes return on equity by limiting
capital investment and attempting to increase the utilization of its equipment.
The Company limits capital expenditures through the use of equipment owned by
independent contractors and facilities provided by commission sales agents. The
Company's participation in the flatbed market also reduces capital requirements
because flatbed operations generally require a lower ratio of trailers to
tractors than is required for van traffic.
o Productivity Incentives. Smithway seeks to create an entrepreneurial
environment for its personnel by compensating all independent contractors,
commission sales agents, and most flatbed drivers solely on a percentage of
revenue basis, and all Company sales personnel partially through percentage of
revenue bonuses. The majority of employees also own Smithway stock through the
Company's 401(k) plan.
o Operating Efficiencies. Smithway enhances operating efficiency through
freight-selection software, satellite-based communication, late-model revenue
equipment, and the Smithway Network. The Spectrum freight selection software
permits dispatchers to select freight based upon profitability and compatibility
with preferred routes. The satellite-based tracking and communication system
permits instantaneous location of equipment and communication with drivers.
Smithway operates a late-model tractor fleet (with an average age of 26 months
at December 31, 1997) to enhance fuel efficiency and driver recruitment while
reducing maintenance downtime.
- --------
(*) May contain "forward-looking" statements.
4
Operations
Smithway integrates its sales and dispatch functions throughout its
computer-connected "Smithway Network." The Smithway Network consists of the
Company's headquarters in Fort Dodge, Iowa, and 23 field offices, independent
agencies, and terminals strategically located near major shippers to provide the
consistent, local contact with shipper personnel expected by many of the
Company's flatbed customers. The headquarters and 18 terminals and field offices
are managed by Smithway employees, while the 5 agencies are managed by
independent commission agents. The customer sales representatives and agents at
each location have front-line responsibility for booking freight and dispatching
all trucks in their regions. Fleet managers at the Fort Dodge, Iowa,
headquarters coordinate all load movements via computer link to optimize load
selection and promote proper fleet balance among regions. Personnel at the
Company's headquarters also handle all sales and dispatch functions for the van
division and for flatbed traffic that does not originate within a specific sales
region.
Agents are important to the Company's operations because they are the
primary contact for shippers within their region and have regular contact with
drivers and independent contractors. The Company's agents are paid a commission
on revenue they generate. Although agent contracts typically are cancelable on
14 days' notice, Smithway's agents average nearly ten years' tenure with the
Company. In addition to sales and customer service benefits, management believes
agents offer the advantage of minimizing capital investment and fixed costs,
because agents are responsible for all of their own expenses.
Customers and Marketing
Smithway's sales force includes six national sales representatives and
personnel at 19 terminals and field offices and 5 independent commission
agencies. National sales representatives focus on national customers and van
freight, while sales personnel at terminals, field offices, and agencies are
responsible for regional customer contact. The Company's sales force emphasizes
rapid response time to customer requests for equipment, undamaged and on-time
pickup and delivery, one of the nation's largest fleets of flatbed equipment,
safe and professional drivers, logistics management, dedicated fleet capability,
and its strategically located Smithway Network. Management believes that few
other carriers operating principally in the Midwest flatbed market offer similar
size, service, and the reliability of a late-model fleet. Consequently, the
Company seeks primarily service-sensitive freight rather than competing for all
freight on the basis of price.
In 1997, the Company's top 50, 25, 10, and 5 customers accounted for
49%, 40%, 32%, and 20% of revenue, respectively, with more than 450 customers
accounting for the remaining 51% of revenue. No single customer accounted for
more than 5% of Smithway's revenue during 1997.
Technology
Management believes that advances in technology can enhance the
Company's operating efficiency and customer service. Three principal
technologies used by Smithway includes freight selection software,
satellite-based tracking and communication with tractors, and electronic data
interchange ("EDI") with customers. In July 1993, the Company initiated the use
of the Spectrum freight selection software. Spectrum ranks each potential load
based upon rate per loaded mile, empty mile exposure, and history of obtaining a
profitable return load from the proposed destination.
Smithway operates satellite-based tracking and communication units in
all of its Company-owned tractors and has offered rental of these units as an
option to its independent contractors. Management believes on-board
communication capability can reduce unnecessary stops and out-of-route miles
because drivers are not forced to find a telephone to contact the Company or
receive instructions. In addition, drivers can immediately report breakdowns or
other emergency conditions. The system also enables the Company to advise
customers of the location of freight in transit through its hourly position
reports of each tractor's location.
5
Smithway also offers its customers EDI technology. EDI allows customers
to communicate directly with the Company via computer link and, with the aid of
satellite communication, obtain location updates of in-transit freight, expected
delivery times, and account payment instructions.
Drivers, Independent Contractors, And Other Personnel
Smithway seeks drivers and independent contractors who safely manage
their equipment and treat freight transportation as a business. The Company
historically has operated a fleet comprised of substantial numbers of both
Company-owned and independent contractor tractors. Management believes a mixed
fleet offers competitive advantages because the Company is able to recruit from
both personnel pools to facilitate fleet expansion. The Company intends to
retain a mixed fleet in the future to insure that its recruiting efforts toward
either group are not damaged by becoming categorized as predominantly either a
Company-owned or independent contractor fleet, although acquisitions or other
factors may cause fluctuations in the fleet mix from time to time.
Smithway has implemented several policies to promote driver and
independent contractor recruiting and retention. These include maintaining an
open-door policy with easy access to senior executives, appointing an advisory
board comprised of top drivers and independent contractors to consult with
management, and assigning each driver and independent contractor to a particular
dispatcher to insure personal contact. In addition, the Company utilizes
conventional (engine-forward) tractors, which are more comfortable for the
driver, and operates over relatively short distances (609-mile average length of
haul in 1997) to return drivers home as frequently as possible.
Smithway is not a party to a collective bargaining agreement and its
employees are not represented by a union. At December 31, 1997, the Company had
519 Company drivers, 234 non-driver employees, and 447 independent contractors.
Management believes that the Company has good relationships with its employees
and independent contractors.
Safety and Insurance
Smithway's active safety and loss prevention program has resulted in the
Department of Transportation's highest safety and fitness rating and numerous
safety awards. Its safety and loss prevention program includes, pre-screening,
initial orientation, six weeks on-the-road training for drivers without
substantial experience, 100% log monitoring, and safety bonuses.
The Company maintains insurance covering losses in excess of a $50,000
self-insured retention for cargo loss, personal injury, property damage, and
physical damage claims. The Company has a $100,000 deductible for workers'
compensation claims in states where a deductible is allowed. Its primary
personal injury and property damage insurance policy has a limit of $2.0 million
per occurrence, and the Company carries excess liability coverage, which
management believes is adequate to cover exposure to claims exceeding its
retention limit.
Revenue Equipment
Smithway's equipment strategy for its own tractors (as opposed to
independent contractors' tractors) is to operate late-model tractors and trade
or dispose of its tractors prior to the expiration of major component
warranties. Management believes that operating newer equipment can minimize
repair and maintenance expense and offer improvements in fuel efficiency.
Smithway orders conventional (engine forward) tractors with standard engine and
drivetrain components, and trailers with standard brakes and tires to minimize
its inventory of spare parts. All equipment is subject to the Company's regular
maintenance program, and is also inspected and maintained each time it passes
through a Smithway maintenance facility. Smithway's Company-owned tractor fleet
had an average age of 26 months at December 31, 1997.
6
Competition
The truckload segment of the trucking industry is highly competitive and
fragmented, and no carrier or group of carriers dominates the flatbed or van
market. Smithway competes primarily with other regional, short-to-medium-haul
carriers and private truck fleets used by shippers to transport their own
products in proprietary equipment. 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, focusing on short-to-medium lengths of
haul. Although management believes the 1,293 flatbed trailers it operated at
December 31, 1997, rank its flatbed division among the ten largest such fleets
in that industry segment, there are other trucking companies, including
diversified carriers with large flatbed fleets, that possess substantially
greater financial resources and operate more equipment than Smithway.
Fuel Availability and Cost
The Company actively manages its fuel costs. Company drivers purchase
virtually all of the Company's fuel through service centers with which Smithway
has volume purchasing arrangements. In addition, management periodically enters
into futures contracts on heating oil, which is derived from the same petroleum
products as diesel fuel, in an effort to partially hedge increases in fuel
prices. Most of the Company's contracts with customers contain fuel surcharge
provisions. Although the Company historically has been able to pass through most
long-term increases in fuel prices and taxes to customers in the form of
surcharges and higher rates, shorter-term increases are not fully recovered.(*)
Regulation
Historically, the Interstate Commerce Commission ("ICC") and various
state agencies regulated motor carriers' operating rights, accounting systems,
mergers and acquisitions, periodic financial reporting, and other matters. In
1995, federal legislation preempted state regulation of prices, routes, and
services of motor carriers and eliminated the ICC. Several ICC functions were
transferred to the Department of Transportation ("DOT"). Management does not
believe that regulation by the DOT or by the states in their remaining areas of
authority will have a material effect on the Company's operations. The Company's
drivers and independent contractors must comply with the safety and fitness
regulations promulgated by the DOT, including those relating to drug and alcohol
testing and hours of service.
