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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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, 2002
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 (I.R.S. Employer
of Incorporation) Identification 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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES [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 11, 2003 was
$532,073,754 (based upon $17.59 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 11,
2003 was 50,000,000.
Portions of the Proxy Statement of Registrant for the Annual Meeting of
Stockholders to be held on May 8, 2003 are incorporated in Part III of this
report.
TABLE OF CONTENTS
Page
Part I
Item 1. Business 1
Item 2. Properties 4
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 5
Item 6. Selected Financial Data 6
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 11
Item 8. Financial Statements and Supplementary Data 12
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 25
Part III
Item 10. Directors and Executive Officers of the Registrant 25
Item 11. Executive Compensation 25
Item 12. Security Ownership of Certain Beneficial Owners and
Management 25
Item 13. Certain Relationships and Related Transactions 25
Item 14. Controls and Procedures 26
Part IV
Item 15. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K 27
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 combined 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 fifteen years from 1986 to 2002, Heartland has
grown to $340.7 million in revenue from $21.6 million and net income has
increased to $42.8 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 five acquisitions
since 1987 with the most recent in this past year. In June 2002, the Company
purchased the trucking assets of the truckload carrier Great Coastal Express
(Great Coastal). Great Coastal is based in Chester, Virginia with additional
terminals in Roanoke, Virginia, Charlotte, North Carolina and Baltimore,
Maryland. The Company serves its customers in the mid-Atlantic region from the
four Great Coastal terminals. These five acquisitions have enabled Heartland to
solidify its position within existing regions, expand its customer base in the
East and Northeast United States, and to pursue new customer relationships in
new markets.
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., 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, regional
operations managers, and fleet management.
The Company's regional operations managers 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, trailer
asset management, and 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 (540-mile average length of haul in
2002) 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.
Heartland also operates nine specialized regional distribution operations
near Atlanta, Georgia; Carlisle, Pennsylvania; Columbus, Ohio; Decatur,
Illinois; Jacksonville, Florida; Kingsport, Tennessee; Chester, Virginia;
Charlotte, North Carolina; Baltimore, Maryland and Roanoke, Virginia. 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.
1
Dispatchers at the regional locations handle these operations, 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. We believe
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 62%, 48%, and
37% of revenue, respectively, in 2002. The Company's primary customers include
retailers and manufacturers. The distribution of customers is not significantly
different from the previous year. One customer accounted for 14% of revenue in
2002. No other customer accounted for as much as ten percent of revenue.
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, seasonal
variations during and after the winter holiday season have historically resulted
in reduced shipments by several industries served. 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.
Drivers, Independent Contractors, and Other Personnel
Heartland's workforce is an essential ingredient in achieving its business
objectives. As of December 31, 2002, Heartland employed 2,518 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 combined fleet of
company and independent contractor tractors. Management believes that a combined
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.
2
Revenue Equipment
Heartland's management believes that operating high-quality, efficient
equipment is an important part of providing excellent service to customers.
Company-owned tractors are equipped with satellite communications systems
manufactured by Qualcomm. The satellite technology allows for efficient
communication with our drivers to accommodate the needs of our customers. The
owner-operator tractors will be equipped with the Qualcomm units during the
first quarter of 2003. A uniform fleet of tractors and trailers are utilized to
minimize maintenance costs and to standardize the Company's maintenance program.
The tractors are manufactured by Freightliner while trailers are manufactured by
Wabash National. 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. Owner-operator tractors are inspected by the Company for compliance with
operational and safety requirements of the Company and the United States
Department of Transportation (DOT). These tractors are periodically inspected to
monitor continued compliance.
Effective October 1, 2002, all newly manufactured truck engines must comply
with the engine emission standards mandated by the Environmental Protection
Agency (EPA). All truck engines manufactured prior to October 1, 2002 are not
subject to these new standards. During 2002 the Company significantly increased
the purchase of trucks with pre-October 2002 engines to delay the business risk
of buying new engines until adequate testing is completed. The Company will take
delivery of new trucks with pre-October engines from its truck manufacturer in
the first quarter of 2003. The Company expects subsequent new truck purchases
during the remainder of 2003 to be minimal. Truck purchases will depend on the
Company's evaluation of the new EPA-compliant engines.
Fuel
The Company purchases fuel through a network of approximately 100 fuel
stops throughout the United States. The Company has negotiated volume discounts
based on certain purchase commitments. Bulk fuel sites are maintained at
primarily all of the Company's terminal locations in order to take advantage of
volume pricing. Both aboveground and underground storage tanks are utilized at
the bulk fuel sites. Exposure to environmental clean up costs is minimized by
periodic inspection and monitoring of the tanks.
Increases in fuel prices due to decreases in production can have an adverse
effect on the results of operations. The Company has fuel surcharge agreements
with most customers enabling the pass through of long-term price increases. Fuel
consumed by empty and out-of-route miles and by truck engine idling time are not
recoverable.
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 (540-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 regulated by the United
States Department of Transportation (DOT). The DOT generally governs matters
such as safety requirements, registration to engage in motor carrier operations,
accounting systems, certain mergers, consolidations, acquisitions, and periodic
financial reporting. The Company currently has a satisfactory DOT safety rating,
which is the highest available rating. A conditional or unsatisfactory DOT
safety rating could have an adverse effect on the Company, as some of the
Company's contracts with customers require a satisfactory rating. Such matters
as weight and dimensions of equipment are also subject to federal, state, and
international regulations.
3
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.
Company Internet Site
The Company files its Annual Report on Form 10-K, its Quarterly Reports on
Form 10-Q, Definitive Proxy Statements and periodic Current Reports on Form 8-K
with the Securities and Exchange Commission (SEC). The public may read and copy
any material filed by the Company with the SEC at the SEC's Public Reference
Room at 450 Fifth Street NW, Washington, DC 20549. The public may obtain
information from the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC maintains an internet site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding the
Company and other issuers that file electronically with the SEC.
The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Definitive Proxy Statements, Current Reports on Form 8-K and amendments to those
reports are not available on the Company's internet site,
http://www.heartlandexpress.com. Paper copies of these reports can be obtained
free of charge from the Company as soon as reasonably practicable after the
reports are filed electronically with the SEC by calling the Company's
accounting department at 319-545-2728.
The aforementioned periodic filings are not available on the Company's
internet site because of the ease of access to such reports via the SEC internet
site. The Company does, however, make all press releases, including earnings
announcements, available on its internet site.
Forward-Looking Information
The forward-looking statements in this report, which reflect management's
best judgment based on factors currently known, involve risks and uncertainties.
Actual results could differ materially from those anticipated in the
forward-looking statements included herein as a result of a number of factors,
including, but not limited to, those discussed in Item 7, "Management's
Discussion and Analysis of Results of Operations and Financial Condition."
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 leases facilities in Carlisle, Pennsylvania;
Decatur, Illinois; Chester, Virginia; Roanoke, Virginia; Baltimore, Maryland;
and Charlotte, North Carolina. A Company-owned facility in Dubois, Pennsylvania
is being leased to an unrelated third party.
ITEM 3. LEGAL PROCEEDINGS
On January 7, 2002, the Owner-Operator Independent Drivers Association,
Inc. served a lawsuit against the Company in the United State District Court for
the Southern District of Iowa. The lawsuit was granted class action status on
January 23, 2003 on behalf of the Company's owner-operators since October 1,
1997.
4
Among other things, the lawsuit alleges that the Company failed to adequately
inform the owner-operators of certain deductions from their settlement
statements in violation of Department of Transportation regulations and that the
Company's standard contract with owner-operators violates those regulations. The
lawsuit seeks unspecified damages and an injunction to prevent owner-operators
from hauling for the Company until alleged contractual deficiencies are
corrected. A trial is scheduled to begin in September, 2003 and the Company
intends to defend the lawsuit vigorously. Although there can be no assurance,
the Company does not expect that an adverse outcome would materially affect the
Company's financial position or results of operations.
On June 21, 2002 a driver for the Company was involved in a multiple (5)
fatality accident in Knoxville, Tennessee. In connection with this accident, two
lawsuits have been field in the U.S. District Court for the Eastern District of
Tennessee, Northern Division, at Knoxville. The first of these lawsuits was
filed on July 17, 2002, and the second lawsuit was filed on July 23, 2002. The
combined relief sought in these cases is approximately $54.5 million for
compensatory damages and $215 million for punitive damages. The Company has
insurance coverage of $50 million for compensatory and punitive damages arising
out of these cases, subject to a self-insured retention payable by the Company.
To the Company's knowledge, no other action, including governmental, is
contemplated in connection with the accident. In connection with this
litigation, the company has reserved the entire amount of its self-insured
retention. Although there can be no assurance, the Company does not anticipate
that its ultimate liability resulting from this litigation will exceed the
coverage limits under its insurance policy. If the Company's ultimate liability
were to exceed such coverage limits, the Company's financial position and
results of operations could be materially affected.
