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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One) The Company's primary customers include retailers, manufacturers, and
third party logistics providers.
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from__________________To_________________________
Commission file number 0-15087
HEARTLAND EXPRESS, INC.
(Exact name of registrant as specified in its charter)
Nevada 93-0926999
(State or Other Jurisdiction of Incorporation) (I.R.S. Employer I.D. No.)
2777 Heartland Drive
Coralville, Iowa 52241
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 319-545-2728
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
Common Stock
Indicated 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 the registrant's definitive proxy statement
incorporated by reference in Part III of this Form 10-K. [X]
The aggregate market value of the shares of the registrant's $0.01 par value
common stock held by non-affiliates of the registrant as of March 15, 2000 was
$159,808,422 (based upon $13.66 per share being the average of the closing bid
and asked price on that date as reported by NASDAQ). In making this calculation
the issuer has assumed, without admitting for any purpose, that all executive
officers and directors of the registrant, and no other persons, are affiliates.
The number of shares outstanding of the Registrant's common stock as March 15,
2000 was 25,366,582.
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 1999 annual meeting of
stockholders that will be filed no later than April 28, 2000.
1
Cross Reference Index
The following cross reference index indicates that 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 3-5 herein
Item 2 Properties Page 5 herein
Item 3 Legal Proceedings Page 6 herein
Item 4 Submission of Matters to a Vote of Stockholders Page 6 herein
Part II
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters Page 6 herein
Item 6 Selected Financial Data Page 7 herein
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations Page 8-12 herein
Item 7A Quantitative and Qualitative Disclosures about
Market Risk Page 12 herein
Item 8 Financial Statements and Supplementary Data Page 13 and
17-27 herein
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure Page 13 herein
Part III
Item 10 Directors and Executive Officers of the Registrant Pages 3 to 5 of
Proxy Statement
Item 11 Executive Compensation Pages 6 and 7 of
Proxy Statement
Item 12 Security Ownership of Certain Beneficial Owners
and Management Page 9 of
Proxy Statement
Item 13 Certain Relationships and Related Transactions Page 5 of Proxy
Statement
Part IV
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K Pages 14
and 15 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
General
Heartland Express, Inc. ("Heartland" or the "Company") is a short-to-medium
haul truckload carrier based near Iowa City, Iowa. The Company provides
nationwide transportation service to major shippers, using late-model equipment
and a balanced fleet of company-owned and owner-operator tractors. The Company's
primary traffic lanes are between customer locations east of the Rocky
Mountains, with selected service to the West. Management believes that the
Company's service standards and equipment accessibility have made it a core
carrier to many of its major customers.
Heartland was founded by Russell A. Gerdin in 1978 and became publicly
traded in November 1986. Over the thirteen years from 1986 to 1999, Heartland
has grown to $261.0 million in revenue from $21.6 million and net income has
increased to $33.1 million from $3.0 million. Much of this growth has been
attributable to expanding service for existing customers, acquiring new
customers, and continued expansion of the Company's operating regions.
In addition to internal growth, Heartland has completed four acquisitions
since 1987. These acquisitions have enabled Heartland to solidify its position
within historical regions, expand its customer base in the East and Northeast
United States, and to pursue new customer relationships in new markets. Most
recently, in July 1997, Heartland increased its Eastern operations by acquiring
A & M Express, Inc. located in Kingsport, Tennessee.
A & M Express, Inc. is predominately a dry-van carrier that operates a
primarily company-owned fleet. A & M reported gross revenues of approximately
$28 million in 1996. A & M Express generates a small portion of its revenues
from the flat bed market. The Company is operating A & M Express as a separate
subsidiary. However, administrative functions are being performed at Heartland's
corporate headquarters. The purchase of A & M was funded by cash and
investments.
Heartland Express, Inc. is a holding company incorporated in Nevada, which
owns, directly or indirectly, all of the stock of Heartland Express Inc. of
Iowa, Heartland Equipment, Inc., Munson Transportation, Inc., Munson Transport
Service, Inc., Munson Equipment, Inc., and A & M Express, Inc.
Operations
Heartland's operations department focuses on the successful execution of
customer expectations and providing consistent opportunity for the fleet of
employee drivers and independent contractors, while maximizing equipment
utilization. These objectives require a combined effort of marketing, customer
service, transportation planning, and fleet management.
The Company's customer service employees are responsible for maintaining
the continuity between the customer's needs and Heartland's ability to meet
those needs by communicating customer's expectations to the fleet management
group. They are charged with development of customer relationships, ensuring
service standards, coordinating proper freight-to-capacity balancing, and
trailer asset management.
Transportation planning employees are responsible for daily tactical
decisions pertaining to matching the Company's freight with the appropriate
capacity within geographical service areas. They assign orders to drivers based
on well-defined criteria, such as driver safety and DOT compliance, customer
needs and service requirements, equipment utilization, driver time at home,
operational efficiency, and equipment maintenance needs.
Fleet management employees are charged with the management and development
of their fleets of drivers. Additionally, they maximize the capacity that is
available to the organization to meet the service needs of the Company's
customers. Their responsibilities include meeting the needs of the drivers
within the standards that have been set by the organization and communicating
the requirements of the customers to the drivers on each order to ensure
successful execution.
Serving the short-to-medium haul market (608-mile average length of haul in
1999) permits the Company to use primarily single, rather than team drivers and
dispatch most trailers directly from origin to destination without an
intermediate equipment change other than for driver scheduling purposes.
3
Heartland also operates four specialized regional distribution operations
for major customers near Atlanta, Georgia; Carlisle, Pennsylvania; Columbus,
Ohio; and Jacksonville, Florida. These short-haul operations concentrate on
freight movements generally within a 400-mile radius of the regional terminal,
and are designed to meet the needs of significant customers in those regions.
These operations are handled by dispatchers at the regional locations, and the
Company uses a centralized computer network and regular communication to achieve
system-wide load coordination.
The Company emphasizes customer satisfaction through on-time performance,
dependable late-model equipment, and consistent equipment availability to serve
large customers' volume requirements. The Company also maintains a high trailer
to tractor ratio, which facilitates the stationing of trailers at customer
locations for convenient loading and unloading. This minimizes waiting time,
which increases tractor utilization and assists with driver retention.
Customers and Marketing
The Company targets customers in its operating area that require multiple,
time-sensitive shipments, including those employing "just-in-time" manufacturing
and inventory management. In seeking these customers, Heartland has positioned
itself as a provider of premium service at compensatory rates, rather than
competing solely on the basis of price. Freight transported for the most part is
non-perishable and predominantly does not require driver handling. Heartland's
reputation for quality service, reliable equipment, and equipment availability
makes it a core carrier to many of its customers.
Heartland seeks to transport freight that will complement traffic in its
existing service areas and remain consistent with the Company's focus on
short-to-medium haul and regional distribution markets. Management believes that
building additional service in the Company's primary traffic lanes will assist
in controlling empty miles and enhancing driver "home time."