The Company's operations are subject to various federal, state, and
local environmental laws and regulations, implemented principally by the EPA and
similar state regulatory agencies, governing the management of hazardous wastes,
other discharge of pollutants into the air and surface and underground waters,
and the disposal of certain substances. The Company transports certain
commodities that may be deemed hazardous substances, and its Fort Dodge, Iowa,
headquarters has above-ground fuel storage tanks and fueling facilities. If the
Company should be involved in a spill or other accident involving hazardous
substances, if any such substances were found on the Company's properties, or if
the Company were found to be in violation of applicable laws and regulations,
the Company could be responsible for clean-up costs, property damage, and fines
or other penalties, any one of which could have a materially adverse effect on
the Company. Smithway does not have underground fuel storage tanks at any of its
properties, and at December 31, 1997, the above-ground fuel tank at Fort Dodge
was the only fueling site at Company locations. Management believes that its
operations are in material compliance with current laws and regulations and does
not know of any existing condition that would cause compliance with applicable
environmental regulations to have a material effect on the Company's capital
expenditures, earnings, or competitive position. If the Company should fail to
comply with applicable regulations, the Company could be subject to substantial
fines or penalties and to civil or criminal liability.(*)
- -----------------------------
(*) May contain "forward-looking" statements.
7
ITEM 2. PROPERTIES
Smithway's headquarters consists of 25,000 square feet of office space
and 59,800 square feet of equipment maintenance and wash facilities, located on
31 acres near Fort Dodge, Iowa. Driver recruitment activity takes place at Grand
Rapids, Michigan; Fort Dodge, Iowa; Joplin, Missouri; McPherson, Kansas;
Oklahoma City, Oklahoma; Yankton, South Dakota; and Youngstown, Ohio.
Maintenance and repair shops are operated at Fort Dodge, Joplin, McPherson, and
Yankton. Of the 18 locations at which sales and dispatch functions are
performed, 11 are located in or near truckstops, to afford drivers and
independent contractors access to required facilities without capital investment
by Smithway.
The Smithway Network consists of locations in or near the following
cities:
Company Locations Ownership Agent Locations
Cincinnati, Ohio............................. Leased Cedar Rapids, Iowa
Chicago, Illinois............................ Owned Detroit, Michigan
Dallas, Texas................................ Leased<F1> Hennepin, Illinois
Denver, Colorado............................. Leased<F1> Norfolk, Nebraska
Fort Dodge, Iowa............................. Owned Toledo, Ohio
Grand Rapids, Michigan....................... Leased
Joplin, Missouri............................. Owned
Kansas City, Missouri........................ Leased<F1>
McPherson, Kansas............................ Leased
Memphis, Tennessee........................... Leased
Montgomery, Alabama.......................... Leased
Oklahoma City, Oklahoma...................... Owned
Oshkosh, Wisconsin........................... Leased<F1>
Philadelphia, Pennsylvania................... Leased<F1>
Stockton, California......................... Leased<F1>
St. Louis, Missouri.......................... Leased<F1>
St. Paul, Minnesota.......................... Leased<F1>
Yankton, South Dakota........................ Leased
Youngstown, Ohio............................. Leased<F1>
- -----------------------------
<FN>
<F1> Month-to-month leases.
</FN>
ITEM 3. LEGAL PROCEEDINGS
The Company from time to time is a party to litigation arising in the
ordinary course of its business, substantially all of which involves claims for
personal injury and property damage incurred in the transportation of freight.
The Company is not aware of any claims or threatened claims that might have a
materially adverse effect upon its operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 31, 1997, no
matters were submitted to a vote of security holders.
8
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 has been
traded on the Nasdaq National Market, under the symbol SMXC, since June 27,
1996, the date of the Company's initial public offering. 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 from
June 27, 1996, to December 31, 1997.
Period High Low
- ---------------------------------------- ------------------------------
Calendar Year 1996
2nd Quarter (from June 27, 1996) $ 8 1/2 $ 8 1/2
3rd Quarter $ 8 1/2 $ 7 1/2
4th Quarter $ 9 3/8 $ 8
Period High Low
- --------------------------------------- ------------------------------
Calendar Year 1997
1st Quarter $ 9 3/4 $ 8
2nd Quarter $ 12 1/4 $ 8 1/2
3rd Quarter $ 14 1/4 $ 11
4th Quarter $ 14 3/4 $ 11 1/4
The prices reported reflect interdealer quotations without retail
mark-ups, mark-downs, or commissions, and may not represent actual transactions.
As of March 2, 1998, the Company had 158 stockholders of record of its Class A
Common Stock. However, the Company believes that many additional holders of
Class A Common Stock are unidentified because a substantial number of the
Company's shares are held of record by brokers or dealers for their customers in
street names.
Dividend Policy. The Company has never declared and paid a cash dividend
on its Class A common stock. It is the current intention of the Company's Board
of Directors to continue to retain earnings to finance the growth of the
Company's business rather than to pay dividends. Future payments of cash
dividends will depend upon the financial condition, results of operations and
capital commitments of the Company, restrictions under then-existing agreements,
and other factors deemed relevant by the Board of Directors.
9
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
Years Ended December 31,
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(in thousands, except per share and operating data amounts)
---------- ---------- ---------- ---------- ----------
Statement of Operations Data:
Operating revenue.................$ 120,117 $ 93,667 $ 77,339 $ 69,180 $ 59,931
Operating expenses:
Purchased transportation........ 47,095 37,386 31,621 27,420 23,797
Compensation and employee
benefits...................... 26,904 20,800 17,182 15,877 13,840
Fuel, supplies, and maintenance. 15,965 12,347 10,183 9,368 8,876
Insurance and claims............ 2,206 1,995 1,827 2,238 2,318
Taxes and licenses.............. 2,299 1,856 1,588 1,454 1,492
General and administrative...... 5,391 4,214 3,592 3,512 3,357
Communications and utilities.... 1,378 971 758 585 543
Depreciation and amortization... 7,880 5,740 3,879 2,774 2,821
---------- ---------- ---------- ---------- ----------
Total operating expenses...... 109,118 85,309 70,630 63,228 57,044
---------- ---------- ---------- ---------- ----------
Total operating income........ 10,999 8,358 6,709 5,952 2,887
Interest expense (net)............ 1,545 1,548 1,225 966 1,179
---------- ---------- ---------- ---------- ----------
Earnings before income taxes and
accounting change............... 9,454 6,810 5,484 4,986 1,708
Income taxes...................... 3,781 2,860 2,393 1,879 603
Accounting change................. - - - - 86
---------- ---------- ---------- ---------- ----------
Net earnings...................... 5,673 3,950 3,091 3,107 1,019
Pro Forma Data:
Pro forma provision for income
taxes<F1>....................... - - - 232 177
---------- ---------- ---------- ---------- ----------
Pro forma net earnings<F1>........$ 5,673 $ 3,950 $ 3,091 $ 2,875 $ 842
Pro forma basic and diluted
earnings per common
share<F1><F2>...................$ 1.13 $ 0.93 $ 0.88 $ 0.82 $ 0.25
Pro forma weighted averages shares
outstanding<F2>
Basic earnings per common share. 5,000,860 4,249,893 3,524,042 3,498,212 3,428,270
Diluted earnings per common
share......................... 5,019,247 4,250,051 3,524,042 3,498,212 3,428,270
Operating Data<F3>:
Operating ratio<F4>............... 90.8% 91.1% 91.3% 91.4% 95.2%
Average revenue per tractor per
week............................$ 2,342 $ 2,243 $ 2,160 $ 2,272 $ 2,129
Average revenue per loaded mile...$ 1.36<F5> 1.37 $ 1.38 $ 1.39 $ 1.33
Average length of haul in miles.. 609 568 563 571 583
Company tractors at end of period. 525 458 376 302 288
Independent contractor tractors at
end of period................... 443 406 303 258 219
Weighted average tractors during
period.......................... 909 747 619 532 497
Trailers at end of period......... 1,673 1,492 1,167 911 814
Balance Sheet Data (at end of
period):
Working capital (deficit).........$ 10,100 $ 1,893 $ 2,516 $ 371 $ (2,236)
Net property and equipment........ 53,132 39,170 27,843 15,824 14,211
Total assets...................... 74,878 55,330 40,702 25,229 22,569
Long-term debt, including current
maturities...................... 30,976 15,904 23,219 11,775 10,899
Total stockholders' equity.......... 29,906 24,193 7,871 4,789 2,513
- ------------------------
<FN>
<F1> Adjusted to reflect a provision for pro forma income taxes for certain
related entities acquired by Smithway, the earnings of which were not
subject to corporate income. Such transactions were accounted for in a
manner similar to a pooling of interests. See Note 1 to Consolidated
Financial Statements.
<F2> Adjusted to reflect the issuance of 3,513,697 shares of Common Stock by
the Company in the formation of the holding company and acquisition of
the related entities referred to in Note (1) above. See Note 1 to
Consolidated Financial Statements.
<F3> Excludes brokerage activities except as to operating ratio.
<F4> Operating expenses as a percentage of operating revenue.
<F5> Net of fuel surcharges.