Additionally, the Company is a party to ordinary, routine litigation and
administrative proceedings incidental to its business. None of the claims would
materially impact net income or financial position. These proceedings primarily
involve claims for personal injury and property damage incurred in connection
with the transportation of freight. The Company maintains insurance to cover
liabilities arising from the transportation of freight for amounts in excess of
self-insured retentions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2002, no matters were submitted to a vote of
security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
The Company's 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, 2001 to December 31, 2002. The
prices have been restated to reflect stock splits of 25% on May 31, 2001 and
approximately 57.7% on February 19, 2002.
Period High Low
Calendar Year 2002
1st Quarter $ 25.03 $ 17.46
2nd Quarter 24.09 17.15
3rd Quarter 24.07 17.25
4th Quarter 23.39 16.77
Calendar Year 2001
1st Quarter $ 13.95 $ 10.97
2nd Quarter 15.09 11.67
3rd Quarter 19.31 13.25
4th Quarter 19.60 14.04
5
The prices reported reflect interdealer quotations without retail mark-ups,
markdowns or commissions, and may not represent actual transactions. As of March
4, 2003 the Company had 238 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.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's consolidated financial statements and notes under Item 8 of this
Form 10-K.
Year Ended December 31,
(in thousands, except per share data)
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Income Statement Data:
Operating revenue ................ $ 340,745 $ 294,617 $ 274,827 $ 261,004 $ 263,489
--------- --------- --------- --------- ---------
Operating expenses:
Salaries, wages, and benefits .... 109,960 87,643 73,847 60,258 51,995
Rent and purchased transportation 64,159 65,912 75,191 90,337 100,089
Operations and maintenance ....... 56,335 47,903 42,651 30,167 26,072
Taxes and licenses ............... 7,144 6,189 5,952 5,935 6,150
Insurance and claims ............. 9,193 7,619 6,706 5,742 6,810
Communications and utilities ..... 2,957 2,903 2,952 2,629 2,684
Depreciation ..................... 20,379 17,001 16,285 16,216 18,108
Other operating expenses ......... 8,843 6,814 6,505 5,941 5,872
(Gain) loss on disposal of
fixed assets.................... (274) 14 (1,512) (928) (332)
--------- --------- --------- --------- ---------
278,696 241,998 228,577 216,297 217,448
--------- --------- --------- --------- ---------
Operating income............. 62,049 52,619 46,250 44,707 46,041
Interest income .................... 2,811 4,435 5,726 5,953 4,896
--------- --------- --------- --------- ---------
Income before income taxes ......... 64,860 57,054 51,976 50,660 50,937
Income taxes ....................... 22,053 19,398 17,672 17,536 17,828
--------- --------- --------- --------- ---------
Net income ......................... $ 42,807 $ 37,656 $ 34,304 $ 33,124 $ 33,109
========= ========= ========= ========= =========
Basic weighted average shares
Outstanding ........................ 50,000 50,000 50,342 57,871 59,133
========= ========= ========= ========= =========
Basic earnings per share ........... $ 0.86 $ 0.75 $ 0.68 $ 0.57 $ 0.56
========= ========= ========= ========= =========
Balance sheet data:
Net working capital ................ $ 146,297 $ 147,904 $ 118,506 $ 111,675 $ 127,989
Total assets........................ 373,108 314,238 268,055 246,494 256,828
Stockholders' equity................ 275,930 232,789 195,134 174,840 186,848
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods.
The Company's management routinely makes judgments and estimates about the
effect of matters that are inherently uncertain. As the number of variables and
assumptions affecting the probable future resolution of the uncertainties
increase, these judgments become even more subjective and complex. The Company
has identified certain accounting policies, described below, that are the most
important to the portrayal of the Company's current financial condition and
results of operations. The Company's significant accounting policies are
disclosed in Item 8. Note 1, "Significant Accounting Policies" of Notes to
Consolidated Financial Statements.
The most significant accounting policies and estimates that affect the
financial statements include the following:
* Selections of estimated useful lives and salvage values for purposes of
depreciating tractors and trailers. Depreciable lives of tractors and
trailers are 5 and 7 years, respectively. Estimates of salvage value at the
expected date of trade-in or sale are based on the expected market values
of equipment at the time of disposal.
* Management estimates accruals for the self-insured portion of pending
accident liability, workers' compensation, physical damage and cargo damage
claims. The Company's self-insured limit is $500,000 per claim. These
accruals are recorded at the estimated maximum exposure and are based upon
individual case estimates, including negative development, and estimates of
incurred-but-not-reported losses based upon past experience.
Management periodically re-evaluates these estimates as events and
circumstances change. These factors may significantly impact the Company's
results of operations from period-to-period.
Results of Operations
The following table sets forth the percentage relationship of income and
expense items to operating revenue for the years indicated.
Year Ended December 31,
----------------------------
2002 2001 2000
------ ------ ------
Operating revenue .......................... 100.0% 100.0% 100.0%
------ ------ ------
Operating expenses:
Salaries, wages, and benefits ............ 32.3% 29.7% 26.9%
Rent and purchased transportation ........ 18.8 22.4 27.4
Operations and maintenance ............... 16.5 16.2 15.5
Taxes and licenses ....................... 2.1 2.1 2.2
Insurance and claims ..................... 2.7 2.6 2.4
Communications and utilities ............. 0.9 1.0 1.1
Depreciation ............................. 6.0 5.8 5.9
Other operating expenses.................. 2.6 2.3 2.4
(Gain) loss on disposal of fixed assets .. (0.1) (0.0) (0.6)
------ ------ ------
Total operating expenses.................. 81.8% 82.1% 83.2%
------ ------ ------
Operating income ....................... 18.2% 17.9% 16.8%
Interest income ............................ 0.8 1.5 2.1
------ ------ ------
Income before income taxes ............... 19.0% 19.4% 18.9%
Federal and state income taxes ............. 6.4 6.6 6.4
------ ------ ------
Net income ............................. 12.6% 12.8% 12.5%
====== ====== ======
7
Year Ended December 31, 2002 Compared With Year Ended December 31, 2001
Operating revenue increased $46.1 million (15.7%), to $340.7 million in
2002 from $294.6 million in 2001, as a result of the Company's expansion of the
customer base as well as increased volume from existing customers. The June 2002
acquisition of the trucking assets of Great Coastal Express, Inc. contributed
approximately $27.3 million to the increase in revenue for 2002. Operating
revenue for both periods was also positively impacted by fuel surcharges
assessed to the customer base. Fuel surcharge revenue decreased in 2002 in
comparison to 2001.
Salaries, wages, and benefits increased $22.3 million (25.5%), to $109.9
million in 2002 from $87.6 million in 2001. As a percentage of revenue,
salaries, wages, and benefits increased to 32.3% 2002 from 29.7% in 2001. These
increases are the result of increased reliance on employee drivers and a
corresponding decrease in miles driven by independent contractors. The increase
in employee driver miles was attributable to internal growth in the company
tractor fleet and the acquisition of Great Coastal Express. During 2002,
employee drivers accounted for 73% and independent contractors 27% of the total
fleet miles, compared with 68% and 32%, respectively, in 2001. In addition, the
increased reliance on employee drivers resulted in higher workers' compensation
and health insurance costs for the year.
Rent and purchased transportation decreased $1.8 million (2.7%), to $64.1
million in 2002 from $65.9 million in 2001. As a percentage of revenue, rent and
purchased transportation decreased to 18.8% in 2002 from 22.4% in 2001. This
reflected the Company's decreased reliance upon independent contractors. Rent
and purchased transportation for both periods includes amounts paid to
independent contractors for fuel surcharge.
Operations and maintenance increased $8.4 million (17.6%) to $56.3 million
in 2002 from $47.9 million in 2001. As a percentage of revenue, operations and
maintenance increased to 16.5% in 2002 from 16.3% in 2001. The increase,
primarily related to fuel expense, is attributable to increased reliance on the
Company owned fleet. Average fuel prices during 2002 were lower compared to 2001
with the exception of the fourth quarter of 2002 when prices rose substantially.
Taxes and licenses increased $0.9 million (15.4%), to $7.1 million in 2002
from $6.2 million in 2001. As a percentage of revenue, taxes and licenses
remained constant at 2.1%. The increase in taxes and licenses is related to and
in proportion with the growth in fleet size.
Insurance and claims increased $1.5 million (18.2%), to $9.2 million in
2002 from $7.7 million in 2001. As a percentage of revenue, insurance and claims
increased to 2.7% in 2002 from 2.6% in 2001. 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. The 2002 increase is a result of less favorable
claims experience and a slight increase in frequency.
Communication and utility expenses increased slightly in 2002 compared to
2001, primarily due to the utilization of improved communications technology.