The Company's 25, 10, and 5 largest customers accounted for 65%, 48%, and
34% of revenue, respectively, in 1999. The Company's primary customers include
retailers, manufacturers, and third party logistics providers. The distribution
of customers is not significantly different from the previous year. Sears
Logistics Services accounted for 14% of revenue in 1999. No other customer
accounted for as much as ten percent of revenue.
Drivers, Independent Contractors, and Other Personnel
Heartland's workforce is an essential ingredient in achieving its business
objectives. As of December 31, 1999, Heartland employed 1,410 persons. The
Company also contracted with independent contractors to provide and operate
tractors. Independent contractors own their own tractors and are responsible for
all associated expenses, including financing costs, fuel, maintenance,
insurance, and taxes. The Company historically has operated a balanced fleet of
company and independent contractor tractors. Management believes that a balanced
fleet compliments the Company's recruiting efforts and offers greater
flexibility in responding to fluctuations in shipper demand.
Management's strategy for both employee and independent contractor drivers
is to (1) hire the best; (2) promote retention through financial incentives,
positive working conditions, and targeting freight that requires little or no
handling; and (3) minimize safety problems through careful screening, mandatory
drug testing, continuous training, and financial rewards for accident-free
driving. Heartland also seeks to minimize turnover of its employee drivers by
providing modern, comfortable equipment and of all drivers by regularly
scheduling them to their homes. All drivers are compensated for empty miles as
well as loaded miles. This provides an incentive for the Company to minimize
empty miles and at the same time does not penalize drivers for inefficiencies of
operations that are beyond their control.
Heartland is not a party to a collective bargaining agreement. Management
believes that the Company has good relationships with its employees and
independent contractors.
4
Revenue Equipment
Heartland's management believes that operating high-quality, efficient
equipment is an important part of providing excellent service to customers. The
Company's policy is to operate its tractors while under warranty to minimize
repair and maintenance cost and reduce service interruptions caused by
breakdowns. In addition, the Company's preventive maintenance program is
designed to minimize equipment downtime, facilitate customer service, and
enhance trade value when equipment is replaced. Factors considered when
purchasing new equipment include fuel economy, price, technology, warranty
terms, manufacturer support, driver comfort, and resale value.
Competition
The truckload industry is highly competitive and includes thousands of
carriers, none of which dominates the market. The Company competes primarily
with other truckload carriers, and to a lesser extent with railroads, intermodal
service, less-than-truckload carriers, and private fleets operated by existing
and potential customers. Although intermodal and rail service has improved in
recent years, such service has not been a major factor in the Company's
short-to-medium haul traffic lanes (608-mile average length of haul).
Historically, competition has created downward pressure on the truckload
industry's pricing structure. Management believes that competition for the
freight targeted by the Company is based primarily upon service and efficiency
and to a lesser degree upon freight rates.
Regulation
The Company is a common and contract motor carrier of general commodities.
Historically, the Interstate Commerce Commission (the "ICC") and various state
agencies regulated motor carriers' operating rights, accounting systems, mergers
and acquisitions, periodic financial reporting, and other matters. In 1995
federal legislation preempted state regulation of prices, routes, and services
of motor carriers and eliminated the ICC. Several ICC functions were transferred
to the Department of Transportation (the "DOT"). Management does not believe
that regulation by the DOT or by the states in their remaining areas of
authority will have a material effect on the Company's operations. The Company's
employee and independent contractor drivers also must comply with the safety and
fitness regulations promulgated by the DOT, including those relating to drug and
alcohol testing and hours of service.
The Company's operations are subject to various federal, state, and local
environmental laws and regulations, implemented principally by the 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. 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 and competitive position. In the event the Company should
fail to comply with applicable regulations, the Company could be subject to
substantial fines or penalties and to civil or criminal liability.
ITEM 2. PROPERTIES
Heartland's headquarters is located adjacent to Interstate 80, near Iowa
City, Iowa. The facilities include five acres of land, two office buildings of
approximately 25,000 square feet combined and a storage building, all leased
from the Company's president and principal stockholder. Company-owned facilities
at this location include three tractor and trailer maintenance garages totaling
approximately 26,500 square feet, and a safety and service complex adjacent to
Heartland's corporate offices. The adjacent facility provides the Company with
six acres of additional trailer parking space, a drive-through inspection bay,
an automatic truck wash facility, and 6,000 square feet of office space and
driver facilities. The Company also owns a motel located adjacent to its
corporate offices, which functions as a motel and driver training center.
The Company owns regional facilities in Ft. Smith, Arkansas; O'Fallon,
Missouri; Atlanta, Georgia; Columbus, Ohio; Jacksonville, Florida; and
Kingsport, Tennessee. The Company is leasing facilities in Carlisle,
Pennsylvania; Decatur, Illinois; and Rochester, New York. A facility in Dubois,
Pennsylvania is being leased to an unrelated third party. The Company sold
closed facilities in Woodville, Ohio and Monmouth, Illinois and a rental
property in Jacksonville, Florida during 1999 to unrelated third parties. Closed
facilities in Monmouth, Illinois and Forest Park, Georgia were sold subsequent
to year-end to unrelated third parties.
5
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to routine litigation incidental to its business,
primarily involving claims for personal injury and property damage incurred in
the transportation of freight. The Company believes that adverse results in
these cases, whether individual or in the aggregate, would not have a material
effect upon the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
During the fourth quarter of 1999, no matters were submitted to a vote of
securities holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Price Range of Common Stock
The Company's common stock has been traded on the NASDAQ National Market
under the symbol HTLD, since November 5, 1986, the date of the Company's initial
public offering. The following table sets forth for the calendar period
indicated the range of high and low price quotations for the Company's common
stock as reported by NASDAQ from January 1, 1998 to December 31,1999.
Period High Low
Calendar Year 1999
1st Quarter $17.75 $13.00
2nd Quarter 16.63 13.00
3rd Quarter 17.88 13.38
4th Quarter 16.63 12.38
Calendar Year 1998
1st Quarter $29.00 $22.75
2nd Quarter 29.00 19.75
3rd Quarter 20.25 15.50
4th Quarter 20.25 12.38
The prices reported reflect interdealer quotations without retail mark-ups,
mark-downs or commissions, and may not represent actual transactions. As of
March 15, 2000 the Company had 240 stockholders of record of its common stock.
However, the Company estimates that it has a significantly greater number of
stockholders 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. It is the current
intention of the Company's Board of Directors to retain earnings to finance the
growth of the Company's business. Future payments of cash dividends will depend
upon the financial condition, results of operations and capital requirements of
the Company, as well as other factors deemed relevant by the Board of Directors.