</FN>
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
GENERAL
From 1995 to 1997 the Company expanded its operating revenue by 55.3%,
to $120.1 million in 1997 from $77.3 million in 1995. This revenue growth was
accompanied by a 83.5% increase in net earnings, to $5.7 million in 1997 from
$3.1 million in 1995. The Company's growth during the period was attributable to
internal expansion to meet customer demand and acquisitions of the trucking
assets and business of five trucking companies. Economies of scale and
continuing cost control efforts contributed to expansion of the Company's pretax
margin to 7.9% in 1997 from 7.1% in 1995. Pretax margin is used by management to
evaluate the Company's performance because the relative percentage of the
Company's revenue equipment fleet obtained from independent contractors and
under operating leases over different time periods can affect comparisons of
operating ratio without relation to the effect on earnings.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain
items to revenue for the periods indicated:
1997 1996 1995
------ ------ ------
Operating revenue.................................... 100.0% 100.0% 100.0%
Operating expenses:
Purchased transportation....................... 39.2 39.9 40.9
Compensation and employee benefits............. 22.4 22.2 22.2
Fuel, supplies, and maintenance................ 13.3 13.2 13.2
Insurance and claims........................... 1.8 2.1 2.4
Taxes and licenses............................. 1.9 2.0 2.1
General and administrative..................... 4.5 4.5 4.6
Communication and utilities.................... 1.1 1.0 1.0
Depreciation and amortization.................. 6.6 6.1 5.0
------ ------ ------
Total operating expenses....................... 90.8 91.1 91.3
------ ------ ------
Earnings from operations............................. 9.2 8.9 8.7
Interest expense, net................................ 1.3 1.7 1.6
------ ------ ------
Earnings before income taxes......................... 7.9 7.3 7.1
Income taxes......................................... 3.2 3.1 3.1
------ ------ ------
Net earnings......................................... 4.7% 4.2% 4.0%
====== ====== ======
Comparison of year ended December 31, 1997 to year ended December 31, 1996.
Operating revenue increased $26.5 million (28.2%), to $120.1 million in
1997 from $93.7 million in 1996. The revenue increase resulted primarily from a
21.7% increase in weighted average tractors, to 909 in 1997 from 747 during 1996
as the Company expanded internally to meet customer demand and acquired the
business of Pirie Motor Freight, Inc. in February 1997, and Royal Transport Ltd.
in September 1997. Revenue per tractor per week (excluding revenue from
brokerage operations) increased $99 per week (4.4%), to $2,342 in 1997 from
$2,243 in 1996. In addition, revenue from the Company's brokerage division
increased $900,000 (14.1%), to $7.3 million in 1997 from $6.4 million in 1996.
Purchased transportation consists primarily of payments to independent
contractor providers of revenue equipment, expenses related to brokerage
activities, and payments under operating leases of revenue equipment. Purchased
transportation increased $9.7 million (26.0%), to $47.1 million in 1997 from
$37.4 million in 1996, as the Company's business expanded and the Company
contracted with more independent contractor providers of revenue equipment. As a
percentage of revenue, purchased transportation decreased to 39.2% in 1997 from
39.9% in 1996, as the increase in expenses related to brokerage revenue was more
than offset by the decrease in the percentage of the Company's overall fleet
comprised of tractors and trailers leased from independent contractors and a
decrease in the amount of fuel surcharge passed through to independent
contractors and tractors utilized by the brokerage division.
11
Compensation and employee benefits increased $6.1 million (29.4%) to
$26.9 million in 1997 from $20.8 million in 1996. As a percentage of revenue,
compensation and employee benefits increased to 22.4% in 1997 from 22.2% in
1996, because of the increase in the percentage of the Company's revenue
equipment fleet being operated by employee drivers.
Fuel, supplies, and maintenance increased $3.6 million (29.3%), to $16.0
million in 1997 from $12.3 million in 1996. As a percentage of revenue, fuel,
supplies, and maintenance increased slightly to 13.3% in 1997 from 13.2% in
1996, because the increase in the percentage of the Company's fleet being
comprised of Company-owned tractors, for which the Company pays fuel costs, more
than offset decreasing per gallon fuel prices.
Insurance and claims increased $211,000 (10.6%), to $2.2 million in 1997
from $2.0 million in 1996. As a percentage of revenue, insurance and claims
decreased to 1.8% of revenue in 1997 from 2.1% in 1996, as the Company reduced
its insurance reserves as claims were ultimately resolved at less than the
reserve amount.
Taxes and licenses increased $443,000 (23.9%), to $2.3 million in 1997
from $1.9 million in 1996. As a percentage of revenue, taxes and licenses
remained relatively constant at 1.9% and 2.0% of revenue for 1997 and 1996,
respectively.
General and administrative expenses increased $1.2 million (27.9%), to
$5.4 million in 1997 from $4.2 million in 1996. As a percentage of revenue,
general and administrative expenses were unchanged at 4.5% of revenue for each
year.
Communications and utilities increased $407,000 (41.9%), to $1.4 million
in 1997 from $1.0 million in 1996. As a percentage of revenue, communications
and utilities increased to 1.1% in 1997 from 1.0% in 1996 as a result of an
increase in the number of Company-owned terminals, for which the Company pays
telephone costs, and an increase in the costs relating to usage of mobile,
satellite-based tracking and communication units.
Depreciation and amortization increased $2.1 million (37.3%), to $7.9
million in 1997 from $5.7 million in 1996. As a percentage of revenue,
depreciation and amortization increased to 6.6% of revenue in 1997 from 6.1% in
1996. The increase was attributable to a newer and larger fleet of Company-owned
tractors and trailers, which increased the cost of the equipment being
depreciated, and an increase in Company tractors financed with debt rather than
operating leases. These factors were partially offset by an increase in revenue
per tractor per week, which more efficiently spread the fixed cost of
depreciation over a larger revenue base.
Interest expense, net remained unchanged at $1.5 million in each year.
As a percentage of revenue, interest expense, net decreased to 1.3% of revenue
in 1997 from 1.7% in 1996, as the increase in average debt balance was offset by
lower average interest rates of 7.1% in 1997 compared with 7.5% in 1996.
As a result of the foregoing, the Company's pretax margin improved to
7.9% in 1997 from 7.3% in 1996.
The Company's effective tax rate was 40.0% in 1997 (3.2% of revenue),
compared with 42.0% in 1996 (3.1% of revenue). The effective tax rate is higher
than the expected combined tax rate for a company headquartered in Iowa because
of the cost of nondeductible driver per diem expense absorbed by the Company.
The impact of the Company's paying per diem travel expenses varies depending
upon the ratio of drivers to independent contractors and the Company's net
earnings.
As a result of the factors described above, net earnings increased to
$5.7 million in 1997 (4.7% of revenue), from $4.0 million in 1996 (4.2% of
revenue).
12
Comparison of year ended December 31, 1996 to year ended December 31, 1995.
Operating revenue increased $16.3 million (21.1%), to $93.7 million in
1996 from $77.3 million in 1995. The revenue increase resulted primarily from a
20.7% increase in weighted average tractors, to 747 in 1996 from 619 during 1995
as the Company expanded internally to meet customer demand and acquired the
business of Smith Trucking, Inc. in January 1996, and Marquardt Transportation,
Inc. in October 1996. Revenue per tractor per week (excluding revenue from
brokerage operations) increased $83 (3.8%), to $2,243 in 1996 from $2,160 in
1995. In addition, revenue from the Company's brokerage division increased 0.6%,
to $6.4 million in 1996.
Purchased transportation increased $5.8 million (18.2%), to $37.4
million in 1996 from $31.6 million in 1995. As a percentage of revenue,
purchased transportation decreased to 39.9% in 1996 from 40.9% in 1995, as a
reduction in the number of tractors financed under operating leases more than
offset a slight increase in the percentage of revenue generated by independent
contractors.
Compensation and employee benefits increased $3.6 million (21.1%), to
$20.8 million in 1996 from $17.2 million in 1995, but remained unchanged as a
percentage of revenue. An increase in non-driver employees as a result of
acquisitions offset a slight decline in the percentage of revenue produced by
Company-owned tractors.
Fuel, supplies, and maintenance increased $2.1 million (21.3%), to $12.3
million in 1996 from $10.2 million in 1995. As a percentage of revenue, fuel,
supplies, and maintenance remained constant at 13.2% in 1996 and 1995, as
reduced repair and maintenance expense attributable to a newer Company-owned
tractor fleet was offset by higher average fuel costs. The Company's average
fuel cost increased to $1.18 per gallon in 1996 from $1.08 in 1995.
Insurance and claims increased $168,000 (9.2%), to $2.0 million in 1996
from $1.8 million in 1995. As a percentage of revenue, insurance and claims
decreased to 2.1% of revenue in 1996 from 2.4% in 1995, as the Company reduced
its self-retention without a corresponding increase in premiums paid.
Taxes and licenses increased $268,000 (16.9%), to $1.9 million in 1996
from $1.6 million in 1995. As a percentage of revenue, taxes and licenses
decreased to 2.0% of revenue in 1996 from 2.1% in 1995, as the Company hauled
fewer loads requiring special permits.
General and administrative expenses increased $622,000 (17.3%), to $4.2
million in 1996 from $3.6 million in 1995. As a percentage of revenue, general
and administrative expenses decreased to 4.5% of revenue in 1996 from 4.6% in
1995, as the percentage of revenue generated by the Company's employees
increased and the percentage of revenue generated by Smithway's independent
commission agents and third-party freight brokers (who receive commissions
larger than the revenue bonuses received by the Company's employees) decreased.
In addition, certain fixed costs remained constant while revenue increased.
Communications and utilities increased $213,000 (28.1%), to $971,000 in
1996 from $758,000 in 1995. As a percentage of revenue, communications and
utilities remained constant at 1.0% of revenue.
Depreciation and amortization increased $1.9 million (48.0%), to $5.7
million in 1996 from $3.9 million in 1995. As a percentage of revenue,
depreciation and amortization increased to 6.1% of revenue in 1996 from 5.0% in
1995. The increase was attributable to a newer fleet of Company-owned tractors
and trailers, which increased the cost of the equipment being depreciated, and
an increase in Company tractors financed with borrowing rather than operating
leases. These factors were partially offset by an increase in revenue per
tractor.