Depreciation increased $3.4 million (19.9%), to $20.4 million in 2002 from
$17.0 million in 2001 primarily due to an increase in the number of
Company-owned tractors and the growth of the trailer fleet. As a percentage of
revenue, depreciation increased to 6.0% in 2002 from 5.8% in 2001.
Other operating expenses increased $2.0 million (29.8%), to $8.8 million in
2002 from $6.8 million in 2001 due to an increase in total fleet miles. As a
percentage of revenue, other operating expenses increased to 2.6% in 2002 from
2.3% in 2001. Other operating expenses consist of costs incurred for freight
handling, highway tolls, driver recruiting expenses, and administrative costs.
Primarily as a result of the foregoing, the Company's operating ratio
(operating expenses expressed as a percentage of operating revenue) decreased to
81.8% in 2002 compared with 82.1% in 2001.
Interest income decreased $1.6 million (36.6%), to $2.8 million in 2002
from $4.4 million in 2001 due to lower interest rates. The Company had $153.9
million in cash, cash equivalents, and investments at December 31, 2002 compared
with $161.1 million at December 31, 2001. 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 34.0% in both 2002 and 2001.
8
As a result of the foregoing, net income increased to $42.8 million in 2002
from $37.7 million in 2001 with a net margin of 12.6% in 2002.
Year Ended December 31, 2001 Compared With Year Ended December 31, 2000
Operating revenue increased $19.8 million (7.2%), to $294.6 million in 2001
from $274.8 million in 2000, as a result of the Company's expansion of the
customer base as well as increased volume from existing customers. Operating
revenue for both periods was also positively impacted by fuel surcharges
assessed to the customer base.
Salaries, wages, and benefits increased $13.8 million (18.7%), to $87.6
million in 2001 from $73.8 million in 2000. As a percentage of revenue,
salaries, wages, and benefits increased to 29.7% in 2001 from 26.9% in 2000.
These increases are the result of increased reliance on employee drivers and a
corresponding decrease in miles driven by independent contractors. The increase
in employee driver miles was attributable to internal growth in the company
tractor fleet. During 2001, employee drivers accounted for 68% and independent
contractors 32% of the total fleet miles, compared with 60% and 40%,
respectively, in 2000.
Rent and purchased transportation decreased $9.3 million (12.3%), to $65.9
million in 2001 from $75.2 million in 2000. As a percentage of revenue, rent and
purchased transportation decreased to 22.4% in 2001 from 27.4% in 2000. This
reflected the Company's decreased reliance upon independent contractors. Rent
and purchased transportation for both periods includes amounts paid to
independent contractors for fuel surcharge.
Operations and maintenance increased $5.2 million (12.3%), to $47.9 million
in 2001 from $42.7 million in 2000. As a percentage of revenue, operations and
maintenance increased to 16.2% in 2001 from 15.5% in 2000. This increase is
attributable to an increased reliance on the Company owned fleet.
Insurance and claims increased $0.9 million (13.6%), to $7.6 million in
2001 from $6.7 million in 2000. As a percentage of revenue, insurance and claims
increased to 2.6% in 2001 from 2.4% in 2000. 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.
Depreciation increased $0.7 million (4.4%), to $17.0 million in 2001 from
$16.3 million in 2000 primarily due to an increase in the number of
Company-owned tractors. As a percentage of revenue, depreciation decreased to
5.8% from 5.9% in 2000.
Other operating expenses increased $0.3 million (4.8%), to $6.8 million in
2001 from $6.5 million in 2000 due to an increase in total fleet miles. As a
percentage of revenue, other operating expenses decreased to 2.3% in 2001 from
2.4% in 2000. Other operating expenses consist of pallet cost, driver recruiting
expenses, and administrative costs.
Primarily as a result of the foregoing, the Company's operating ratio
decreased to 82.1% in 2001 compared with 83.2% in 2000.
Interest income decreased $1.3 million (22.5%), to $4.4 million in 2001
from $5.7 million in 2000 due to lower interest rates. The Company had $161.1
million in cash, cash equivalents, and investments at December 31, 2001 compared
with $128.0 million at December 31, 2000. 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 34.0% in both 2001 and 2000.
As a result of the foregoing, net income increased to $37.7 million in 2001
from $34.3 million in 2000. The net income for 2000 period was impacted by the
gain from the sale of fixed assets, primarily real estate.
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.
9
Net cash provided by operations was $67.9 million in 2002, $61.2 million in
2001, and $49.9 million in 2000. The primary source of funds in 2002 was net
income of $42.8 million increased by non-cash adjustments, including
depreciation and amortization of $20.4 million.
Net investing activities consumed $79.3 million in 2002, $68.5 million in
2001, and $34.1 million in 2000. The primary use of cash in 2002 other than the
investment in tax-exempt putable bonds mentioned above, was $80.7 million for
capital expenditures, primarily revenue equipment and trucking assets of Great
Coastal Express. 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 $14.0 million in 2000. The 2000
financing activity was comprised solely of the repurchase of approximately 2.1
million shares of the Company's common stock. There were no financing activities
in 2002 and 2001.
The Company ended the year with $153.9 million in cash, cash equivalents,
and investments and no debt. Based on the Company's strong financial position,
management foresees no significant barriers to obtaining sufficient financing,
if necessary, to continue with growth plans.
Inflation
Most of the Company's operating expenses are inflation-sensitive, with
inflation generally producing increased costs of operations. The Company
historically has limited the effects of inflation through increases in freight
rates and certain cost control efforts. An extended period of inflation could
increase costs such as fuel, wages, and revenue equipment prices. Competitive
conditions in the transportation industry, such as lower demand for
transportation services, could affect the Company's ability to obtain rate
increases.
Forward-Looking Statements and Risk Factors
Statements in this report that are not reported financial results or other
historical information are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such statements are based
on present information the Company has related to its existing business
circumstances and involve a number of business risks and uncertainties, any of
which could cause actual results to differ materially from such forward-looking
statements. Further, investors are cautioned that the Company does not assume
any obligation to update forward-looking statements based on unanticipated
events or changed expectations. In addition to specific factors that may be
described in connection with any particular forward-looking statement, the
following factors could cause actual results to differ materially.
Growth with existing customers and the ability to solicit new business is
dependent upon the Company's ability to provide on-time service and certain
economic factors. Weakness in the economy including decreased consumer demand
could adversely affect the demand for the Company's transportation services and
future growth. The ability to negotiate increased freight rates to offset
effects of inflation and cost increases is also dependent upon the state of the
economy to a certain extent. The Company may also be affected by the financial
failure of existing customers resulting in fewer shipments or potential bad debt
write-offs. An extended period of economic downturn could also enhance revenue
growth because of industry consolidation. The truckload industry is highly
competitive with an abundance of trucking companies, both profitable and
marginal. The business failures of the marginal competition may result in
increased opportunities for the financially strong.
Shortages of fuel and the resulting increase in the price of diesel can
have an adverse impact on operations and profitability. Instability in the
Middle East and South America caused dramatic increases in the price of fuel in
the second half of 2002 and into the first quarter of 2003. The Company's
operating results are negatively impacted to the extent that high fuel costs
cannot be recovered through customer fuel surcharge agreements.
The Company is subject to regulation by the DOT, EPA, and various other
federal and state authorities. New or more comprehensive regulations pertaining
to fuel emissions, driver hours-of-service, or other mandated regulation could
result in the increased cost of operations. In addition, increased taxes and
operating fees mandated by federal and state taxing authorities can have an
adverse effect on profitability.
10
Effective October 1, 2002 all newly manufactured engines must comply with
emission standards mandated by the EPA. Truck engines manufactured prior to
October 1, 2002 are not subject to the new emission standards. The Company does
not intend to purchase any tractors with EPA-compliant engines until adequate
testing by the manufacturers has been completed. The pricing, engine life,
maintenance cost, and fuel efficiency of the new engine could have an impact on
the Company's operating expenses.
The Company's operation is highly dependent on the hiring and retention of
experienced drivers with safe driving records. There has been a shortage of
qualified drivers and independent contractors over the past several years. The
availability of company employed drivers improved in 2002 primarily due to
industry consolidation caused by the business failures of marginal competitors.
However, the availability of independent contractors has declined due to high
fuel prices and the decreased availability of tractor financing. The Company
expects that the hiring of qualified drivers will remain competitive. A shortage
of qualified drivers and independent contractors for an extended period of time
could effect the growth and operating results of the Company.
The Company is involved in routine litigation incidental to its business,
primarily involving claims for personal injury, property damage, and workers'
compensation incurred in the transportation of freight. The Company has assumed
the liability for claims up to $500,000, plus administrative expenses, for each
occurrence. Claims in excess of $500,000 are covered by premium-based policies
to levels that management considers adequate. In recent years the cost of
insurance in the industry has increased dramatically due to increased claims and
economic conditions. The Company's current insurance policies expire in 2003.