6
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below reflect the
consolidated financial position and results of operations of Heartland Express,
Inc., and its subsidiaries. The selected consolidated financial data are derived
from the Company's consolidated financial statements. This data should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's consolidated financial statements
and notes thereto included elsewhere herein.
Year Ended December 31,
(in thousands, except per share data)
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
Income Statement Data:
Operating revenue ............... $ 261,004 $ 263,489 $ 262,504 $ 229,011 $ 191,507
--------- --------- --------- --------- ---------
Operating expenses:
Salaries, wages, and benefits.... 60,258 51,995 49,535 40,261 40,715
Rent and purchased transportation 90,337 100,089 101,169 93,961 64,043
Operations and maintenance....... 30,167 26,072 27,739 22,158 21,035
Taxes and licenses............... 5,935 6,150 6,049 5,693 5,246
Insurance and claims............. 5,742 6,810 10,404 9,976 7,967
Communications and utilities..... 2,629 2,684 2,681 2,158 2,562
Depreciation..................... 16,216 18,108 16,752 13,571 15,066
Other operating expenses......... 5,941 5,872 5,048 4,534 3,745
(Gain) on sale of fixed assets... (928) (332) (59) (189) (27)
--------- --------- --------- --------- ---------
216,297 217,448 219,318 192,123 160,352
--------- --------- --------- --------- ---------
Operating income................... 44,707 46,041 43,186 36,888 31,155
Interest income/(expense), net..... 5,953 4,896 3,782 2,839 1,524
--------- --------- --------- --------- ---------
Income before income taxes......... 50,660 50,937 46,968 39,727 32,679
Federal and state income taxes..... 17,536 17,828 16,895 14,697 12,094
--------- --------- --------- --------- ---------
Net income ........................ $ 33,124 $ 33,109 $ 30,073 $ 25,030 $ 20,585
========= ========= ========= ========= =========
Basic weighted average shares
outstanding........................ 29,360 30,000 30,000 30,000 30,036
========= ========= ========= ========= =========
Basic earnings per share .......... $ 1.13 $ 1.10 $ 1.00 $ 0.83 $ 0.69
========= ========= ========= ========= =========
Balance sheet data:
Net working capital ............... $ 111,675 $ 127,989 $ 82,170 $ 69,845 $ 40,780
Total assets ...................... $ 246,494 $ 256,828 $ 225,467 $ 191,504 $ 158,146
Long term debt .................... $ -- $ -- $ -- $ -- $ --
Stockholders' equity .............. $ 174,840 $ 186,848 $ 153,739 $ 123,666 $ 98,636
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The following table sets forth the percentage relationship of expense items
to operating revenue for the periods indicated.
Year Ended December 31,
--------------------------------------
1999 1998 1997
----------- ------------ -----------
Operating revenue 100.0% 100.0% 100.0%
----------- ------------ -----------
Operating expenses:
Salaries, wages, and benefits 23.1% 19.7% 18.9%
Rent and purchased transportation 34.6 38.0 38.5
Operations and maintenance 11.6 9.9 10.5
Taxes and licenses 2.3 2.3 2.3
Insurance and claims 2.2 2.6 4.0
Communications and utilities 1.0 1.0 1.0
Depreciation 6.2 6.9 6.4
Other operating 2.3 2.2 1.9
expenses
(Gain) on sale of fixed assets (0.4) (0.1) -
----------- ------------ -----------
Total operating 82.9% 82.5% 83.5%
expenses ----------- ------------ -----------
Operating income 17.1% 17.5% 16.5%
Interest income, net 2.3 1.9 1.4
----------- ------------ -----------
Income before income taxes 19.4% 19.4% 17.9%
Federal and state income taxes 6.7 6.8 6.4
----------- ------------ -----------
Net income 12.7% 12.6% 11.5%
=========== ============ ===========
Results of Operations
Year Ended December 31, 1999 Compared With Year Ended December 31, 1998
Operating revenue decreased $2.5 million (0.9%), to $261.0 million in 1999
from $263.5 million in 1998. The Company's growth of operating revenues was
curtailed by the industry-wide shortage of experienced employee drivers and
independent contractors.
Salaries, wages, and benefits increased $8.3 million (15.9%), to $60.3
million in 1999 from $52.0 million in 1998. As a percentage of revenue,
salaries, wages, and benefits increased to 23.1% in 1999 from 19.7% in 1998.
These increases are the result of increased reliance on employee drivers and a
corresponding decrease in miles driven by independent contractors. In addition,
the Company has increased employee driver pay three times since September 1,
1998. The increase in employee driver miles was attributable to internal growth
in the company tractor fleet. During 1999, employee drivers accounted for 51%
and independent contractors 49% of the total fleet miles, compared with 45% and
55%, respectively, in 1998.
Rent and purchased transportation decreased $9.8 million (9.7%), to $90.3
million in 1999 from $100.1 million in 1998. As a percentage of revenue, rent
and purchased transportation decreased to 34.6% in 1999 from 38.0% in 1998. This
reflected the Company's decreased reliance upon independent contractors. In
addition, an increased industry demand for independent contractors has negated
the Company's previous competitive advantage.
Operations and maintenance increased $4.1 million (15.7%), to $30.2 million
in 1999 from $26.1 million in 1998. As a percentage of revenue, operations and
maintenance increased to 11.6% in 1999 from 9.9% in 1998. This increase is
attributable to an increase in fuel prices and increased reliance on the Company
owned fleet. The fuel cost per gallon steadily increased after the first quarter
of 1999 with heavy increases experienced in the fourth quarter of 1999.
8
Taxes and licenses decreased $0.2 million (3.5%), to $5.9 million in 1999
from $6.1 million 1998. As a percentage of revenue, taxes and licenses remained
constant at 2.3% in 1999 and in 1998.
Insurance and claims decreased $1.1 million (15.7%), to $5.7 million in
1999 from $6.8 million in 1998. As a percentage of revenue, insurance and claims
decreased to 2.2% in 1999 from 2.6% in 1998. The decrease was primarily
attributable to the favorable settlement of claims and the lessor severity of
incurred claims. Insurance and claims expense will vary as a percentage of
operating revenue from period to period based on the frequency and severity of
claims incurred in a given period as well as changes in claims development
trends.
Communications and utilities decreased $0.1 million (2.1%), to $2.6 million
in 1999 from $2.7 million in 1998. As a percentage of revenue, communications
and utilities remained constant at 1.0% in 1999 and in 1998.
Depreciation decreased $1.9 million (10.4%), to $16.2 million in 1999 from
$18.1 million in 1998. As a percentage of revenue, depreciation decreased to
6.2% in 1999 from 6.9% in 1998. The decrease resulted from the increase in the
number of trailers in the Company's fleet becoming fully depreciated.
Other operating expenses remained constant at $5.9 million in 1999 and in
1998. As a percentage of revenue, other operating expenses increased to 2.3% in
1999 from 2.2% in 1998. Other operating expenses consists of pallet cost, driver
recruiting expenses, goodwill, and administrative costs.