Interest expense increased $323,000 (26.4%), to $1.5 million in 1996
from $1.2 million in 1995. As a percentage of revenue, interest expense
increased to 1.7% of revenue in 1996 from 1.6% in 1995, because increased
average debt balances associated with expanding the fleet of Company-owned
tractors and trailers ($19.7 million in 1996 compared with $17.4 million in
1995), more than offset lower average interest rates (7.5% in 1996 compared with
8.4% in 1995) and reduction of debt with the approximately $10.7 million net
proceeds of the Company's initial public offering.
As a result of the foregoing, the Company's pretax margin improved to
7.3% in 1996 from 7.1% in 1995.
13
The Company's effective tax rate was 42.0% in 1996 (3.1% of revenue),
compared with 43.6% in 1995 (3.1% of revenue). The effective tax rate is higher
than the expected combined tax rate for a company headquartered in Iowa because
of the cost of nondeductible driver per diem expense absorbed by the Company.
The impact of the Company's paying per diem travel expenses varies depending
upon the ratio of drivers to independent contractors and the Company's net
earnings.
As a result of the factors described above, net earnings increased to
$4.0 million in 1996 (4.2% of revenue) from $3.1 million in 1995 (4.0% of
revenue).
LIQUIDITY AND CAPITAL RESOURCES
The growth of the Company's business has required significant
investments in new revenue equipment that the Company historically has financed
with borrowing under installment notes payable to commercial lending
institutions and equipment manufacturers, borrowings under lines of credit, cash
flow from operations, equipment leases from third-party lessors, and proceeds of
the Company's initial public offering. The Company also has obtained a portion
of its revenue equipment fleet from independent contractors who own and operate
the equipment, which reduces overall capital expenditure requirements compared
with providing a fleet of entirely Company-owned equipment. The Company's
primary sources of liquidity currently are funds provided by operations and
borrowings under credit agreements with financial institutions and equipment
manufacturers. Management believes that its sources of liquidity are adequate to
meet its current anticipated working capital requirements, capital expenditures,
and other needs at least through 1998.(*)
Net cash provided by operating activities was $14.9 million, $7.1
million, and $6.5 million for the years ended December 31, 1997, 1996, and 1995
respectively. The Company's principal use of cash from operations is to service
debt and internally finance accounts receivable associated with growth in the
business. Customer accounts receivable increased $1.4 million, $4.0 million, and
$404,000 for the years ended December 31, 1997, 1996, and 1995 respectively. The
average age of the Company's accounts receivable was approximately 34 days for
1997, and 30 days for 1996 and 1995.
Net cash used in financing activities of $10.0 million, $766,000, and
$2.1 million for the years ended December 31, 1997, 1996, and 1995,
respectively, consisted primarily of net payments of $5.5 million, $16.1
million, and $1.7 million of principal under the Company's long-term debt
agreements, and net (payments) borrowings of ($4.5 million), $4.5 million, $0,
under the Company's former line of credit, which was paid off during 1997.
At December 31, 1997, the Company had outstanding long-term debt
(including current maturities) consisting of approximately $31.0 million, most
of which was comprised of obligations for the purchase of revenue equipment.
Approximately $21.0 million consisted of borrowings from financial institutions
and equipment manufacturers and $10 million represented the amount drawn under
the Credit Agreement. Interest rates on this debt range from 5.67% to 7.90% with
maturities through 2005.
At December 31, 1997, the Credit Agreement provided for borrowings of up
to $15.0 million, based upon certain accounts receivable and revenue equipment
values. The interest rate under the Credit Agreement is 1% plus the LIBOR rate
for the corresponding period. The Credit Agreement is unsecured and contains
covenants that impose certain minimum financial ratios and limit additional
liens, the size of certain mergers and acquisitions, dividends, and other
matters. The Company was in compliance with the Credit Agreement at December 31,
1997.
- -----------------------------
(*) May contain "forward-looking" statements.
14
INFLATION AND FUEL COST
Most of the Company's operating expenses are inflation-sensitive, with
inflation generally producing increased costs of operation. During the past
three years, the most significant effects of inflation have been on revenue
equipment prices and the compensation paid to drivers. Innovations in equipment
technology and comfort have resulted in higher tractor prices, and there has
been an industry-wide increase in wages paid to attract and retain qualified
drivers. The Company historically has limited the effects of inflation through
increases in freight rates and certain cost control efforts. The failure to
obtain rate increases in the future could have an adverse effect on
profitability. In addition to inflation, fluctuations in fuel prices can affect
profitability. Most of the Company's contracts with customers contain fuel
surcharge provisions. Although the Company historically has been able to pass
through most long-term increases in fuel prices and taxes to customers in the
form of surcharges and higher rates, shorter-term increases are not fully
recovered.(*)
SEASONALITY
In the trucking industry, results of operations show a seasonal pattern
because customers generally reduce shipments during the winter season, and the
Company experiences some seasonality due to the open, flatbed nature of the
majority of its trailers. The Company at times has experienced delays in meeting
its shipment schedules as a result of severe weather conditions, particularly
during the winter months. In addition, the Company's operating expenses have
been higher in the winter months due to decreased fuel efficiency and increased
maintenance costs in colder weather.
YEAR 2000
The Company has identified fifteen Year 2000 issues, and has
successfully written and tested programs to deal with seven of these issues. It
is anticipated that programs addressing the remaining issues will be written by
the end of 1998. All programs are expected to be fully tested and problems
resolved by June 30, 1999. Management expects the Year 2000 issues to have
minimal impact on the Company's results of operations, liquidity, and capital
resources.(*)
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The Company may from time-to-time make written or oral forward-looking
statements. Written forward-looking statements may appear in documents filed
with the Securities and Exchange Commission, in press releases, and in reports
to stockholders. The Private Securities Litigation Reform Act of 1995 contains a
safe harbor for forward-looking statements. The Company relies on this safe
harbor in making such disclosures. In connection with this "safe harbor"
provision, the Company is hereby identifying important factors that could cause
actual results to differ materially from those contained in any forward-looking
statement made by or on behalf of the Company. Factors that might cause such a
difference include, but are not limited to, the following:
Economic Factors; Fuel Prices. Negative economic factors such as
recessions, downturns in customers' business cycles, surplus
inventories, inflation, and higher interest rates could impair the
Company's operating results by decreasing equipment utilization or
increasing costs of operations. Increases in fuel prices usually are not
fully recovered. Accordingly, high fuel prices can have a negative
impact on the Company's profitability.
Resale of Used Revenue Equipment. The Company historically has
recognized a gain on the sale of its revenue equipment. The market for
used equipment has experienced greater supply than demand in 1995
through 1997. If the resale value of the Company's revenue equipment
were to decline, the Company could find it necessary to dispose of its
equipment at lower prices or retain some of its equipment longer, with a
resulting increase in operating expenses.
- -----------------------------
(*) May contain "forward-looking" statements.
15
Recruitment, Retention, and Compensation of Qualified Drivers and
Independent Contractors. Competition for drivers and independent
contractors is intense in the trucking industry. There is, and
historically has been, an industry-wide shortage of qualified drivers
and independent contractors. This shortage could force the Company to
significantly increase the compensation it pays to driver employees and
independent contractors or curtail the Company's growth.
Competition. The trucking industry is highly competitive and fragmented.
The Company competes with other truckload carriers, private fleets
operated by existing and potential customers, and to some extent
railroads and rail-intermodal service. Competition is based primarily on
service, efficiency, and freight rates. Many competitors offer
transportation service at lower rates than the Company. The Company's
results could suffer if it cannot obtain higher rates than competitors
that offer a lower level of service.
Acquisitions. A significant portion of the Company's growth since June
1995 has occurred through acquisitions, and acquisitions are an
important component of the Company's growth strategy. Management must
continue to identify desirable target companies and negotiate, finance,
and close acceptable transactions or the Company's growth could suffer.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's audited financial statements, including its consolidated
balance sheets and consolidated statements of earnings, cash flows, and
stockholders' equity, and notes related thereto, are included at pages 21 to 39
of this report. The supplementary quarterly financial data follow:
Quarterly Financial Data:
First Second Third Fourth
Quarter Quarter Quarter Quarter
1997 1997 1997 1997
--------- --------- --------- ---------
Operating revenue.............. $ 26,908 $ 30,614 $ 31,834 $ 30,761
Earnings from operations....... 1,955 3,107 3,369 2,569
Earnings before income taxes... 1,639 2,650 2,899 2,267
Income taxes................... 688 1,114 1,204 775
Net earnings................... 951 1,536 1,695 1,492
Basic and diluted earnings per
share........................ 0.19 0.31 0.34 0.30
First Second Third Fourth
Quarter Quarter Quarter Quarter
1996 1996 1996 1996
--------- --------- --------- ---------
Operating revenue.............. 19,860 23,411 24,937 25,459
Earnings from operations....... 1,296 2,524 2,534 2,005
Earnings before income taxes... 882 1,972 2,294 1,662
Income taxes................... 369 818 964 710
Net earnings................... 513 1,154 1,330 952
Basic and diluted earnings per
share........................ $ 0.15 $ 0.33 $ 0.27 $ 0.19
As a result of rounding, the total of the four quarters may not equal the
Company's results for the full year.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND
FINANCIAL DISCLOSURE
No reports on Form 8-K have been filed within the twenty-four months
prior to December 31, 1997, involving a change of accountants or disagreements
on accounting and financial disclosure.