Increases in premiums and self-retention levels could impact the results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company purchases only high quality liquid investments. Primarily all
investments as of December 31, 2002 have an original maturity of twelve months
or less. The Company holds all investments to maturity and therefore, is exposed
to minimal market risk related to its cash equivalents.
The Company has no debt outstanding as of December 31, 2002 and therefore,
has no market risk related to debt.
The price and availability of diesel fuel are subject to fluctuations due
to changes in the level of global oil production, seasonality, weather, and
other market factors. Historically, the Company has been able to recover a
majority of fuel price increases from customers in the form of fuel surcharges.
The Company cannot predict the extent to which high fuel price levels will occur
in the future or the extent to which fuel surcharges could be collected to
offset such increases. As of December 31, 2002, the Company had no derivative
financial instruments to reduce its exposure to fuel price fluctuations.
11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
To the Board of Directors and
Stockholders of Heartland Express, Inc.:
We have audited the accompanying consolidated balance sheet of Heartland
Express, Inc. (a Nevada corporation) and Subsidiaries (the Company) as of
December 31, 2002, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended. These consolidated
financial statements and consolidated financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and consolidated financial
statements schedule based on our audit. The accompanying 2001 and 2000
consolidated financial statements and consolidated financial statement schedule
of Heartland Express, Inc. and Subsidiaries were audited by other auditors who
have ceased operations. Those auditors expressed an unqualified opinion on those
consolidated financial statements and consolidated financial statement schedule
in their report dated January 13, 2002 (except with respect to the matter
discussed in Note 6, as to which the date in January 28, 2002).
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated 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
audit provides a reasonable basis for our opinion.
In our opinion, the 2002 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, 2002, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
Our audit was made for the purpose of forming an opinion on the basic
consolidated 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 consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
As discussed in Note 1 to the consolidated financial statements, in 2002, the
Company changed its method of accounting for goodwill and related amortization.
KPMG LLP
Des Moines, Iowa
January 17, 2003
12
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, 2001
and 2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. 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, 2002 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001 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 states 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 13, 2002 (except with respect to the matter discussed in Note 6, as to
which the date is January 28, 2002)
THIS REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP. THIS
REPORT HAS NOT BEEN REISSED BY ARTHUR ANDERSEN AND IS INCLUDED HEREIN PURSUANT
TO RULE 2-02(e) OF REGULATION S-X OF THE SECURITIES AND EXCHANGE COMMISSION.
13
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------
ASSETS 2002 2001
------------- -------------
CURRENT ASSETS
Cash and cash equivalents ................. $ 109,397,246 $ 120,794,142
Investments ............................... 44,464,176 40,281,980
Trade receivables, net of allowance
for doubtful accounts of:
$650,000 and $402,812, respectively ....... 33,012,394 25,700,435
Prepaid tires and tubes ................... 4,757,850 4,077,276
Deferred income taxes ..................... 21,134,000 17,358,000
Other current assets ...................... 620,344 144,890
------------- -------------
Total current assets .................... 213,386,010 208,356,723
------------- -------------
PROPERTY AND EQUIPMENT
Land and land improvements ................ 4,402,820 4,402,820
Buildings ................................. 8,532,621 8,532,621
Furniture and fixtures .................... 1,300,848 1,300,848
Shop and service equipment ................ 1,403,633 1,453,755
Revenue equipment ......................... 175,476,971 133,902,094
------------- -------------
191,116,893 149,592,138
Less accumulated depreciation ............. 39,715,307 47,473,283
------------- -------------
Property and equipment, net ............... 151,401,586 102,118,855
------------- -------------
OTHER ASSETS, net of accumulated
amortization of $3,524,135 and
$3,512,466, respectively .................. 8,320,593 3,762,832
------------- -------------
$ 373,108,189 $ 314,238,410
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities .. $ 8,632,810 $ 7,073,957
Compensation and benefits ................. 7,632,766 6,383,984
Income taxes payable ...................... 6,070,318 6,693,398
Insurance accruals ........................ 40,228,160 36,443,348
Other accruals ............................ 4,525,396 3,858,496
------------- -------------
Total current liabilities ................. 67,089,450 60,453,183
------------- -------------
DEFERRED INCOME TAXES ........................ 30,089,000 20,996,000
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01;
authorized 5,000,000 shares; none issued .. -- --
Common stock, par value $.01; authorized
395,000,000 shares; issued and
outstanding: 50,000,000 in both 2002 and
2001 (Note 6) ............................. 500,000 500,000
Additional paid-in capital ................ 8,603,762 6,608,170
Retained earnings ......................... 268,488,971 225,681,057
------------- -------------
277,592,733 232,789,227
Less unearned compensation ................ (1,662,994) --
------------- -------------
275,929,739 232,789,227
------------- -------------
$ 373,108,189 $ 314,238,410
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
14
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
-------------------------------------------
2002 2001 2000
------------- ------------- -------------
Operating revenue ................ $ 340,745,026 $ 294,617,263 $ 274,827,551
------------- ------------- -------------
Operating expenses:
Salaries, wages, and benefits .. 109,959,772 87,643,187 73,846,541
Rent and purchased
transportation ............... 64,159,365 65,911,825 75,190,893
Operations and maintenance ..... 56,334,769 47,903,499 42,650,757
Taxes and licenses ............. 7,144,078 6,188,628 5,952,448
Insurance and claims ........... 9,192,632 7,618,919 6,706,247
Communications and utilities ... 2,956,810 2,902,496 2,952,394
Depreciation ................... 20,378,720 17,000,927 16,284,550
Other operating expenses ....... 8,843,137 6,814,399 6,505,174
(Gain) loss on disposal of
fixed assets ................... (273,549) 14,442 (1,511,587)
------------- ------------- -------------
278,695,734 241,998,322 228,577,417
------------- ------------- -------------
Operating income ............... 62,049,292 52,618,941 46,250,134
Interest income .................. 2,811,181 4,434,914 5,725,551
------------- ------------- -------------
Income before income taxes ..... 64,860,473 57,053,855 51,975,685
Income taxes ..................... 22,052,559 19,398,239 17,671,725
------------- ------------- -------------
Net income ..................... $ 42,807,914 $ 37,655,616 $ 34,303,960
============= ============= =============
Basic earnings per share ......... $ 0.86 $ 0.75 $ 0.68
============= ============= =============
Basic weighted average shares
outstanding ...................... 50,000,000 50,000,000 50,341,771
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
15
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Capital Additional Unearned
Stock, Paid-In Retained Compen-
Common Capital Earnings sation Total
--------- ----------- ------------ ----------- -------------
Balance, December 31, 1999 $ 264,603 $ 6,608,170 $167,966,778 $ -- $ 174,839,551
Repurchase of common stock (10,937) -- (13,998,963) -- (14,009,900)
Net income ............... -- -- 34,303,960 -- 34,303,960
--------- ----------- ------------ ----------- -------------
Balance, December 31, 2000 253,666 6,608,170 188,271,775 -- 195,133,611
Stock splits (Note 6) .... 246,334 -- (246,334) -- --
Net income ............... -- -- 37,655,616 -- 37,655,616
--------- ----------- ------------ ----------- -------------
Balance, December 31, 2001 500,000 6,608,170 225,681,057 -- 232,789,227
Net income ............... -- -- 42,807,914 -- 42,807,914
Transfer pursuant to stock
awards (Note 6) ........ -- 1,995,592 -- (1,995,592) --
Amortization of unearned
compensation ........... -- -- -- 332,598 332,598
--------- ----------- ------------ ----------- -------------
Balance, December 31, 2002 $ 500,000 $ 8,603,762 $268,488,971 $(1,662,994) $ 275,929,739
========= =========== ============ =========== =============
The accompanying notes are an integral part of these consolidated financial
statements.