Primarily as a result of the foregoing, the Company's operating ratio
increased to 82.9% in 1999 compared with 82.5% in 1998.
Interest income (net) increased $1.1 million (21.6%), to $6.0 million in
1999 from $4.9 million in 1998. As a percentage of revenue, interest income
increased to 2.3% in 1999 from 1.9% in 1998. The Company had $126.7 million in
cash, cash equivalents, and investments at December 31, 1999 compared with
$143.4 million at December 31, 1998. Interest income earned is primarily exempt
from federal taxes and therefore earned at a lower pre-tax rate.
The Company's effective tax rate was 34.5% in 1999 and 35% in 1998. This
decrease is primarily attributable to the increase of tax-exempt interest
earned.
As a result of the foregoing, net income remained constant at $33.1 million
in 1999 and in 1998.
Year Ended December 31, 1998 Compared With Year Ended December 31, 1997
Operating revenue increased $1.0 million (0.4%), to $263.5 million in 1998
from $262.5 million in 1997. The Company's growth of operating revenues was
curtailed by the industry-wide shortage of experienced employee drivers and
independent contractors.
Salaries, wages, and benefits increased $2.5 million (5.0%), to $52.0
million in 1998 from $49.5 million in 1997. As a percentage of revenue,
salaries, wages and benefits increased to 19.7% in 1998 from 18.9% in 1997. An
increase in the percentage of employee drivers operating the Company's tractor
fleet and a corresponding decrease in the percentage of the fleet being provided
by independent contractors was the primary cause. This increase in employee
driver miles was attributable to internal growth and the effect of a full year
of operations of A & M Express which was acquired in July, 1997 and primarily
relies on employee drivers. During 1998, employee drivers accounted for 45% and
independent contractors 55% of the total fleet miles, compared with 43% and 57%,
respectively, in 1997.
Rent and purchased transportation decreased $1.1 million (1.1%), to $100.1
million in 1998 from $101.2 million in 1997. As a percentage of revenue, rent
and purchased transportation decreased to 38.0% in 1998 from 38.5% in 1997. This
reflected the Company's decreased reliance upon independent contractors. In
addition, an increased industry demand for independent contractors has negated
the Company's previous competitive advantage.
9
Operations and maintenance decreased $1.7 million (6.0%), to $26.1 million
in 1998 from $27.7 million in 1997. As a percentage of revenue, operations and
maintenance decreased to 9.9% in 1998 from 10.5% in 1997. This decrease is
attributable to a decrease in fuel prices and lower repair and maintenance costs
due to the replacement of older tractors with newer models.
Taxes and licenses increased $0.1 million (1.7%), to $6.1 million in 1998
from $6.0 million 1997, primarily from an increase in fleet size. As a
percentage of revenue, taxes and licenses remained constant at 2.3% in 1998 and
in 1997.
Insurance and claims decreased $3.6 million (34.5%), to $6.8 million in
1998 from $10.4 million in 1997. As a percentage of revenue, insurance and
claims decreased to 2.6% in 1998 from 4.0% in 1997. The decrease was primarily
attributable to the favorable settlement of claims and the lessor severity of
incurred claims. Insurance and claims expense will vary as a percentage of
operating revenue from period to period based on the frequency and severity of
claims incurred in a given period as well as changes in claims development
trends.
Communications and utilities remained constant at $2.7 million in 1998 and
1997. As a percentage of revenue, communications and utilities remained constant
at 1.0% in 1998 and in 1997.
Depreciation increased $1.4 million (8.1%), to $18.1 million in 1998 from
$16.8 million in 1997. As a percentage of revenue, depreciation increased to
6.9% in 1998 from 6.4% in 1997. The increase resulted from a growth in the
company owned fleet, as a percentage of the total fleet.
Other operating expenses increased $0.9 million (16.3%), to $5.9 million in
1998 from $5.0 million in 1997. As a percentage of revenue, other operating
expenses increased to 2.2% in 1998 from 1.9% in 1997. Other operating expenses
consists of pallet cost, driver recruiting expenses, goodwill, and
administrative costs. The primary area of increase was higher costs associated
with the recruitment of qualified employee drivers and independent contractors.
Primarily as a result of the foregoing, the Company's operating ratio was
82.5% in 1998 compared with 83.5% in 1997.
Interest income (net) increased $1.1 million (29.0%), to $4.9 million in
1998 from $3.8 million in 1997. As a percentage of revenue, interest income
(net) increased to 1.9% in 1998 from 1.4% in 1997. The Company had $143 million
in cash, cash equivalents, and investments at December 31, 1998 compared with
$96.0 million at December 31, 1997. Interest income earned is primarily exempt
from federal taxes and therefore earned at a lower pre-tax rate.
The Company's effective tax rate was 35% in 1998 and 36% in 1997. This
decrease is primarily attributable to the increase in tax-exempt interest
earned.
As a result of the foregoing, net income increased $3.0 million (10.1%), to
$33.1 million in 1998 (12.6% of revenue) from $30.1 million in 1997 (11.5% of
revenue).
Liquidity and Capital Resources
The growth of the Company's business requires significant investments in
new revenue equipment. Historically the Company has been debt-free, financing
revenue equipment through cash flow from operations. The Company also obtains
tractor capacity by utilizing independent contractors, who provide a tractor and
bear all associated operating and financing expenses.
Cash and cash equivalents and investments decreased to $126.7 million as of
December 31, 1999 from $143.4 million at December 31, 1998. The Company's policy
is to purchase only high quality liquid investments. Cash equivalents and
investments primarily consists of municipal demand bonds and municipal demand
bond funds.
Net cash provided by operations was $45.6 million in 1999, $52.7 million in
1998, and $46.8 million in 1997. The primary source of funds in 1999 was net
income of $33.1 million increased by non-cash adjustments, including
depreciation and amortization of $17.3 million.
10
Net investing activities consumed $17.7 million in 1999 and $11.6 million
in 1997, and generated $14.5 million in 1998. The primary use of cash in 1999
was $18.6 million for capital expenditures, including revenue equipment. The
Company expects to finance future growth in its company-owned fleet primarily
through cash flow from operations and cash equivalents currently on hand.(*)
Net cash used in financing activities was $45.1 million in 1999, none in
1998, and $18.5 million in 1997. The 1999 financing activity was comprised
solely of the repurchase of approximately 3.5 million shares of the Company's
common stock. On February 28, 2000 the Company repurchased approximately 1.1
million shares of its outstanding common stock for $14.0 million.
Trade receivables increased to $23.5 million as of December 31, 1999 from
$21.4 million as of December 31, 1998 primarily due to a 6.5% increase in fourth
quarter operating revenue. Cash paid for income taxes decreased to $16.6 million
in 1999 from $18.9 million in 1998. Lower income taxes on a cash basis are
primarily due to increased interest income exempt from federal taxes.