16
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" on pages 2, 3, 4, and 5 of the Registrant's Proxy Statement for the
1998 annual meeting of stockholders, which will be filed with the Securities and
Exchange Commission in accordance with Rule 14a-6 promulgated under the
Securities Exchange Act of 1934, as amended (the "Proxy Statement") is
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information respecting executive compensation set forth under the
caption "Executive Compensation" on page 4 of the Proxy Statement is
incorporated herein by reference; provided, that the "Compensation Committee
Report on Executive Compensation" contained in the Proxy Statement is not
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information respecting security ownership of certain beneficial
owners and management set forth under the caption "Security Ownership of
Principal Stockholders and Management" on page 7 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" on page 4 and "Certain Transactions" on page 8 of the
Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) 1. Financial Statements.
The Company's audited financial statements are set forth at the
following pages of this report:
Page
Independent Auditors' Report........................................... 21
Consolidated Balance Sheets............................................ 22
Consolidated Statements of Earnings.................................... 24
Consolidated Statements of Stockholders' Equity....................... 25
Consolidated Statements of Cash Flows.................................. 26
Notes to Consolidated Financial Statements............................. 28
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
There were no reports on Form 8-K filed during the fourth quarter ended
December 31, 1997.
17
(c) Exhibits
Exhibit
Number Description
1 <F1> Form of Underwriting Agreement.
2.1 <F1> Asset Purchase Agreement dated January 10, 1996, among Smithway
Motor Xpress, Inc., an Iowa corporation, Smith Trucking Company, a
Kansas corporation, and Delmar Smith.
2.2 <F2> Asset Purchase Agreement dated October 4, 1996, among Smithway Motor
Xpress, Inc., an Iowa corporation, Smithway Motor Xpress Corp., a
Nevada corporation, Marquardt Transportation, Inc., a South Dakota
corporation, and Ralph and Lucille Marquardt.
2.3 <F2> First Amendment to Asset Purchase Agreement dated as of October 24,
1996, among Smithway Motor Xpress, Inc., an Iowa corporation, Smithway
Motor Xpress Corp., a Nevada corporation, Marquardt Transportation,
Inc., a South Dakota corporation, and Ralph and Lucille Marquardt.
2.4 <F2> Second Amendment to Asset Purchase Agreement dated as of December
27, 1996, among Smithway Motor Xpress, Inc., an Iowa corporation,
Smithway Motor Xpress Corp., a Nevada corporation, Marquardt
Transportation, Inc., a South Dakota corporation, and Ralph and
Lucille Marquardt.
3.1 <F1> Articles of Incorporation.
3.2 <F1> Bylaws.
4.1 <F1> Articles of Incorporation.
4.2 <F1> Bylaws.
10.1 <F1> Outside Director Stock Plan dated March 1, 1995.
10.2 <F1> Incentive Stock Plan, adopted March 1, 1995.
10.3 <F1> 401(k) Plan, adopted August 14, 1992, as amended.
10.4 <F1> Form of Agency Agreement between Smithway Motor Xpress, Inc. and its
independent commission
agents.
10.5 <F1> Memorandum of officer incentive compensation policy.
10.6 <F1> Form of Independent Contractor Agreement between Smithway Motor
Xpress, Inc. and its independent contractor providers of tractors.
10.7 <F1> Asset Purchase Agreement dated January 10, 1996, among Smithway Motor
Xpress, Inc., an Iowa corporation, Smith Trucking Company, a Kansas
corporation, and Delmar Smith, filed as Exhibit 2.4 to this
Registration Statement and incorporated by reference.
10.8 <F2> Asset Purchase Agreement dated October 4, 1996, among Smithway Motor
Xpress, Inc., an Iowa corporation, Smithway Motor Xpress Corp., a
Nevada corporation, Marquardt Transportation, Inc., a South Dakota
corporation, and Ralph and Lucille Marquardt.
10.9 <F2> First Amendment to Asset Purchase Agreement dated as of October 24,
1996, among Smithway Motor Xpress, Inc., an Iowa corporation, Smithway
Motor Xpress Corp., a Nevada corporation, Marquardt Transportation,
Inc., a South Dakota corporation, and Ralph and Lucille Marquardt.
10.10<F2> Second Amendment to Asset Purchase Agreement dated as of December
27, 1996, among Smithway Motor Xpress, Inc., an Iowa corporation,
Smithway Motor Xpress Corp., a Nevada corporation, Marquardt
Transportation, Inc., a South Dakota corporation, and Ralph and
Lucille Marquardt.
18
Exhibit
Number Description
10.11<F3> Credit Agreement dated September 3, 1997, between Smithway Motor
Xpress Corp., as Guarantor, Smithway Motor Xpress, Inc., as Borrower,
and LaSalle National Bank.
21 <F2> List of subsidiaries.
23 <F4> Consent of KPMG Peat Marwick LLP, independent accountants.
27 <F4> Financial Data Schedule.
- ---------------
<FN>
<F1> Incorporated by reference from the Company's Registration Statement on
Form S-1, Registration No. 33-90356, effective June 27, 1996.
<F2> Incorporated by reference from the Company's Yearly Report on Form
10-K for the fiscal year ended December 31, 1996. Commission File
No.000-20793, dated March 31, 1997.
<F3> Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1997. Commission File No.
000-20793, dated November 12, 1997.
<F4> Filed herewith.
</FN>
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SMITHWAY MOTOR XPRESS CORP.
Date: March 27, 1998 By: /s/ William G. Smith
--------------------- --------------------
William G. Smith
Chairman of the Board, President,
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Position Date
/s/ William G. Smith Chairman of the Board,
- --------------------------- President, and Chief
William G. Smith Executive Officer; Director
(principal executive officer March 27, 1998
/s/ G. Larry Owens Executive Vice President and
- --------------------------- Chief Financial Officer;
G. Larry Owens Director March 27, 1998
/s/ Michael E. Oleson Treasurer and Chief Accounting
- --------------------------- Officer (principal financial
Michael E. Oleson and accounting officer) March 27, 1998
/s/ Herbert D. Ihle
- -------------------
Herbert D. Ihle Director March 27, 1998
/s/ Robert E. Rich
- -------------------
Robert E. Rich Director March 27, 1998
/s/ Terry G. Christenberry Director March 27, 1998
- ---------------------------
Terry G. Christenberry
20
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Smithway Motor Xpress Corp.:
We have audited the accompanying consolidated balance sheets of Smithway
Motor Xpress Corp. and subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Smithway
Motor Xpress Corp. and subsidiary as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Des Moines, Iowa
February 4, 1998
21
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in thousands)
December 31,
-----------------------
Assets 1997 1996
------ ----- ----
Current assets:
Cash and cash equivalents $ 4,082$ 940
Receivables (note 6):
Trade 11,040 9,676
Other 1,261 985
Recoverable income taxes - 211
Inventories 1,064 713
Deposits, primarily with insurers (note 13) 770 921
Prepaid expenses 1,160 846
Deferred income taxes (note 7) 350 282
---------- -----------
Total current assets 19,727 14,574
---------- -----------
Property and equipment (note 6):
Land 531 531
Buildings and improvements 5,100 4,375
Tractors 38,217 28,245
Trailers 24,233 19,514
Other equipment 5,308 3,543
---------- -----------
73,389 56,208
Less accumulated depreciation 20,257 17,038
---------- -----------
Net property and equipment 53,132 39,170
---------- -----------
Other assets, net (notes 3 and 14) 2,019 1,586
---------- -----------
$ 74,878$ 55,330
========== ===========
See accompanying notes to consolidated financial statements.
22
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in thousands)
December 31,
Liabilities and --------------------
Stockholders' Equity 1997 1996
-------------------- ----- ----
Current liabilities:
Line of credit (note 5) $ - $ 4,490
Current maturities of long-term debt (note 6) 3,971 3,260
Accounts payable 2,277 2,211
Accrued compensation 1,278 760
Income taxes payable 275 -
Accrued loss reserves (note 13) 905 1,267
Other accrued expenses 921 693
--------- ---------
Total current liabilities 9,627 12,681
Long-term debt, less current maturities (note 6) 27,005 12,644
Deferred income taxes (note 7) 8,340 5,812
--------- ---------
Total liabilities 44,972 31,137
--------- ---------
Stockholders' equity (note 8 and 9):
Preferred stock (.01 par value; authorized 5 million
shares; issued none) - -
Common stock:
Class A (.01 par value; authorized 20 million shares;
issued 1997 4,003,068; 1996 - 3,999,293 shares) 40 40
Class B (.01 par value; authorized 5 million shares;
issued 1 million shares) 10 10
Additional paid-in capital 11,144 11,104
Retained earnings 18,789 13,116
Reacquired shares, at cost (14,404 shares) (77) (77)
--------- ---------
Total stockholders' equity 29,906 24,193
--------- ---------
Commitments (notes 12 and 13).
$ 74,878 $55,330
========= =========
See accompanying notes to consolidated financial statements.
23
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARY
Consolidated Statements of Earnings
(Dollars in thousands, except per share data)
Years ended December 31,
-----------------------------------------
1997 1996 1995
----- ---- ----
Operating revenue:
Freight $ 119,688 $ 93,428$ 77,020
Other 429 239 319
------------ ------------ -------------
Operating revenue 120,117 93,667 77,339
------------ ------------ -------------
Operating expenses:
Purchased transportation 47,095 37,386 31,621
Compensation and employee benefits 26,904 20,800 17,182
Fuel, supplies, and maintenance 15,965 12,347 10,183
Insurance and claims 2,206 1,995 1,827
Taxes and licenses 2,299 1,856 1,588
General and administrative 5,391 4,214 3,592
Communications and utilities 1,378 971 758
Depreciation and amortization 7,880 5,740 3,879
------------ ------------ -------------
Total operating expenses 109,118 85,309 70,630
------------ ------------ -------------
Earnings from operations 10,999 8,358 6,709
Financial (expense) income:
Interest expense (1,654) (1,705) (1,456)
Interest income 109 157 231
------------ ------------ -------------
Earnings before income taxes 9,454 6,810 5,484
Income taxes (note 7) 3,781 2,860 2,393
------------ ------------ -------------
Net earnings $ 5,673 $ 3,950 $ 3,091
============ ============ =============
Basic and diluted earnings per share (note 10) $ 1.13 $ 0.93$ 0.88
============ ============ =============
See accompanying notes to consolidated financial statements.