16
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------------------
2002 2001 2000
------------- ------------- -------------
OPERATING ACTIVITIES
Net income ................................... $ 42,807,914 $ 37,655,616 $ 34,303,960
Adjustments to reconcile to net cash provided
by operating activities:
Depreciation and amortization ............. 20,390,389 17,779,043 17,217,526
Deferred income taxes ..................... 5,317,000 2,993,000 1,478,000
Amortiziation of unearned compensation .... 332,598 -- --
(Gain) loss on disposal of fixed assets ... (273,549) 14,442 (1,511,587)
Changes in certain working capital items:
Trade receivables ....................... (7,311,959) (745,754) (1,475,973)
Prepaids ................................ (678,174) (296,632) (2,125,626)
Other current assets .................... (475,454) 183,383 31,199
Accounts payable and accrued expenses ... 8,399,063 1,594,686 2,349,670
Accrued income taxes .................... (623,080) 2,074,516 (355,459)
------------- ------------- -------------
Net cash provided by operating activities .... 67,884,748 61,252,300 49,911,710
------------- ------------- -------------
INVESTING ACTIVITIES
Proceeds from sale of property and equipment . 10,159,471 402,113 2,163,324
Additions to property and equipment .......... (58,469,994) (29,104,777) (36,335,347)
Acquisition of business ...................... (26,719,495) -- --
Net maturities (purchases) of municipal bonds (4,182,196) (40,281,980) 500,000
Other ........................................ (69,430) 499,410 (413,767)
------------- ------------- -------------
Net cash used in investing activities ........ (79,281,644) (68,485,234) (34,085,790)
------------- ------------- -------------
FINANCING ACTIVITIES
Repurchase of common stock ................... -- -- (14,009,900)
------------- ------------- -------------
Net cash used in financing activities ........ -- -- (14,009,900)
------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents ................................ (11,396,896) (7,232,934) 1,816,020
CASH AND CASH EQUIVALENTS
Beginning of year ............................ 120,794,142 128,027,076 126,211,056
------------- ------------- -------------
End of year .................................. $ 109,397,246 $ 120,794,142 $ 128,027,076
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the period for:
Income taxes .............................. $ 17,358,639 $ 14,330,723 $ 16,549,184
Noncash investing activities:
Book value of revenue equipment traded .... $ 25,770,052 $ 11,516,930 $ 12,202,753
The accompanying notes are an integral part of these consolidated financial
statements.
17
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Nature of Business:
Heartland Express, Inc., (the "Company") is a short-to-medium-haul,
truckload carrier of general commodities. The Company provides nationwide
transportation service to major shippers, using late-model equipment and a
combined 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. The Company operates the business
as one reportable segment.
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 accounting
principles generally accepted in the United States of America 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.
The Company maintains its cash accounts primarily with a bank owned by the
Company's president. Total cash balances are insured by the F.D.I.C up to
$100,000. The Company had cash balances on deposit with the bank at December 31,
2002 and 2001 that exceeded the balance insured by the F.D.I.C. in the amount of
$3,327,000 and $2,639,000, respectively.
Investments:
Substantially all investments represent fixed rate municipal bonds putable
by the Company upon demand and municipal bonds with a maturity of one year or
less. These investments are stated at amortized cost. Due to the short maturity
term of these investments, amortized cost approximates fair value. Investment
income received is generally exempt from federal income taxes.
Revenue and Expense Recognition:
Revenue, drivers' wages and other direct operating expenses are recognized
when the freight is delivered.
Property, Equipment, and Depreciation:
Property and equipment are stated at cost, while maintenance and repairs
are charged to operations as incurred. If equipment is traded rather then sold,
the cost of the new equipment is recorded at an amount equal to the lower of the
monetary consideration paid plus the net book value of the traded equipment or
the fair value of the new equipment.
18
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation for financial statement purposes is computed by the straight-line
method for all assets other than tractors, which are depreciated by the 125%
declining balance method. For revenue equipment purchased after January 1, 2000
the trailers are depreciated with a $6,000 salvage value and the tractors with a
$15,000 salvage value. Previously, trailers were depreciated to a salvage value
of up to 30% based upon when they were put in service and we assumed no salvage
value for tractors.
Lives of the assets are as follows:
Years
Land improvements and building 3-30
Furniture and fixtures 2-3
Shop and service equipment 3-5
Revenue equipment 5-7
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.
Goodwill:
The Company adopted Statement of Financial Accounting Standards No. 142,
"Accounting for Goodwill and Other Intangible Assets" (SFAS No. 142), on January
1, 2002. SFAS No. 142 requires that goodwill be tested at least annually for
impairment by applying a fair value based analysis. With the adoption of SFAS
No. 142, goodwill will no longer be subject to amortization resulting in a
decrease in annualized operating expenses of $778,116. Prior to 2002, goodwill
was amortized on a straight-line basis over a five year period. Goodwill, net of
amortization, is recorded in other assets. Management has determined that no
impairment charge is required for 2002.
Earnings Per Share:
Basic earnings per share are based upon the weighted average common shares
outstanding during each year. Diluted earnings per share are based upon the
weighted average common and common equivalent shares outstanding during each
year. Heartland Express has no common stock equivalents; therefore, diluted
earnings per share are not applicable.
Insurance and Claims accruals:
Insurance accruals reflect the estimated cost for cargo loss and damage,
bodily injury and property damage (BI/PD), group health and workers'
compensation claims, including estimated loss development and loss adjustment
expenses, not covered by insurance. The cost of cargo and BI/PD insurance and
claims are included in insurance and claims expense, while the costs of group
health and workers' compensation insurance and claims are included in salaries,
wages, and benefits in the consolidated statements of operations.
Impairment of Long-Lived Assets:
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (SFAS No. 144). The Company periodically evaluates property and
equipment for impairment upon the occurrence of events or changes in
circumstances that indicate the carrying amount of asset may not be recoverable.
Management has determined that the adoption of SFAS No. 144 did not require an
impairment charge in 2002.
19
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes:
The Company uses the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases. 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.
Prospective Accounting Pronouncements:
In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, "Accounting for Obligations Associated with the Retirement of
Long-Lived Assets." SFAS No. 143, effective January 1, 2003, addresses financial
accounting and reporting obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. Under the new
statement, the Company will record both an initial asset and a liability, at
fair value, for estimated costs of legal obligations associated with the
retirement of long-lived asset will be depreciated over the expected useful life
of the asset. As of December 31, 2002, management has determined that SFAS 143
will not have a significant effect on the Company's financial position or
results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." The provisions of this statement are effective with the beginning
of fiscal year 2003. As of December 31, 2002, management believes that SFAS 145
will have no significant effect on the Company's financial position or results
of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The Statement requires that a
liability for all costs be recognized when the liability is incurred with exit
or disposal activities as opposed to when the entity commits to an exit plan
under EITF No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring)." The statement will be applied prospectively to activities
exited from or disposed of initiated after December 31, 2002. As of December 31,
2002, management believes that the adoption of SFAS 146 will have no material
effect on its financial position or results of operations.
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 37%,
38%, and 35% of revenues for the years ended December 31, 2002, 2001, and 2000,
respectively. Operating revenue from one customer exceeded 10% of total gross
revenues in 2002, 2001 and 2000. Annual revenues for this customer were $46.3
million, $45.3 million, and $42.9 million for the years ended December 31, 2002,
2001, and 2000, respectively.
20
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes 3. 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:
2002 2001
------------ ------------
Deferred income tax liabilities,
related to property and equipment $ 30,089,000 $ 20,996,000
============ ============
Deferred income tax assets:
Allowance for doubtful accounts $ 263,000 $ 153,000
Accrued expenses 3,263,000 2,262,000
Insurance accruals 16,293,000 13,562,000
Other 1,315,000 1,381,000
------------ ------------
Deferred income tax assets $ 21,134,000 $ 17,358,000
============ ============
The income tax provision is as follows:
2002 2001 2000
------------ ------------ ------------
Current income taxes:
Federal $ 15,372,814 $ 15,357,642 $ 14,846,728
State 1,362,745 1,047,597 1,346,997
------------ ------------ ------------
16,735,559 16,405,239 16,193,725
------------ ------------ ------------
Deferred income taxes:
Federal 5,684,000 3,027,000 1,574,000
State (367,000) (34,000) (96,000)
------------ ------------ ------------
5,317,000 2,993,000 1,478,000
------------ ------------ ------------
Total $ 22,052,559 $ 19,398,239 $ 17,671,725
============ ============ ============
The income tax provision differs from the amount determined by applying the
U.S. federal tax rate as follows:
2002 2001 2000
------------ ------------ ------------
Federal tax at statutory rate (35%) $ 22,701,166 $ 19,968,849 $ 18,191,490
State taxes, net of federal benefit 807,000 502,000 340,000
Non-taxable interest income (907,000) (1,458,000) (1,725,000)
Other (548,607) 385,390 865,235
------------ ------------ ------------
$ 22,052,559 $ 19,398,239 $ 17,671,725
============ ============ ============
21
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Related Party Transactions
The Company leases two office buildings and a storage building from its
president under a lease which provides for monthly rentals of $24,969 plus the
payment of all property taxes, insurance and maintenance. The lease expires May
31, 2005 and contains a five-year renewal option. In the opinion of management,
the rates paid are comparable to those that could be negotiated with a third
party.
The total minimum rental commitment under the building lease is as follows:
Year Ending December 31:
2003 299,625
2004 299,625
2005 124,844
---------
$ 724,094
=========
Rent expense paid to the Company's president totaled $299,625 for the years
ended December 31, 2002 and 2001, and $292,281 for the year ended December 31,
2000. The Company maintains cash accounts with a bank owned by the Company's
president. At December 31, 2002 and 2001, the Company had cash accounts of
$3,427,396 and $2,738,588, respectively, on deposit at the bank. In the opinion
of management, interest rates earned are comparable to those that could be
earned at other area banks.