Insurance accruals decreased to $34.3 million as of December 31, 1999 from
$35.5 million as of December 31, 1998. The Company's insurance program for
liability, physical damage and cargo damage involves self insurance retentions
for the first $500,000. Claims in excess of the risk retention are covered by
insurance in amounts which management considers adequate. The Company accrues
the estimated cost of the uninsured portion of the pending claims. These
accruals are estimated based on management's evaluation of the nature and
severity of individual claims and estimate of future claims development based on
historical claim development trends. If adjustments to previously established
accruals are required, such amounts are included in operating expenses.
The Company has one customer who accounted for more than 10% of the
Company's revenue for the year ended December 31, 1999. As disclosed in footnote
two to the financial statements, historically a small number of customers
generate a substantial percentage of revenue. In 1999 the Company's largest
customer generated approximately 14% of operating revenue. The loss of a major
customer could negatively impact the Company. Any negative impact would be
mitigated by two factors: (1) the strong overall financial position of the
Company (no long term debt at December 31, 1999 and $126.7 million in cash, cash
equivalents and investments) and (2) the flexibility inherent in having a
substantial percentage of fleet miles being generated by independent contractors
who provide their own tractors.(*)
Based on the Company's strong financial position (current ratio of 3.0 and
no debt), management foresees no significant barriers to obtaining sufficient
financing, if necessary, to continue with growth plans. (*
Inflation and Fuel Cost
Most of the Company's operating expenses are inflation-sensitive, with
inflation generally producing increased costs of operations. During the past
three years, the most significant effects of inflation have been on revenue
equipment prices and the compensation paid to the 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. 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
The nature of the Company's primary traffic (appliances, automotive parts,
paper products, retail goods, and packaged foodstuffs) causes it to be
distributed with relative uniformity throughout the year. However, earnings have
historically been affected adversely during the fourth quarter as a result of
reduced shipments by customers during the winter holiday season. In addition,
the Company's operating expenses historically have been higher during the winter
months due to increased operating costs in colder weather and higher fuel
consumption due to increased engine idling.
(*) Forward - looking statements
11
Year 2000
In late 1999, the Company completed the remediation and testing of its
systems to ensure compliance with the Year 2000. As a result of those planning
and implementation efforts, the Company experienced no significant disruptions
in mission critical information technology and non-information technology
systems and believes those systems successfully responded to the Year 2000 date
change. Costs of remediation efforts were immaterial.
The Company is not aware of any material problems resulting from Year 2000
issues, either with its internal systems or the services of third parties. The
Company will continue to monitor its mission critical computer applications and
those of its suppliers and vendors throughout the year 2000 to ensure that any
latent Year 2000 matters that may arise are addressed promptly.
Recent Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (FAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. In June 1999, the FASB issued
Statement No. 137, Accounting for Derivative Instruments and Hedging Activities
- - Deferral of the Effective Date of FASB Statement No. 133. FAS 133 established
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded on the balance sheet as either an asset or liability measured at its
fair value. FAS 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting.
FAS 133, as amended, is effective for fiscal years beginning after June 15,
2000. A company may also implement FAS 133 as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998, and
thereafter). FAS 133 must be applied to (a) derivative instruments and (b)
certain derivative instruments embedded in hybrid contracts. With respect to
hybrid instrument, a company may elect to apply FAS 133, as amended, to (1) all
hybrid contracts, (2) only those hybrid instruments that were issued, acquired,
or substantively modified after December 31, 1997, or (3) only those hybrid
instruments that were issued, acquired, or substantively modified after December
31, 1998. The Company has not yet determined the timing or impact of adoption of
statement No. 133.
Forward - Looking Information
Certain matters discussed in this annual report and marked with an asterisk
are "forward-looking statements" intended to qualify for the safe harbors from
liability established by Private Securities Litigation Reform Act of 1995. Such
statements address future plans, objectives, expectations and events or
conditions concerning various matters such as capital expenditures, litigation,
liquidity and capital resources, and accounting matters. Actual results in each
case could differ materially from those currently anticipated in such
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company purchases only high quality liquid investments. Primarily all
investments as of December 31, 1999 have an original maturity of three months or
less. The Company holds all investments to maturity and therefore, is exposed to
minimal market risk related to its cash equivalents and municipal bonds.
The Company has no debt outstanding as of December 31, 1999 and therefore,
has no market risk related to debt.
The Company does not engage in fuel hedging with financial instruments. The
Company has entered into fuel purchase contracts through March 2000. The
contracts represent approximately 2% of annual fuel usage.
12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's audited financial statements, including its consolidated
balance sheets and consolidated statements of operations, cash flows, and
stockholders' equity, and notes related thereto, are contained at pages 17 to 27
of this report. Selected quarterly data is contained at page 26. Such
information is incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information respecting executive officers, directors, and director
nominee, set forth under the caption "Election of Directors-Information
Concerning Executive Officers and Directors" and "Compliance with Section 16(a)
of the Securities Exchange Act of 1934" on pages 2 through 4 and 6 of the
registrant's proxy statement relating to its 2000 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
(the "Proxy Statement"), is incorporated by reference. With the exception of the
foregoing information and other information specifically incorporated by
reference into this Form 10-K report, the Proxy Statement is not being filed as
a part hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information respecting executive compensation set forth under the
caption "Executive Compensation" on pages 4 and 5 of the Proxy Statement is
incorporated herein by reference; provided, however, that the "Board of
Directors' Report on Executive Compensation" is not incorporated by reference
here.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information respecting security ownership of certain beneficial owners
and management included under the caption "Principal Stockholders and
Stockholdings of 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 "Board of Directors Interlocks and
Insider Participation / Certain Transactions and Relationships" on page 4 of the
Proxy Statement is incorporated herein by reference.
13
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements and Schedules
The Company's audited financial statements are set forth on the following
pages of this report:
Page
Reports of Independent Public Accountants............................... 17
Consolidated Balance Sheets............................................. 18
Consolidated Statements of Operations................................... 19
Consolidated Statements of Stockholders' Equity......................... 20
Consolidated Statements of Cash Flows................................... 21
Notes to Consolidated Financial Statements.............................. 22-27
(a) 2. Financial Statement Schedule
Page
Valuation and Qualifying Accounts and Reserves.......................... 27
(a) 3. Exhibits required by Item 601 of Regulation S-K are listed below.
(b) Reports on Form 8-K
A Form 8-K was filed on October 26, 1999, pertaining the repurchase of
3,539,749 shares of the Company's outstanding common stock.
(c) Exhibits
14
Exhibit No. Document Page of Method of Filing
3.1 Articles of Incorporation Incorporated by reference to the
Company's registration statement
on Form S-1,Registration No.
33-8165, effective November 5, 1986
3.2 Bylaws Incorporated by reference to the
Company's registration statement
on Form S-1, Registration No.