24
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996, and 1995
(Dollars in thousands)
Equity
reduction
Additional for Total
Common paid-in Retained Reacquired ESOP stockholders'
stock capital earnings shares debt equity
------- ----------- --------- ----------- ----------- --------------
Balance at December 31, 1994 $ 28 $ - $ 5,167 $ (58) $ (348) $ 4,789
Net earnings - - 3,091 - - 3,091
Net contributions - 127 - - - 127
Net undistributed earnings of
"S" corporation
and sole proprietorship
at date of termination - 47 (47) - - -
Cancellation of reacquired
common shares - (58) - 58 - -
Reduction of ESOP debt - - - - 105 105
Change in price of common shares
repurchased which was
provided for in 1994 (note 8) - 203 - - - 203
Acquisition of 9,627 common shares - - - (52) - (52)
Change in value and number of
redeemable common shares - (319) (73) - - (392)
------- ----------- --------- ----------- ----------- --------------
Balance at December 31, 1995 28 - 8,138 (52) (243) 7,871
Net earnings - - 3,950 - - 3,950
Reduction of ESOP debt - - - - 243 243
Acquisition of 4,777 common shares - - - (25) - (25)
Shares sold for cash, net of
issuance costs (note 8) 15 10,727 - - - 10,742
Change in value and number of
redeemable common shares 7 377 1,028 - - 1,412
------- ----------- --------- ----------- ----------- -------------
Balance at December 31, 1996 50 11,104 13,116 (77) - 24,193
Net earnings - - 5,673 - - 5,673
Issuance of stock bonuses - 40 - - - 40
------- ----------- --------- ----------- ----------- -------------
Balance at December 31, 1997 $ 50 $ 11,144 $ 18,789 $ (77) $ - $ 29,906
======== ========== ========== =========== ===========
=============
See accompanying notes to consolidated financial statements.
25
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years ended December 31,
---------------------------------
1997 1996 1995
Cash flows from operating activities:
Net earnings $ 5,673 $ 3,950 $ 3,091
--------- ------------ ---------
Adjustments to reconcile net earnings to
cash provided by operating
activities:
Depreciation and amortization 7,880 5,740 3,879
Deferred income taxes 2,460 2,088 1,184
Provision for bad debts 60 -- --
Stock bonuses 40 -- --
Change in:
Receivables (1,214) (4,756) (1,285)
Inventories (326) (210) (72)
Deposits, primarily with insurers 151 (67) (46)
Prepaid expenses (264) 90 (408)
Accounts payable and other accrued
liabilities 450 249 180
--------- ------------ ---------
Total adjustments 9,237 3,134 3,432
--------- ------------ ---------
Net cash provided by operating
activities 14,910 7,084 6,523
--------- ----------- ---------
Cash flows from investing activities:
Payments for acquisitions (2,599) (3,834) --
Purchase of property and equipment (357) (6,341) (2,836)
Proceeds from sale of property and
equipment 1,317 1,321 211
Purchase of other assets (117) -- (500)
Proceeds from short-term investments --- 500 500
--------- ------------ ---------
Net cash used in investing
activities (1,756) (8,354) (2,625)
--------- ------------ ---------
Cash flows from financing activities:
Proceeds from long-term debt 14,300 -- 2,869
Principal payments on long-term debt (19,822) (16,068) (4,593)
Borrowings on line of credit agreement 44,670 93,593 77,606
Payments on line of credit agreement (49,160) (89,103) (77,606)
Proceeds from issuance of common stock,
net -- 11,232 --
Other -- (420) (500)
--------- ------------ ---------
Net cash used in financing
activities (10,012) (766) (2,097)
---------- ------------ ---------
Net increase (decrease) in
cash and cash equivalents 3,142 (2,036) 1,801
Cash and cash equivalents at beginning of
year 940 2,976 1,175
---------- ------------ ---------
Cash and cash equivalents at end of year $ 4,082 $ 940 $ 2,976
========== ============ =========
See accompanying notes to consolidated financial statements.
26
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
(Dollars in thousands)
Years ended December 31,
--------------------------------
1997 1996 1995
Supplemental disclosure of cash flow
information: Cash paid during the year for:
Interest $ 1,455 $ 1,732 $ 1,401
Income taxes 835 971 2,151
========== ============ =========
Supplemental schedules of noncash investing
and financing activities:
Notes payable issued for tractors and
trailers $ 20,594 $ 8,996 $ 13,273
Principal payments made by ESOP -- 243 105
Issuance of stock bonuses 40 -- --
Liability issued for intangible assets -- 100 --
---------- ------------ ---------
Cash payments for acquisitions:
Revenue equipment $ 1,990 $ 3,004 $ --
Intangible assets 472 727 --
Other assets 137 103 --
---------- ------------ ---------
$ 2,599 $ 3,834 $ --
========== ============ =========
See accompanying notes to consolidated financial statements.
27
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Dollars in thousands, except share and per share data)
(1) Consolidated Entity
Smithway Motor Xpress Corp. and subsidiary is a Fort Dodge, Iowa, based
truckload motor carrier, primarily serving shippers in the
central United States and southern provinces of Canada. It
operates over short-to-medium traffic routes, concentrating
primarily on the flatbed segment of the truckload market.
Smithway Motor Xpress Corp. was incorporated as a Nevada corporation on
January 17, 1995, to acquire the stock of Smithway Motor Xpress,
Inc.; the stock of Smithway Transportation Brokerage, Inc.; the
stock of Wilmar Truck Leasing, Inc. (an "S" corporation); and
the net assets of Smith Leasing (a sole proprietorship), in
preparation for its initial public offering of Class A Common
Stock. Smithway Transportation Brokerage, Inc. and Wilmar Truck
Leasing, Inc. were merged into Smithway Motor Xpress, Inc.
Unless otherwise indicated, the companies and sole
proprietorship named in this paragraph are collectively referred
to as the "Company."
The transactions described above were between entities under common
control; accordingly, they have been accounted for in a manner
similar to a pooling of interests, and the accompanying
consolidated financial statements represent the historical
combined operations of such companies.
Pursuant to the acquisitions described above, Smithway Motor Xpress
Corp. issued 2,513,697 shares of its Class A Common Stock and
1,000,000 shares of its Class B Common Stock to the previous
owners of the Companies. Management of the Company believes the
fair value of the Class A Common Stock was not materially
different from that of the Class B Common Stock.
On July 2, 1996, the Company sold 1.5 million shares of its Class A
Common Stock in an initial public offering. In addition, certain
shareholders sold 650,000 shares in the initial public offering.
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company as described in note 1. All significant intercompany
balances and transactions have been eliminated in consolidation.
28
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except share and per share data)
(2) Summary of Significant Accounting Policies, Continued
Customers
The Company serves a diverse base of shippers. No single customer
accounted for more than 10 percent of the Company's total
operating revenues during any of the years ended December 31,
1997, 1996, and 1995. The Company's 10 largest customers
accounted for approximately 23 percent, 32 percent, and 34
percent of the Company's total operating revenues during 1997,
1996, and 1995, respectively. The Company's largest concentration
of customers is in the steel and building materials industries,
which together accounted for approximately 51 percent, 47
percent, and 51 percent of the Company's total operating revenues
in 1997, 1996, and 1995, respectively.
Drivers
The Company faces intense industry competition in attracting and
retaining qualified drivers and independent contractors. This
competition could result in the Company temporarily idling some
of its revenue equipment or increasing the compensation the
Company pays to its drivers and independent contractors.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers interest-bearing instruments with maturity of
three months or less at the date of purchase to be the equivalent
of cash. At December 31, 1997 cash equivalents consisted of
$3,700 of commercial paper. There were no cash equivalents at
December 31, 1996.
Receivables
Trade receivables are stated net of an allowance for doubtful accounts
of $60 and $-0- at December 31, 1997 and 1996, respectively. The
financial status of customers is checked and monitored by the
Company when granting credit. The Company routinely has
significant dollar transactions with certain customers. At
December 31, 1997 and 1996, no individual customer accounted for
more than 10 percent of total trade receivables.
Inventories
Inventories consist of tractor and trailer supplies and parts.
Inventories are stated at lower of cost (first-in, first-out
method) or market.
29
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except share and per share data)
(2) Summary of Significant Accounting Policies, Continued
Prepaid Expenses
Prepaidexpenses consist primarily of the cost of tarps, which are
amortized over 36 months and the cost of tires purchased with new
equipment, which are amortized over 2 years. The unamortized cost
is included in prepaid expenses. Replacement and recapped tires
are expensed when placed in service.
Accounting for Leases
The Company is a lessee of revenue equipment under operating leases.
Rent expense is charged to operations as it is incurred under the
terms of the respective leases.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided by
use of the straight-line and declining-balance methods over lives
of 5 to 39 years for buildings and improvements, 5 to 7 years for
tractors and trailers, and 3 to 10 years for other equipment.