Note 5. Accident and Workers' Compensation Claims
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 $500,000 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 $4.1 million in connection with
its liability and workers' compensation insurance arrangements. Deposits of
$765,000 are included in other assets on the balance sheet.
Accident and workers' compensation accruals 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.
Claims are accrued at the maximum estimated exposure based on management's
evaluation of the nature and severity of individual claims. 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.
22
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Stockholders' Equity
On May 10, 2001 the Company's Board of Directors approved a five-for-four
split of the Company's common stock effected in the form of a 25% stock dividend
for stockholders of record as of May 21, 2001. A total of 6,341,549 common
shares were issued in this transaction. On January 28, 2002 the Company's Board
of Directors approved a two and seven tenths-for-one and seven tenths split of
the Company's common stock effect in the form of a 57.7% stock dividend for
stockholders of record as of February 8, 2002. A total of 18,291,869 common
shares were issued in this transaction. The effect of the stock dividends have
been recognized retroactively in the shareholders' equity accounts on the
balance sheet as of December 31, 2002 and 2001, and in all share and per share
data in the accompanying consolidated financial statements, notes to financial
statements and supplemental data.
On March 7, 2002, the principal stockholder awarded 90,750 shares of his
common stock to key employees of the Company. These shares had a fair market
value of $21.99 per share on the date of the award. The shares will vest over a
five-year period subject to restrictions on transferability and to forfeiture in
the event of termination of employment. Any forfeited shares will be returned to
the principal stockholder. The fair market value of these shares, $1,995,592 on
the date of the award, was treated as a contribution of capital and is being
amortized on a straight-line basis over the five year vesting period as
compensation expense. Compensation expense of $332,598 was recognized for the
year ended December 31, 2002.
In September, 2001, the Board of Directors of the Company authorized a
program to repurchase shares of the Company's Common Stock with an aggregate
purchase price of $5.0 million. No shares were purchased during 2002 and 2001,
and the authorization to repurchase remains open at December 31, 2002.
The Company purchased 2,155,735 shares of its common stock for $14,009,900
on February 28, 2000. The shares have been reported as retired in the
accompanying financial statements.
Note 7. Profit Sharing Plan and Retirement Plan
The Company has a retirement savings plan (the "Plan") for substantially
all employees who have completed one year of service and are 19 years of age or
older. Employees may make 401(k) contributions subject to Internal Revenue Code
limitations. The Plan provides for a discretionary profit sharing contribution
to non-driver employees and a mandatory matching contribution of a discretionary
percentage to driver employees. Company contributions totaled $620,000,
$497,000, and $255,000, for the years ended December 31, 2002, 2001, and 2000,
respectively.
Note 8. Acquisition of Business
On June 1, 2002, the Company acquired the business and trucking assets of
Great Coastal Express, Inc. ("Great Coastal"), a privately-held truckload
carrier. Great Coastal had gross revenues of approximately $70 million in 2001.
The acquired assets (primarily revenue equipment) were recorded at their
estimated fair values of approximately $22.2 million in accordance with SFAS No.
141, Business Combinations. Goodwill in the amount of $4.4 million has been
recorded in "Other Assets, net" for the amount which the purchase price exceeded
the fair value of the assets acquired and is primarily attributable to the
driver workforce acquired as part of the acquisition. The acquisition has been
accounted for in the Company's results of operations since the acquisition date.
The pro forma effect of the acquisition on the Company's results of operations
is immaterial. The acquisition was funded from cash and investments.
23
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Commitments and Contingencies
On January 7, 2002, the Owner-Operators Independent Drivers Association,
Inc. served a lawsuit against the Company in the United States District Court
for the Southern District of Iowa. The lawsuit alleges that the Company failed
to adequately inform the owner-operators of certain deductions from their
settlement statements in violation of Department of Transportation regulations
and that the Company's standard contract with owner-operators violates those
regulations. The lawsuit seeks unspecified damages and an injunction to prevent
owner-operators from hauling for the Company until alleged contractual
deficiencies are corrected. The Company intends to defend the lawsuit
vigorously.
On June 21, 2002 a driver for the Company was involved in a multiple (5)
fatality accident in Knoxville, Tennessee. In connection with this accident, two
lawsuits have been field in the U.S. District Court for the Eastern District of
Tennessee, Northern Division, at Knoxville. The first of these lawsuits was
filed on July 17, 2002, and the second lawsuit was filed on July 23, 2002. The
combined relief sought in these cases is approximately $54.5 million for
compensatory damages and $215 million for punitive damages. The Company has
insurance coverage of $50 million for compensatory and punitive damages arising
out of these cases, subject to a self-insured retention payable by the Company.
To the Company's knowledge, no other action, including governmental, is
contemplated in connection with the accident. In connection with this
litigation, the Company has reserved the entire amount of its self-insured
retention. Although there can be no assurance, the Company does not anticipate
that its ultimate liability resulting from this litigation will exceed the
coverage limits under its insurance policy. If the Company's ultimate liability
were to exceed such coverage limits, the Company's financial position and
results of operations could be materially affected.
The Company is involved in certain legal proceedings arising in the normal
course of business. In the opinion of management, the Company's potential
exposure under pending legal proceedings is adequately provided for in the
accompanying financial statements.
Note 10. Quarterly Financial Information (Unaudited)
First Second Third Fourth
---------------------------------------------
(In Thousands, Except Per Share Data)
Year ended December 31, 2002
Operating revenue $ 73,270 $ 84,360 $ 91,123 $ 91,992
Operating income 13,693 15,983 16,129 16,243
Income before income taxes 14,451 16,705 16,778 16,926
Net income 9,538 11,025 11,073 11,171
Basic earnings per share 0.19 0.22 0.22 0.22
Year ended December 31, 2001
Operating revenue $ 71,923 $ 75,251 $ 73,918 $ 73,525
Operating income 12,160 13,456 12,939 14,064
Income before income taxes 13,529 14,634 13,962 14,929
Net income 8,929 9,658 9,215 9,853
Basic earnings per share 0.18 0.19 0.18 0.20
24
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, 2002 $ 402,812 $ 248,986 $ - $ 1,798 $650,000
Year ended December 31, 2001 402,812 178,457 - 178,457 402,812
Year ended December 31, 2000 402,812 251,555 - 251,555 402,812
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 14, 2002, Arthur Andersen LLP (Andersen) was indicted on federal
obstruction of justice charges arising from the federal government's
investigation of Enron Corp. On June 15, 2002, Arthur Andersen was found guilty
of these charges.
On April 5, 2002, on recommendation of the Audit Committee of the Company's
Board of Directors, the Company's Board of Directors dismissed Andersen as the
Company's independent public accountants and engaged KPMG LLP (KPMG) to audit
the consolidated financial statements of the Company for the fiscal year 2002.
KPMG has not audited any of the Company's financial statements for year-ends
prior to December 31, 2002 and therefore is unable to express an opinion on any
prior years' financial information.
During the Company's fiscal years ended December 31, 2001 and 2000, and
during the subsequent interim period through the date of Andersen's dismissal,
there were no disagreements with Andersen on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure
which, if not resolved to Andersen's satisfaction, would have caused them to
make reference to the subject matter in connection with their report on the
Company's consolidated financial statements for such years; and there were no
reportable events, as listed in Item 304(a)(1)(v) of Regulation S-K. Andersen's
reports on the Company's consolidated financial statements for Company's fiscal
years ended December 31, 2001 and 2000 did not contain an adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope or accounting principles.
During the Company's fiscal years ended December 31, 2001 and 200 and the
subsequent interim period through the date of Andersen's dismissal, the Company
did not consult KPMG with respect to the application of accounting principles to
a specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Company's consolidated financial
statements, or any other matters or reportable events listed in Item
304(a)(2)(i) and (ii) of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 of Part III is presented under the
items entitled "Certain Information Regarding Directors and Executive Officers"
and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
Definitive Proxy Statement for the Annual Meeting of Stockholders on May 8,
2003. Such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Part III is presented under the item
entitled "Executive Compensation" in the Company's Definitive Proxy Statement
for the Annual Meeting of Stockholders on May 8, 2003. Such information is
incorporated herein by reference.
25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 of Part III is presented under the item
entitled "Security Ownership of Principal Stockholders and Management" in the
Company's Definitive Proxy Statement for the Annual Meeting of Stockholders on
May 8, 2003. Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Part III is presented under the item
entitled "Certain Relationships and Related Transactions" in the Company's
Definitive Proxy Statement for the Annual Meeting of Stockholders on May 8,
2003. Such information is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
Evaluation of Disclosure Control and Procedures
Within 90 days of the filing of this report, the principal executive
officer and principal financial officer of the Company, under the supervision
and with the participation of the Company's management, have evaluated the
disclosure controls and procedures of the Company as defined in Exchange Act
Rule 13(a)-14(c) and have determined that such controls and procedures are
effective.