33-8165, effective November 5, 1986
3.3 Certificate of Amendment to Incorporated by reference to the
Articles of Incorporation Company's Form 10-QA, for the
quarter ended June 30, 1997,
dated March 26, 1998.
4.1 Articles of Incorporation Incorporated by reference to the
Company's registration statement
on Form S-1, Registration No.
33-8165, effective November 5, 1986
4.2 Bylaws Incorporated by reference to the
Company's registration statement
on Form S-1, Registration No.
33-8165, effective November 5, 1986
4.3 Certificate of Amendment to Incorporated by reference to the
Articles of Incorporation Company's Form 10-QA, for the
quarter ended June 30, 1997,
dated March 26, 1998.
9.1 Voting Trust Agreement dated Incorporated by reference to the
June 6, 1997 between Larry Company's Form 10-K for the year
Crouse as trustee under the ended December 31, 1997.
Gerdin Educational Trusts and Commission file no. 0-15087.
Larry Crouse voting trustee.
10.1 Business Property Lease Incorporated by reference to the
between Russell A. Gerdin Company's Form 10-K for the year
as Lessor and the Company ended December 31, 1996.
as Lessee, regarding the Commission file no. 0-15087.
Company's headquarters at
2777 Heartland Drive,
Coralville, Iowa 52241
10.2 Form of Independent Contractor Incorporated by reference to the
Operating Agreement between Company's Form 10-K for the year
the Company and its independent ended December 31, 1993.
contractor providers of tractors Commission file no. 0-15087.
10.3 Description of Key Management Incorporated by reference to the
Deferred Incentive Compensation Company's Form 10-K for the year
Arrangement ended December 31, 1993.
Commission file no. 0-15087.
21 Subsidiaries of the Registrant Incorporated by reference to the
Company's Form 10-K for the year
ended December 31, 1997.
Commission file no. 0-15087.
27 Financial Data Schedule Filed herewith.
15
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused the report to be signed on its behalf by
the undersigned thereunto duly authorized.
HEARTLAND EXPRESS, INC.
Date: March 26, 2000 By: /s/ Russell A. Gerdin
Russell A. Gerdin
President and Secretary
Pursuant to the Securities Act of 1934, this report has been signed below by the
following persons on behalf of the registrant in the capacities and on the dates
indicated.
Signature Title Date
/s/ Russell A. Gerdin Chairman, President and Chief
Russell A. Gerdin Executive Officer (Principal
Executive Officer),Secretary March 26, 2000
/s/ John P. Cosaert Vice President of Finance
John P. Cosaert (Principal Financial Officer
and Principal Accounting
Officer) and Treasurer March 26, 2000
/s/ Richard O. Jacobson Director
Richard O. Jacobson March 26, 2000
/s/ Michael J. Gerdin Director
Michael J. Gerdin March 26, 2000
/s/ Benjamin J. Allen Director
Benjamin J. Allen March 26, 2000
/s/ Lawrence D. Crouse Director
Lawrence D. Crouse March 26, 2000
16
REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Heartland Express, Inc.:
We have audited the accompanying consolidated balance sheets of Heartland
Express, Inc. (a Nevada corporation) and Subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1999. These financial statements and schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Heartland
Express, Inc. and Subsidiaries, as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to be
set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Kansas City, Missouri
January 21, 2000
17
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1999 1998
----------- ------------ ------------
CURRENT ASSETS
Cash and cash equivalents ..................... $126,211,056 $143,434,594
Trade receivable, less allowance:
1999 & 1998 $402,812 .......................... 23,478,708 21,391,206
Prepaid tires and tubes ....................... 1,655,018 1,039,405
Investments ................................... 500,000 --
Deferred income taxes ......................... 15,979,000 16,082,000
Other current assets .......................... 359,472 306,142
------------ ------------
Total current assets ........................ 168,183,254 182,253,347
------------ ------------
PROPERTY AND EQUIPMENT
Land and land improvements .................... 3,701,400 3,830,779
Buildings ..................................... 9,740,487 9,214,397
Furniture and fixtures ........................ 2,611,166 2,535,343
Shop and service equipment .................... 1,563,485 1,444,764
Revenue equipment ............................. 121,822,991 112,162,731
------------ ------------
139,439,529 129,188,014
Less accumulated depreciation and amortization 66,533,949 60,618,544
------------ ------------
Property and equipment, net ................... 72,905,580 68,569,470
------------ ------------
OTHER ASSETS .................................... 5,404,707 6,005,191
------------ ------------
$246,493,541 $256,828,008
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities ...... $ 10,595,662 $ 7,615,143
Compensation and benefits ..................... 4,225,023 4,431,905
Income taxes payable .......................... 4,974,341 3,578,501
Insurance accruals ............................ 34,285,500 35,503,314
Other accruals ................................ 2,427,464 3,135,232
------------ ------------
Total current liabilities ................... 56,507,990 54,264,095
------------ ------------
DEFERRED INCOME TAXES ........................... 15,146,000 15,716,000
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY (Note 7)
Capital Stock
Preferred, par value $.01; authorized
5,000,000 shares; none issued ................. -- --
Common par value $.01; authorized
395,000,000 shares; issued and
outstanding 26,460,251 in 1999
and 30,000,000 shares in 1998 ................. 264,603 300,000
Additional paid-in capital .................... 6,608,170 6,608,170
Retained earnings ............................. 167,966,778 179,939,743
------------ ------------
174,839,551 186,847,913
------------ ------------
$246,493,541 $256,828,008
============ ============
The accompanying notes are an integral part of these financial statements.
18
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
-------------
1999 1998 1997
------------- ------------- -------------
Operating revenue ................ $ 261,004,122 $ 263,489,156 $ 262,504,156
------------- ------------- -------------
Operating expenses:
Salaries, wages, and benefits.. 60,258,431 51,994,959 49,534,386
Rent and purchased transportation 90,337,083 100,089,165 101,169,061
Operations and maintenance .... 30,167,446 26,072,323 27,739,355
Taxes and licenses ............ 5,934,644 6,150,407 6,049,155
Insurance and claims .......... 5,742,167 6,809,819 10,404,326
Communications and utilities .. 2,628,494 2,684,310 2,681,489
Depreciation .................. 16,215,587 18,107,708 16,751,384
Other operating expenses ...... 5,941,411 5,871,671 5,047,624
Gain on sale of fixed assets .. (927,548) (332,255) (58,903)
------------- ------------- -------------
216,297,715 217,448,107 219,317,877
------------- ------------- -------------
Operating income .............. 44,706,407 46,041,049 43,186,279
Interest income ................. 5,952,741 4,895,651 3,846,157
Interest expense ................ -- -- (64,571)
------------- ------------- -------------
Income before income taxes .... 50,659,148 50,936,700 46,967,865
Federal and state income taxes .. 17,535,710 17,827,847 16,894,972
------------- ------------- -------------
Net income .................... $ 33,123,438 $ 33,108,853 $ 30,072,893
============= ============= =============
Basic earnings per share ........ $ 1.13 $ 1.10 $ 1.00
============= ============= =============
Basic weighted average shares
outstanding ................... 29,359,936 30,000,000 30,000,000
============= ============= =============
The accompanying notes are an integral part of these financial statements.