Expenditures for maintenance and minor repairs are charged to
operations, and expenditures for major replacements and
betterments are capitalized. The cost and related accumulated
depreciation on property and equipment retired, traded, or sold
are eliminated from the property accounts at the time of
retirement, trade, or sale. In accordance with industry
practices, the gain or loss on retirement or sale is included in
depreciation and amortization in the consolidated statements of
earnings. Gains or losses on trade-ins are included in the basis
of the new asset.
Intangibles
Included in other assets are certain intangibles which are being
amortized using the straight-line method over periods ranging
from 5 to 10 years. Accumulated amortization of $211 and $55, at
December 31, 1997 and 1996, respectively, have been netted
against these intangible assets.
Revenue Recognition
The Company recognizes operating revenue when the freight to be
transported has been loaded. 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. The Company operates 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.
30
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except share and per share data)
(2) Summary of Significant Accounting Policies, Continued
ESOP Indebtedness
At December 31, 1995, long-term indebtedness of the
Company-sponsored leveraged Employee Stock Ownership Plan (ESOP)
was recorded as long-term debt with a corresponding reduction in
stockholders' equity. The outstanding debt was retired during
1996 with proceeds the ESOP received from the sale of shares
owned by it in the initial public offering.
Insurance and Claims
Losses resulting from personal liability, physical damage, and workers'
compensation are covered by insurance subject to certain
deductibles, and claims resulting from cargo loss and damage are
self-insured. Losses resulting from uninsured claims are
recognized when such losses are known and can be estimated. The
Company estimates and accrues a liability for its share of
ultimate settlements using all available information. Expenses
depend on actual loss experience and changes in estimates of
settlement amounts for open claims which have not been fully
resolved.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect of a change in
tax rates on deferred tax assets and liabilities is recognized in
income in the period that includes the enactment date.
Stock Option Plans
On January 1, 1996, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) 123, "Accounting for
Stock-Based Compensation," which permits entities to recognize as
expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS 123 also allows
entities to continue to apply the provisions of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations and provide pro
forma net earnings and pro forma net earnings per common share
disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS
123 had been applied. APB Opinion No. 25 requires compensation
expense to be recorded only if on the date of grant the current
market price of the underlying stock exceeded the exercise price.
The Company has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS 123.
31
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except share and per share data)
(2) Summary of Significant Accounting Policies, Continued
Net Earnings Per Common Share
The Company adopted the provisions of SFAS 128, "Earnings per Share"
effective December 31, 1997. SFAS 128 is retroactive to prior
years, however, the adoption had no effect on prior years'
earnings per share as previously reported.
Basic earnings per share have been computed by dividing net earnings by
the weighted-average outstanding Class A and Class B common
shares during each of the years. Diluted earnings per share have
been calculated by also including in the computation the effect
of employee stock options, nonvested stock, and similar equity
instruments granted to employees as potential common shares.
(3) Acquisitions
In February 1997, the Company acquired tractors, trailers, and
certain other assets of Pirie Motor Freight, Inc., of Fort Dodge,
Iowa. In exchange for these assets, the Company assumed and
repaid approximately $1,260 in equipment financing secured by
these assets and paid $140 for a noncompete and consulting
agreement. The effect of this transaction was not material to the
consolidated financial statements of the Company.
In September 1997, the Company acquired tractors, trailers, and
certain other assets of Royal Transport, Ltd. of Grand Rapids,
Michigan. In exchange for these assets, the Company repaid
approximately $669 in equipment financing secured by these assets
and paid $179 to the former owners of Royal Transport, Ltd. In
addition, the Company agreed to pay $376 for a noncompete and
consulting agreement. The effect of this transaction was not
material to the consolidated financial statements of the Company.
In January 1996, the Company purchased certain trailers and office
equipment from Smith Trucking Company and entered into a two-year
noncompete agreement. The Company paid total consideration of
$381 in the transaction.
In October 1996, the Company acquired certain assets and assumed
certain liabilities and leases of Marquardt Transportation, Inc.,
of Yankton, South Dakota. Included in the total purchase price of
$3,934 was revenue equipment totaling $3,004; intangible assets
of $827; and various other assets totaling $103.
The above acquisitions were accounted for by the purchase method of
accounting.
32
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except share and per share data)
(4) Fair Value of Financial Instruments
SFAS 107, "Disclosures About Fair Value of Financial Instruments,"
defines the fair value of a financial instrument as the amount at
which the instrument could be exchanged in a current transaction
between willing parties. At December 31, 1997, the carrying
amounts of cash and cash equivalents, trade receivables, other
receivables, accounts payable, and accrued liabilities,
approximate fair value because of the short maturity of those
instruments. The carrying amounts of long-term debt and line of
credit approximate fair value because the applicable borrowing
rates are tied to current market rates.
(5) Line of Credit
At December 31, 1996 the Company had a line of credit agreement
which allowed advances up to the lesser of 85 percent of
qualifying accounts receivable or $5,750. At December 31, 1996,
the Company had outstanding borrowings of $4,490. The interest
rate at December 31, 1996 was 8.75 percent. The Company repaid
this line of credit during 1997.
(6) Long-Term Debt
Long-term debt includes an unsecured credit agreement, entered into
during 1997, with an outstanding balance of $10,000 at December
31, 1997, which allows for borrowings up to the lesser of 85
percent of eligible accounts receivable and 75 percent of the net
book value of unencumbered revenue equipment or $15,000. The
agreement expires August 31, 2001 and contains certain compliance
covenants. The Company was in compliance with these covenants at
December 31, 1997. The interest rate on the outstanding balance
is defined in the agreement and at December 31, 1997 was 6.87
percent. The credit agreement also includes financing for letters
of credit. At December 31, 1997, the Company had a letter of
credit of $1,000 outstanding for self-insured amounts related to
its insurance programs. (See note 13.) This letter of credit
directly reduced the amount of potential borrowings available
under the credit agreement.
Long-term debt also includes equipment notes with balances of $20,976
and $15,904 at December 31, 1997 and 1996, respectively. Interest
rates on the equipment notes range from 5.67 percent to 7.90
percent with maturities through 2005. The equipment notes are
collateralized by the underlying equipment.
Future maturities on long-term debt for years ending December 31, are as
follows: 1998, $3,971; 1999, $4,100; 2000, $14,628; 2001, $2,680;
and 2002, $4,851.
33
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except share and per share data)
(7) Income Taxes
Income taxes consisted of the following components for the three years ended
December 31:
Federal State Total
1997
Current $ 1,082 $ 239 $ 1,321
Deferred 2,016 444 2,460
------------ ------------ ------------
$ 3,098 $ 683 $ 3,781
============ ============ ============
1996
Current $ 725 $ 47 $ 772
Deferred 1,712 376 2,088
------------ ------------ ------------
$ 2,437 $ 423 $ 2,860
============ ============ ============
1995
Current $ 1,088 $ 121 $ 1,209
Deferred 1,034 150 1,184
------------ ------------ ------------
$ 2,122 $ 271 $ 2,393
============ ============ ============
Total income tax expense differs from the amount of income tax expense computed
by applying the normal United States federal income tax rate of 34 percent
to income before income tax expense. The reasons for such differences are
as follows:
Years ended December 31,
--------------------------------------
1997 1996 1995
Computed "expected" income tax
expense $ 3,214 $ 2,315 $ 1,865
State income tax expense, net of
federal benefit 451 279 179
Permanent differences, primarily
nondeductible portion of driver
per diem and travel expenses 230 176 153
Other (114) 90 196
------------ ----------- ----------
$ 3,781 $ 2,860 $ 2,393
============ =========== ==========
Temporary differences between the financial statement basis of assets and
liabilities and the related deferred tax assets and liabilities at December
31, 1997 and 1996, were as follows:
1997 1996
Deferred tax assets:
Alternative minimum tax (AMT) credit
carryforwa$ds 91$ 780
Accrued expenses 540 464
-------------- ------------
Total gross deferred tax assets 1,450 1,244
-------------- ------------
Deferred tax liabilities:
Prepaid expenses (17) (182)
Property and equipment (9,423) (6,592)
-------------- ------------
Total gross deferred tax liabilities (9,440) (6,774)
-------------- ------------
Net deferred tax liabilities $ (7,990) $ (5,530)
============== ============
34
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except share and per share data)
(7) Income Taxes, Continued
The AMT credit carryforwards are available indefinitely to reduce future
income tax liabilities to the extent they exceed AMT liabilities.
(8) Stockholders' Equity
On all matters with respect to which the Company's stockholders have a
right to vote, each share of Class A Common Stock is entitled to one
vote, while each share of Class B Common Stock is entitled to two votes.
The Class B Common Stock is convertible into shares of Class A Common
Stock on a share-for-share basis at the election of the stockholder and
will be converted automatically into shares of Class A Common Stock upon
transfer to any party other than William G. Smith, his wife, Marlys L.
Smith, their children, their grandchildren, trusts for any of their
benefit, and entities wholly owned by them.
Pursuant to the transactions described in note 1, the Company had
outstanding 2,513,697 shares of Class A Common Stock, 1 million shares
of Class B Common Stock, and no shares of preferred stock prior to the
initial public offering of Class A Common Stock and certain reacquired
shares.
Effective July 2, 1996, the Company sold 1.5 million shares of its Class
A Common Stock in an initial public offering. The shares were sold at
$8.50 per share, for a total consideration of $12,750. Underwriting
discounts and offering expenses were $2,008, resulting in net proceeds
to the Company of $10,742.
At December 31, 1994, the Company provided a current liability of $310
for certain minority common shares of the Company which were not
acquired in the transaction described in note 1. Such amount was charged
to additional paid-in capital and retained earnings, since these shares
were reacquired as fractional shares. The actual purchase price of these
fractional shares during 1995 differed from $310 due to a change in the
purchase price of the fractional shares from an anticipated initial
public offering price to the appraised value of the Company at December
31, 1994, and a change in the number of shares repurchased. The effect
of these changes was $203 and was reflected in additional paid-in
capital during 1995.