Changes in Internal Controls
There have been no significant changes (including corrective actions with
regard to significant deficiencies or material weaknesses) in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation referred to in the paragraph
above.
26
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules.
(a)(1) Financial Statements: See Part II, Item 8 hereof.
Page
Independent Auditors' Report - KPMG LLP.............................. 12
Report of Independent Accountants - Arthur Andersen LLP.............. 13
Consolidated Balance Sheets.......................................... 14
Consolidated Statements of Operations................................ 15
Consolidated Statements of Stockholders' Equity...................... 16
Consolidated Statements of Cash Flows................................ 17
Notes to Consolidated Financial Statements........................... 18
(a)(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts and Reserves.......... 24
Schedules not listed have been omitted because they are not applicable or
are not required or the information required to be set forth therein is included
in the Consolidated Financial Statements or Notes thereto.
(a)(3) Exhibits required by Item 601 of Regulation S-K are listed below.
EXHIBIT INDEX
Exhibit No. Document 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 Incorporated by reference to
to Articles of Incorporation the Company's Form 10-QA,
for the quarter ended June 30,
1997, dated March 20, 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.
27
4.3 Certificate of Amendment Incorporated by reference to
to Articles of Incorporation the Company's Form 10-QA,
for the quarter ended June 30,
1997, dated March 20, 1998.
9.1 Voting Trust Agreement dated Incorporated by reference to
June 6, 1997 between Larry the Company's Form 10-K for
Crouse as trustee under the year ended December 31,
the Gerdin Educational 1997. Commission file no.
Trusts and Larry Crouse 0-15087.
voting trustee.
10.1 Business Property Lease between Incorporated by reference to
the Company Russell A. Gerdin the Company's Form 10-Q for
as Lessor and as Lessee, the quarter ended September 30,
regarding the Company's 2000. Commission file .
headquarters at 2777 no. 0-15087
Heartland Drive,Coralville,
Iowa 52241
10.2 Restricted Stock Agreement Filed herewith.
10.3 Incentive Compensation Plan Incorporated by reference to
the Company's Form 10-K for
the year ended December 31,
1993. Commission file no.
0-15087.
16 Letter of Arthur Andersen LLP Filed herewith.
regarding change in certifying
accountant.
21 Subsidiaries of the Registrant Filed herewith.
99.1 Certification of Chief Executive Files herewith.
Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-
Oxley Act of 2002.
99.2 Certification of Chief Financial Files herewith.
Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted pursuant
to Section 906 of the Sarbanes-
Oxley Act of 2002.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended December
31, 2002.
28
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 26,2003 By: /s/ Russell A. Gerdin
Russell A. Gerdin
President and Chief
Executive Officer
(principal executive officer)
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
Russell A. Gerdin Chief Executive Officer
and Secretary,
(principal executive
officer) March 26, 2003
/s/ John P. Cosaert Executive Vice President
John P. Cosaert of Finance, Chief Financial
Officer and Treasurer
(principal accounting and
financial officer) March 26, 2003
/s/ Richard O. Jacobson Director
Richard O. Jacobson March 26, 2003
/s/ Michael J. Gerdin Vice President of Regional
Michael J. Gerdin Operations and Director March 26, 2003
/s/ Benjamin J. Allen Director
Benjamin J.Allen March 26, 2003
/s/ Lawrence D. Crouse Director
Lawrence D. Crouse March 26, 2003
29
CERTIFICATION
I, Russell A. Gerdin, Chairman, President and Chief Executive Officer of
Heartland Express, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Heartland Express, Inc.
(the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure control and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluate the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls: and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 21, 2003
/s/ Russell A. Gerdin
Chairman, President and
Chief Executive Officer
30
CERTIFICATION
I, John P. Cosaert, Executive Vice President and Chief Financial Officer of
Heartland Express, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Heartland Express, Inc.
(the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure control and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 21, 2003
/s/ John P. Cosaert
Executive Vice President and
Chief Financial Officer
31
Exhibit No. 10.2
RESTRICTED STOCK AGREEMENT
The Restricted Stock Agreement (the "Agreement") made this 7th day of
March, 2002, among Russell Gerdin ("Gerdin"), Heartland Express, Inc., a Nevada
corporation (the "Company") and Heartland Express, Inc. of Iowa, as Escrow Agent
("Escrowee").
W I T N E S S E T H
WHEREAS, Gerdin is the President, Chairman of the Board, and principal
shareholder of the Company;
WHEREAS, Gerdin believes the best interests of the Company and its
subsidiaries will be advanced by encouraging and enabling certain officers and
key employees of the Company or its subsidiaries (collectively "Employees") to
have a proprietary interest in the Company;
WHEREAS, Gerdin desires to cause awards of restricted stock to be made to
certain of the Employees and to identify those Employees to receive such award,
determine the number of shares to be awarded to each Employee, and determine
certain terms of the awards to be made;
WHEREAS, Gerdin desires to transfer to the Escrowee 90,750 shares of the
Common Stock of the Company (the "Restricted Stock Shares") currently held by
Gerdin for the purpose of providing the shares necessary to make the restricted
stock awards contemplated hereby;
NOW, THEREFORE, in consideration of the foregoing recitals and the promises
and agreements herein contained, the parties agree as follows:
1. Transfer. Immediately following execution of this Agreement, Gerdin shall
transfer to Escrowee the Restricted Stock Shares to be held and transferred
by Escrowee as herein provided.
2. Determination. Gerdin shall award all of the Restricted Stock Shares and in
so awarding, shall determine the following:
a. The Employees entitled to be awarded Restrictive Stock Shares;
b. The number of Restricted Stock Shares to be awarded to each such Employee;
c. The restriction and forfeiture provisions applicable in the event of
involuntary termination of employment without cause; in all other respects
the terms of the awards shall be as set forth in the form of Stock Award
attached hereto as Exhibit A and B, which forms shall be utilized in each
award of shares hereunder.
3. Awards. Upon the identification of an Employee entitled to receive an award
of Restricted Stock Shares, the Escrowee shall prepare and deliver to such
Employee a Stock Award in the form attached hereto as Exhibit A or B,
depending on each Employee's length of service with the Company or its
subsidiaries. The Stock Award form shall be completed in the manner
specified by the Gerdin under paragraph 2 hereof.
32
4. Transfer. Upon the Employee's execution of the Stock Award, the Escrowee
shall transfer to the employee the shares awarded thereby. The
certificate(s) representing the shares shall bear the legend required by
the Stock Award. Thereafter, the Employee shall be entitled to the rights
but shall be subject to the forfeiture and nontransfer restrictions
specified in the Stock Award.
5. Other Provisions. In all other respects, the provisions of the Stock Award
attached hereto as Exhibit A and B shall control disposition of the shares
awarded.
IN WITNESS WHEREOF, the parties have caused this Restricted Stock Agreement to
be executed on the date and year first above written.
COMPANY: ESCROWEE:
HEARTLAND EXPRESS, INC. HEARTLAND EXPRESS, INC., as
Escrow Agent
By:/s/Russell Gerdin By:/s/Thomas E. Hill
Russell Gerdin Thomas E. Hill
President Vice-President
SHAREHOLDER:
By:/s/Russell Gerdin
Russell Gerdin
33
Exhibit A
STOCK AWARD
THIS STOCK AWARD ("Award") is granted this 1st day of March, 2002, by Heartland
Express, Inc. of Iowa, as Escrow Agent ("Escrowee").
W I T N E S S E T H
WHEREAS, Russell Gerdin (the "Shareholder") is the President, Chairman of
the Board, and principal shareholder of Heartland Express, Inc., a Nevada
Corporation ("Corporation");
WHEREAS, the Shareholder has heretofore transferred and assigned to
Escrowee certain shares of his capital stock of the Corporation with direction
that said shares be awarded to key officers and employees of the Corporation or
its subsidiaries;
WHEREAS, the Shareholder has directed that certain shares be awarded to
____________ (the "Employee") in consideration of his future services to the
Corporation or its subsidiaries;
NOW, THEREFORE, in consideration of services to be rendered by the
Employee, the Escrowee hereby grants this Award to the Employee on the terms
hereinafter expressed:
1. Stock Award. Escrowee hereby grants to the Employee an Award of ___ shares
of Common Stock, $.01 par value, of the Corporation ("Award Shares"),
subject to the forfeiture and nontransferability provisions hereof and the
other terms and conditions set forth herein.
2. Restrictions. The Employee represents that the Award Shares are being
acquired by him for his own account for investment and not with a view to
the distribution thereof, and no part of the Award Shares will be sold or
otherwise disposed of except in compliance with the Securities Act of 1933,
as amended, and the rules and regulations thereunder. The Employee shall
not sell, assign, transfer, convey, donate or otherwise dispose of any of
the Award Shares (and any such disposition or attempted disposition shall
be void and of no force or effect whatsoever) before the first to occur of
either (a) the Employee's death or total and permanent disability, as
determined by the Corporation, or (b) the vesting of such Award Shares in
accordance with paragraph 3.