19
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Capital Additional
Stock, Paid-In Retained
Common Capital Earnings Total
------------ ------------ ------------ ------------
Balance, December 31, 1996 ... $ 3,000,000 $ 3,908,170 $116,757,997 $123,666,167
Reduction in par value ....... (2,700,000) 2,700,000 -- --
Net Income ................... -- -- 30,072,893 30,072,893
------------ ------------ ------------ ------------
Balance, December 31, 1997 ... 300,000 6,608,170 146,830,890 153,739,060
Net income ................... -- -- 33,108,853 33,108,853
------------ ------------ ------------ ------------
Balance, December 31, 1998 ... 300,000 6,608,170 179,939,743 186,847,913
Repurchase of common stock ... (35,397) -- (45,096,403) (45,131,800)
Net income ................... -- -- 33,123,438 33,123,438
------------ ------------ ------------ ------------
Balance, December 31, 1999 ... $ 264,603 $ 6,608,170 $167,966,778 $174,839,551
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
20
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-------------
1999 1998 1997
------------- ------------- -------------
OPERATING ACTIVITIES
Net income ............................ $ 33,123,438 $ 33,108,853 $ 30,072,893
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization ....... 17,312,033 19,227,213 17,488,602
Deferred income taxes ............... (467,000) (426,000) (3,149,000)
Gain on sale of fixed assets ........ (906,600) (272,893) (58,903)
Changes in certain working
capital items:
Trade receivable .................. (2,087,502) 2,856,101 (4,623,019)
Other current assets .............. (53,330) (769,666) 446,071
Prepaids .......................... (851,922) 502,214 1,031,682
Accounts payable and accrued
expenses .......................... (1,851,091) (844,817) 5,413,840
Accrued income taxes .............. 1,395,840 (645,649) 138,279
------------- ------------- -------------
Net cash provided by operating
activities ............................ 45,613,866 52,735,356 46,760,445
------------- ------------- -------------
INVESTING ACTIVITIES
Proceeds from sale of property
and equipment ......................... 1,585,623 483,668 271,721
Capital additions ..................... (18,613,595) (5,511,705) (22,384,516)
Net maturities (purchases) of
municipal bonds ....................... (500,000) 19,769,765 11,691,494
Other ................................. (177,632) (282,912) (1,150,055)
------------- ------------- -------------
Net cash provided (used in) by
investing activities .................. (17,705,604) 14,458,816 (11,571,356)
------------- ------------- -------------
FINANCING ACTIVITIES
Repurchase of common stock ............ (45,131,800) -- --
Principal payments on long-term notes . -- -- (18,542,135)
------------- ------------- -------------
Net cash used in financing activities . (45,131,800) -- (18,542,135)
------------- ------------- -------------
Net increase (decrease) in cash
and cash equivalents .................. (17,223,538) 67,194,172 16,646,954
CASH AND CASH EQUIVALENTS
Beginning of year ..................... 143,434,594 76,240,422 59,593,468
------------- ------------- -------------
End of year ........................... $ 126,211,056 $ 143,434,594 # $ 76,240,422
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest ........................... $ -- $ -- $ 64,571
Income taxes ....................... $ 16,606,870 $ 18,899,496 $ 19,905,693
Noncash investing activities:
Book value of revenue equipment
traded ............................. $ 4,868,860 $ 9,658,636 $ 3,062,392
The accompanying notes are an integral part of these financial statements.
21
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of business and Significant Accounting Policies
Nature of Business:
Heartland Express, Inc., (the "Company") is a short-to-medium-haul, irregular
route, truckload carrier of general commodities. The Company's primary traffic
lanes are between customer locations east of the Rocky Mountains, with selected
service to the West. The Company operates the business as one reportable
segment.
Significant Accounting Policies:
Principles of Consolidation:
The accompanying consolidated financial statements include the parent company,
Heartland Express, Inc., and its subsidiaries, all of which are wholly owned.
All material intercompany items and transactions have been eliminated in
consolidation.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents:
Cash equivalents are short-term, highly liquid investments with original
maturities of three months or less.
Investments:
Substantially all investments represent municipal bonds or municipal bond funds
with a maturity of one year or less. These investments are held to maturity and
stated at amortized cost. Investment income received is generally exempt from
federal income taxes.
Revenue and Expense Recognition:
Operating revenues are recognized on the date the freight is delivered and
expenses are recognized as incurred.
Property and Equipment:
Property and equipment are stated at cost. Generally, at the time of trade-in,
the cost of new equipment is recorded at an amount equal to the net book value
of the traded equipment plus cash paid. Depreciation is computed by the
straight-line method for all assets other than tractors, which are depreciated
by the 125% declining balance method. Trailers are depreciated to a 30% salvage
value except for trailers purchased after January 1, 1996 which have no salvage
value. Lives of the assets are as follows:
22
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Land improvements and building 3-30
Furniture and fixtures 2-3
Shop and service equipment 3-5
Revenue equipment 5-7
Assets to be disposed of are measured at the lower of carrying amount or fair
market value, as estimated by management, less costs to sell.
Tires and Tubes:
The cost of tires and tubes on new revenue equipment is carried as a prepayment
and amortized over the estimated tire life of two years. Replacement tires
(including recapped tires) are expensed when purchased.
Earnings Per Share:
Basic earnings per share is based upon the weighted average common shares
outstanding during each year. Diluted earnings per share is based upon the
weighted average common and common equivalent shares outstanding during each
year. Heartland has no common stock equivalents.
Reclassifications:
Certain reclassifications have been made to the prior year consolidated
financial statements to conform with the current year presentation.
Note 2. Concentrations of Credit Risk and Major Customers
The Company's major customers represent the consumer goods, appliances, food
products and automotive industries. Credit is usually granted to customers on an
unsecured basis. The Company's five largest customers accounted for 34%, 35%,
and 39% of revenues for the years ended December 31, 1999, 1998, and 1997,
respectively. Operating revenue from one customer exceeded 10% of total gross
revenues in 1999, 1998 and 1997. Annual revenues for this customer were $37.0
million, $37.0 million, and $39.0 million for the years ended December 31, 1999,
1998, and 1997, respectively.
23
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Acquisition
On July 14, 1997, the Company acquired the outstanding stock of A & M Express,
Inc., (A & M) a Kingsport, Tennessee based truckload carrier. A & M, a dry van
carrier, operated primarily in the eastern half of the United States. The
acquisition was accounted for by the purchase method of accounting. The results
of A & M's operations are reflected beginning with the effective date of the
acquisition (July 1, 1997). In 1997, The company repaid approximately $18.5
million in debt which was assumed in connection with the acquisition.