(9) Stock Plans
The Company adopted an outside director stock option plan effective
March 1, 1995. The Company has reserved 25,000 shares of Class A Common
Stock for issuance pursuant to the plan agreement. The term of each
option shall be six years from the grant date. Options vest on the first
anniversary of the grant date. Exercise price of each stock option is 85
percent of the fair market value of the common stock on the date of
grant.
The Company also adopted an incentive stock option plan effective March
1, 1995. The Company has reserved 225,000 shares of Class A Common Stock
for issuance pursuant to the plan agreement. Any shares which expire
unexercised or are forfeited become available again for issuance under
the plan. Under this plan, no awards of incentive stock options may be
made after December 31, 2004.
The Company applied APB Opinion No. 25 in accounting for its stock
option plans; and, accordingly, no compensation expense has been
recognized in the consolidated financial statements. Had the Company
determined compensation based on the fair value at the grant date for
its outstanding stock options under SFAS 123, the effect on Company's
net earnings and net earnings per common share for 1997 and 1996 would
have been immaterial. The full impact of calculating compensation cost
for stock options under SFAS 123 is reflected over the options' vesting
period.
35
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except share and per share data)
(9) Stock Plans, Continued
A summary of stock option activity and weighted-average exercise prices
follows:
1997 1996 1995
Shares exercise Shares exercise Shares exercise
price price price
---------- ---------- --------- ---------- --------- ---------
Outstanding at beginning of year 88,000 $ 9.42 85,000 $ 9.50 --- $ ---
Granted 28,000 8.73 3,000 7.23 85,000 9.50
Exercised --- --- --- --- --- ---
Forfeited (2,000) 9.50 --- --- --- ---
----------- ---------- --------- ---------- --------- ---------
Outstanding at end of year 114,000 $ 9.25 88,000 $ 9.42 85,000 $ 9.50
----------- ---------- --------- ---------- --------- ---------
Options exercisable at end of year 48,700 $ 9.20 16,600 $ 9.50 --- $ ---
Weighted-average fair value of $ 2.22 $ 2.72 ---
options granted during the year
At December 31, 1997, the weighted-average remaining contractual life of
the outstanding options was 7.45 years.
The Company used the Black-Scholes option pricing model to determine the
fair value of stock options for the years ended December 31, 1997 and
1996. The following assumptions were used in determining the fair value
of these options: weighted-average risk-free interest rate, 6.12% in
1997 and 6.44% in 1996; weighted-average expected life, 5 years in 1997
and 3 years in 1996; and weighted-average expected volatility, 21% in
1997 and 20% in 1996. There were no expected dividends.
Other stock awards granted during 1997 included 6,539 shares of
non-vested common stock with a fair value of $13 on the grant date. In
1996, the Company granted 1,690 shares of non-vested common stock with a
fair value of $8.88 on the grant date. No stock awards for non-vested
shares were made in 1995.
The Company adopted an independent contractor driver bonus plan
effective January 1, 1997. The maximum number of shares to be awarded
under the plan are 50,000 shares of Class A Common Stock. The Company
awarded 3,211 shares under the plan in 1997.
The Company also adopted a Class A Common Stock profit incentive plan in
1997. Under the plan, the Company will set aside for delivery to certain
participants the number of shares of Class A Common Stock having a
market value on the distribution date equal to a designated percentage
(as determined by the board of directors) of the Company's consolidated
net earnings for the applicable fiscal year. In 1997, the Company
awarded $85 to certain employees for which common stock will be issued
in 1998.
36
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except share and per share data)
(10) Earnings Per Share
A summary of the basic and diluted earnings per share computations for
the years ended December 31, 1997, 1996, and 1995 is presented below:
For the year ended 1997 For the year ended 1996
---------------------------------------- --------------------------------------
Net Shares Net Shares
earnings (denominator) Per share earnings (denominator) Per Share
(numerator) amount (numerator) amount
----------- ------------- --------- ------------ ------------- ---------
Basic EPS
Net earnings available to
common stockholders $5,673 5,000,860 $1.13 $3,950 4,249,893 $0.93
Effect of dilutive
securities
Common stock options --- 18,011 --- 158
Common stock awards --- 376 --- ---
----------- ----------- ----------- ----------- ----------- ----------
Diluted EPS $5,673 5,019,247 $1.13 $3,950 4,250,051 $0.93
----------- ----------- ----------- ----------- ----------- ----------
For the year ended 1995, net earnings available for common stockholders
was $3,091 and weighted-average shares outstanding were 3,524,042,
resulting in basic earnings per share of $.88. Diluted earnings per
share was also $.88 as all common stock options outstanding in 1995 were
anti-dilutive.
(11) Employees' Profit Sharing and Savings Plan and ESOP
The Company has an Employees' Profit Sharing and Savings Plan, which is
a qualified plan under the provisions of Sections 401(a) and 501(a) of
the Internal Revenue Code. Eligible employees are allowed to contribute
up to a maximum of 15 percent of pretax compensation into the plan.
Employers may make savings, matching, and discretionary contributions,
subject to certain restrictions. During the years ended December 31,
1997, 1996, and 1995, Company contributions totaled $150, $-0-, and $64,
respectively. The Plan owns 486,794 shares of the Company's Class A
Common Stock at December 31, 1997.
The Company previously sponsored an ESOP which was merged into the
Employees' Profit Sharing and Savings Plan, effective January 1, 1997.
The ESOP had previously incurred a note payable with a balance at
December 31, 1996 of $243 in connection with the purchase of common
stock of the Company. This debt was retired by the ESOP during 1996 with
the proceeds the ESOP received from stock it sold in the initial public
offering. Actual interest expense on the ESOP debt was $11 and $31
during the years ended December 31, 1996 and 1995, respectively.
Contributions made to the ESOP for the years ended December 31, 1996 and
1995, were $-0- and $138.
37
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except share and per share data)
(12) Lease Commitments
The Company has entered into various noncancelable operating leases for
transportation equipment and buildings which will expire over the next
five years. Under the leases for transportation equipment, the Company
is responsible for all repairs, maintenance, insurance, and all other
operating expenses. Certain leases on transportation equipment require
the Company to guarantee the value at the maturity of the lease at
amounts varying from 10 percent to 20 percent of the original equipment
cost. The maximum contingent liability under such leases is
approximately $576 from 1998 to 2001.
Approximate future minimum lease payments under noncancelable operating
leases as of December 31, 1997, totaled $2,074 and are payable as
follows: 1998, $1,172; 1999, $629; 2000, $269; and 2001, $4.
Rent charged to expense on the above leases, expired leases, and
short-term rentals was $1,740 in 1997; $1,462 in 1996; and $1,901 in
1995.
(13) Contingent Liabilities
The Company's insurance program for personal liability, physical damage,
and workers' compensation involves self-insurance for losses up to $50
per claim, $50 per claim, and $100 per claim, respectively. At December
31, 1997 and 1996, the Company had approximately $905 and $1,267,
respectively, accrued for its estimated liability for incurred losses
related to these programs. Losses in excess of the self-insured amount
per claim are covered by insurance companies.
The insurance companies require the Company to provide letters of credit
to provide funds for payment of the self-insured amounts. At December
31, 1997, the Company had a $1,000 letter of credit issued under the
credit agreement described in note 6. In addition, funds totaling $683
and $862 were held by the insurance companies as deposits at December
31, 1997 and 1996, respectively.
The Company's insurance program for health insurance provided as an
employee benefit for all eligible employees involves self-insurance for
losses up to $60 per claim and an aggregate loss of $940. At December
31, 1997 and 1996, the Company had approximately $250 and $268,
respectively, accrued for its estimated liability related to these
claims.
The Company is also involved in certain legal actions and proceedings
arising from the normal course of operations. Management believes that
liability, if any, arising from such legal actions and proceedings will
not have a material adverse effect on the financial position of the
Company.
(14) Transactions with Related Parties
At December 31, 1997 and 1996, other receivables included $66 in
receivables from an officer and a related party.
38
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except share and per share data)
(15) Quarterly Financial Data (Unaudited)
Summarized unaudited quarterly financial data for the Company for 1997
and 1996 is as follows:
March 31 June 30 September 30 December 31
------------ ----------- ------------ -------------
1997
Operating revenue $ 26,908 30,614 31,834 30,761
Earnings from operations 1,955 3,107 3,369 2,569
Net earnings 951 1,536 1,695 1,492
Basic and diluted earnings
per share 0.19 0.31 0.34 0.30
============ =========== ============ =============
March 31 June 30 September 30 December 31
------------ ----------- ------------ -------------
1996
Operating revenue $ 19,860 23,411 24,937 25,459
Earnings from operations 1,296 2,524 2,534 2,005
Net earnings 513 1,154 1,330 952
Basic and diluted earnings
per share 0.15 0.33 0.27 0.19
============ =========== ============ =============
As a result of rounding, the total of the four quarters may not equal
the Company's results for the year.
(16) Subsequent Event (Unaudited)
In February 1998, the Company acquired tractors, trailers, and certain
other assets of East West Motor Express, Inc. of Black Hawk, South
Dakota. In exchange for these assets, the Company paid approximately
$6,852 to the previous owners, assumed and repaid approximately $4,017
in equipment financing secured by these assets and agreed to pay $2,229
for goodwill. East West Motor Express, Inc. had approximately $31,000 in
revenue during 1997.
39