3. Vesting of Award Shares. The restrictions on transferability imposed under
paragraph 2 hereof shall lapse as to 40% of the Award Shares upon the
second anniversary of the date of grant of this Stock Award, and as to an
additional 20% of the Award Shares on each succeeding anniversary of the
date of grant, provided, however, the Employee shall have first paid to the
Corporation all amounts then required to be paid under paragraph 9 hereof.
4. Forfeiture. In the event that the Employee's full-time active employment
with the Corporation and its subsidiaries terminates on or before the lapse
of any restrictions on transferability as provided in paragraph 3 hereof,
for any reason other than his death or total and permanent disability, as
determined by the Corporation, all of the non-vested Award Shares shall be
forthwith forfeited and returned to the Shareholder without any payment or
other consideration.
34
5. Deposit. The certificates representing the Award Shares, issued in the name
of the Employee, and accompanied by assignments in blank separate from
certificate, shall be deposited with the Escrowee. Upon vesting pursuant to
paragraph 3, the certificates representing the vested shares shall be
delivered to the Employee. Upon forfeiture, the certificates and
assignments in blank shall be delivered to Shareholder.
6. Legend. Certificates representing the Award Shares shall bear a legend
evidencing the restrictions and forfeiture provisions hereof. When such
restrictions and forfeiture provisions terminate, the Employee (or his
estate or the person to whom his rights hereunder, if any, passed by will
or the law of descent and distribution) shall be entitled to have such
legend removed from such certificates upon presentation to the Corporation.
7. Dividend and Voting Rights. The Employee shall be entitled to receive and
retain all cash dividends paid on the Award Shares, and shall be entitled
to vote the Award Shares, until and unless such shares are forfeited
hereunder. Stock dividends, if any, on the Award Shares shall be delivered
to the Escrowee to be held and distributed or forfeited as the case may be,
in accordance with the terms hereof, in the same manner as the Award Shares
in respect of which such stock dividends are paid.
8. Nontransferability. The Award Shares herein granted and the rights and
privileges conferred hereby are personal to the Employee and shall not be
transferred (otherwise then by will or the laws of descent and
distribution, to the extent permitted hereunder), assigned, pledged, or
hypothecated in any way (whether by operation of law or otherwise) and
shall not be subject to execution, attachment or similar process.
9. Taxes. The fair market value of the vested portion of the Award Shares is
deemed to be taxable wages to the Employee on each vesting date. The
Employee shall, at each vesting date, pay to the Corporation an amount
equal to any payroll taxes that the Corporation is required to withhold in
connection with the termination of the restrictions and forfeiture
provisions hereof. The payroll taxes (Federal, FICA, and State, where
applicable) will be based on the average of the high and low price on each
vesting date.
IN WITNESS WHEREOF, the Escrowee has caused this Award to be granted on the
date first above written.
HEARTLAND EXPRESS, INC., as ACCEPTED:
Escrow Agent
Employee
35
Exhibit B
STOCK AWARD
THIS STOCK AWARD ("Award") is granted this 4th day of March, 2002, by Heartland
Express, Inc., as Escrow Agent ("Escrowee").
W I T N E S S E T H
WHEREAS, Russell Gerdin (the "Shareholder") is the President, Chairman of
the Board, and principal shareholder of Heartland Express, Inc., a Nevada
Corporation ("Corporation");
WHEREAS, the Shareholder has heretofore transferred and assigned to
Escrowee certain shares of his capital stock of the Corporation with direction
that said shares be awarded to key officers and employees of the Corporation or
its subsidiaries;
WHEREAS, the Shareholder has directed that certain shares be awarded to
____________("the Employee") in consideration of his future services to the
Corporation or its subsidiaries;
NOW, THEREFORE, in consideration of services to be rendered by the
Employee, the Escrowee hereby grants this Award to the Employee on the terms
hereinafter expressed:
1. Stock Award. Escrowee hereby grants to the Employee an Award of ___ shares
of Common Stock, $.01 par value, of the Corporation ("Award Shares"),
subject to the forfeiture and nontransferability provisions hereof and the
other terms and conditions set forth herein.
2. Restrictions. The Employee represents that the Award Shares are being
acquired by him for his own account for investment and not with a view to
the distribution thereof, and no part of the Award Shares will be sold or
otherwise disposed of except in compliance with the Securities Act of 1933,
as amended, and the rules and regulations thereunder. The Employee shall
not sell, assign, transfer, convey, donate or otherwise dispose of any of
the Award Shares (and any such disposition or attempted disposition shall
be void and of no force or effect whatsoever) before the first to occur of
either (a) the Employee's death or total and permanent disability, as
determined by the Corporation, or (b) the vesting of such Award Shares in
accordance with paragraph 3.
3. Vesting of Award Shares. The restrictions on transferability imposed under
paragraph 2 hereof shall begin to lapse upon the Employee's attainment of
five years of service with the Corporation or its subsidiaries. The
restrictions shall begin to lapse as to 40% of the Award Shares upon the
second anniversary of attaining five years of service, and as to an
additional 20% of the Award Shares on each succeeding anniversary of the
attainment of five years of service, provided, however, the Employee shall
have first paid to the Corporation all amounts then required to be paid
under paragraph 9 hereof.
4. Forfeiture. In the event that the Employee's full-time active employment
with the Corporation and its subsidiaries terminates on or before the lapse
of any restrictions on transferability as provided in paragraph 3 hereof,
for any reason other than his death or total and permanent disability, as
determined by the Corporation, all of the non-vested Award Shares shall be
forthwith forfeited and returned to the Shareholder without any payment or
other consideration.
36
5. Deposit. The certificates representing the Award Shares, issued in the name
of the Employee, and accompanied by assignments in blank separate from
certificate, shall be deposited with the Escrowee. Upon vesting pursuant to
paragraph 3, the certificates representing the vested shares shall be
delivered to the Employee. Upon forfeiture, the certificates and
assignments in blank shall be delivered to Shareholder.
6. Legend. Certificates representing the Award Shares shall bear a legend
evidencing the restrictions and forfeiture provisions hereof. When such
restrictions and forfeiture provisions terminate, the Employee (or his
estate or the person to whom his rights hereunder, if any, passed by will
or the law of descent and distribution) shall be entitled to have such
legend removed from such certificates upon presentation to the Corporation.
7. Dividend and Voting Rights. The Employee shall be entitled to receive and
retain all cash dividends paid on the Award Shares, and shall be entitled
to vote the Award Shares, until and unless such shares are forfeited
hereunder. Stock dividends, if any, on the Award Shares shall be delivered
to the Escrowee to be held and distributed or forfeited as the case may be,
in accordance with the terms hereof, in the same manner as the Award Shares
in respect of which such stock dividends are paid.
8. Nontransferability. The Award Shares herein granted and the rights and
privileges conferred hereby are personal to the Employee and shall not be
transferred (otherwise then by will or the laws of descent and
distribution, to the extent permitted hereunder), assigned, pledged, or
hypothecated in any way (whether by operation of law or otherwise) and
shall not be subject to execution, attachment or similar process.
9. Taxes. The fair market value of the vested portion of the Award Shares is
deemed to be taxable wages to the Employee on each vesting date. The
Employee shall, at each vesting date, pay to the Corporation an amount
equal to any payroll taxes that the Corporation is required to withhold in
connection with the termination of the restrictions and forfeiture
provisions hereof. The payroll taxes (Federal, FICA, and State, where
applicable) will be based on the average of the high and low price on each
vesting date.
IN WITNESS WHEREOF, the Escrowee has caused this Award to be granted on the
date first above written.
HEARTLAND EXPRESS, INC., as ACCEPTED:
Escrow Agent Employee
37
Exhibit No. 16
Letter of Arthur Andersen LLP regarding change in certifying accountant.
Office of the Chief Accountant
Securities and Exchange Commission
450 Fifth Street N W
Washington DC 20549
April 5, 2002
Dear Sir / Madam:
We have read Item 4 included in the Form 8-K dated April 5, 2002 of Heartland
Express, Inc. to be filed with the Securities and Exchange Commission and are in
agreement with the statements contained therein, except that we are not in a
position to agree or disagree with Heartland Express, Inc.'s statement that the
change was approved by the Board of Directors.
Very truly yours,
ARTHUR ANDERSEN LLP
Copy to:
Mr. John P. Cosaert, Chief Financial Officer, Heartland Express, Inc.
38
Exhibit No. 21
Subsidiaries of the Registrant
Heartland Express, Inc. Parent
A & M Express, Inc. Subsidiary
Heartland Equipment, Inc. Subsidiary
Heartland Express, Inc. of Iowa Subsidiary
END OF REPORT