Note 4. Income Taxes
Deferred income taxes are determined based upon the differences between the
financial reporting and tax basis of the Company's assets and liabilities.
Deferred taxes are provided at the enacted tax rates to be in effect when the
differences reverse.
Deferred tax assets and liabilities as of December 31 are as follows:
1999 1998
----------- -----------
Deferred income tax liabilities,
related to property and equipment ................ $15,146,000 $15,716,000
=========== ===========
Deferred income tax assets:
Allowance for doubtful accounts ............... $ 153,000 $ 153,000
Accrued expenses .............................. 1,999,000 2,270,000
Insurance accruals ............................ 12,724,000 13,186,000
Other ......................................... 1,103,000 473,000
----------- -----------
Deferred income tax assets .................... $16,082,000 $15,979,000
=========== ===========
The income tax provision is as follows:
1999 1998 1997
------------ ------------ ------------
Current income taxes:
Federal ........................ $ 16,983,674 $ 18,697,215 $ 17,008,402
State........................... 994,308 1,270,173 1,346,757
------------ ------------ ------------
$ 18,253,847 $ 20,043,972 $ 18,002,710
------------ ------------ ------------
Deferred income taxes:
Federal ........................ $ (448,320) $ (408,960) $ (3,023,040)
State .......................... (18,680) (17,040) (125,960)
------------ ------------ ------------
$ (467,000) $ (426,000) $ (3,149,000)
------------ ------------ ------------
Total .......................... $ 17,827,847 $ 16,894,972 $ 17,535,710
============ ============ ============
24
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The income tax provision differs from the amount determined by applying the U.S.
federal tax rate as follows:
1999 1998 1997
------------ ------------ ------------
Federal tax at statutory
rate (35%) .................... $ 17,827,845 $ 16,438,753 $ 17,730,702
State taxes, net of federal
benefit ....................... 646,000 826,000 875,000
Non-taxable interest income.... (1,545,000) (1,398,000) (1,105,000)
Other ......................... 704,008 572,002 686,219
------------ ------------ ------------
$ 17,827,847 $ 16,894,972 $ 17,535,710
============ ============ ============
Note 5. Related Party Transactions
The Company leases two office buildings and a storage building from its
president under a lease which provided for monthly rentals of $23,500 plus the
payment of all property taxes, insurance and maintenance. The lease expires May
31, 2000 and contains a five year renewal option.
The total minimum rental commitment under the building lease is $117,500 for the
year ending December 31, 2000.
Rent expense paid to the Company's president totaled $282,000 for the years
ended December 31, 1999, 1998, and 1997. The Company also maintains cash
accounts with a bank owned by the Company's president.
Note 6. Accident and Workers' Compensation Claims
Accident and workers' compensation claims include the estimated settlements,
settlement expenses and an allowance for claims incurred but not yet reported
for property damage, personal injury and public liability losses from vehicle
accidents and cargo losses as well as workers' compensation claims for amounts
not covered by insurance.
Accrued claims are determined based on estimates of the ultimate cost of
settling reported and unreported claims, including expected settlement expenses.
Such estimates are based on management's evaluation of the nature and severity
of individual claims and an estimate of future claims development based on
historical claims development trends. Since the reported liability is an
estimate, the ultimate liability may be more or less than reported. If
adjustments to previously established accruals are required, such amounts are
included in operating expenses.
25
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company acts as a self-insurer for liability up to $500,000 for any single
occurrence involving cargo, personal injury or property damage. Liability in
excess of this amount is assumed by an insurance underwriter.
The Company acts as a self-insurer for workers' compensation liability up to a
maximum liability of $300,000 per claim. Liability in excess of this amount is
assumed by an insurance underwriter. The State of Iowa has required the Company
to deposit $700,000 into a trust fund as part of the self-insurance program.
This deposit has been classified with other long-term assets on the balance
sheet. In addition, the Company has provided its insurance carriers with letters
of credit and deposits of approximately $6.2 million in connection with its
liability and workers' compensation insurance arrangements.
Note 7. Stockholders' Equity
On February 18, 1997, the Company amended its articles of incorporation to
increase authorized capital to four hundred million (400,000,000) shares of
capital stock (395,000,000 shares of common stock and 5,000,000 shares of
preferred stock) and reduced the par value from $0.10 to $0.01 per share.
On October 26, 1999, the Company purchased 3,539,749 shares of its common stock
for $45,131,800. The shares have been reported as retired in the accompanying
financial statements.
Note 8. Profit Sharing Plan and Retirement Plan
The Company has a profit sharing plan with 401(k) plan features whereby the
Company may make contributions to the plan at its discretion. Individual
employees may make voluntary contributions to the plan. Company contributions
totaled $759,000, $526,000, and $541,000, for the years ended December 31, 1999,
1998 and 1997, respectively.
26
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Note 9. Commitments and Contingencies
Various claims and legal actions are pending against the Company. In
management's opinion, the resolution of these matters will not materially impact
the Company's financial condition or results of operations.
The Company has entered into fuel purchase contracts through March 2000. The
contracts represent approximately 2% of annual fuel usage. The aggregate
commitment under the contracts is $188,874 as of December 31, 1999.
Note 11. Quarterly Financial Information (Unaudited)
First Second Third Fourth
------- ------- ------- -------
(In Thousands, Except Per Share Data)
Year ended December 31, 1999
Operating revenue .................. $63,097 $66,094 $65,351 $66,462
Operating income ................... 10,159 11,483 11,582 11,483
Income before income taxes ......... 11,638 13,002 13,126 12,893
Net income ......................... 7,564 8,517 8,598 8,445
Basic earnings per share ........... 0.25 0.28 0.29 0.31
Year end December 31, 1998
Operating revenue .................. $66,840 $69,223 $65,015 $62,411
Operating income ................... 10,954 11,976 11,675 11,436
Income before income taxes ......... 12,009 13,104 12,973 12,851
Net income ......................... 7,806 8,518 8,430 8,355
Basic earnings per share ........... 0.26 0.28 0.28 0.28
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A Column B Column C Column D Column E
------------ ----------- ------------------- ----------- ---------
Charges To
-------------------
Balance At Cost Balance
Beginning And Other At End
Description of Period Expense Accounts Deductions of Period
- -------------------------------- ----------- -------- --------- ------------ ---------
Allowance for doubtful accounts:
Year ended December 31, 1999 $ 402,812 $ 4,147 $ - $ 4,147 $ 402,812
Year ended December 31, 1998 $ 491,971 $ 37,078 $ - $ 126,237 $ 402,812
Year ended December 31, 1997 $ 402,812 $ 79,526 $ 250,000 * $ 240,367 $ 491,971
(*) Acquired A & M reserves.
27