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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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ To ________________
Commission file number 0-15087
HEARTLAND EXPRESS, INC.
(Exact name of registrant as specified in its charter)
Nevada 93-0926999
(State or Other Jurisdiction of Incorporation) (I.R.S. Employer I.D. No.)
2777 Heartland Drive
Coralville, Iowa 52241
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 319-645-2728
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 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 9,
1998 was $440,105,826 (based upon $25.50 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 of
March 9, 1998 was 30,000,000.
DOCUMENTS INCORPORATED BY REFERENCE: The information set forth under
Part III, Items 10, 11, 12, and 13 of this Report is incorporated by
reference from the registrant's definitive proxy statement for the 1998
annual meeting of stockholders that will be filed no later than
April 30, 1998.
PAGE
Cross Reference Index
The following cross reference index indicates the document and location of
the information contained herein and incorporated by reference into the
Form 10-K.
Document and Location
Part I
Item 1 Business Page 3 herein
Item 2 Properties Page 5 herein
Item 3 Legal Proceedings Page 5 herein
Item 4 Submission of Matters to a Vote of
Stockholders Page 5 herein
Part II
Item 5 Market for the Registrant's Common Equity
and Related Stockholder Matters Page 6 herein
Item 6 Selected Financial Data Page 7 herein
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of
Operations Pages 8-12 herein
Item 8 Financial Statements and Supplementary
Data Pages 12 and
17-26 herein
Item 9 Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure Page 12 herein
Part III
Item 10 Directors and Executive Officers of
the Registrant Pages 2 to 4 of Proxy
Statement
Item 11 Executive Compensation Pages 5 and 6 of Proxy
Statement
Item 12 Security Ownership of Certain Beneficial
Owners and Management Page 7 of Proxy
Statement
Item 13 Certain Relationships and Related
Transactions Page 4 of Proxy
Statement
Part IV
Item 14 Exhibits, Financial Statement Schedules,
and Reports on Form 8-K Pages 13 and 14 herein
____________________________________________
This report contains "forward-looking statements" in paragraphs that
are marked with an asterisk. These statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
those anticipated. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Cautionary Statement Regarding
Forward-Looking Statements" for additional information and factors to be
considered concerning forward-looking statements.
PART I
ITEM 1. BUSINESS
General
Heartland Express, Inc. ("Heartland" or the "Company") is a
short-to-medium haul truckload carrier based near Iowa City, Iowa. The
Company provides nationwide transportation service to major shippers, using
late-model equipment and a balanced fleet of company-owned and
owner-operator tractors. The Company's primary traffic lanes are between
customer locations east of the Rocky Mountains, with selected service to
the West. Management believes that the Company's service standards and
equipment accessibility have made it a core carrier to many of its major
customers.
Heartland was founded by Russell A. Gerdin in 1978 and became
publicly traded in November 1986. Over the eleven years from 1986 to 1997,
Heartland has grown to $262.5 million in revenue from $21.6 million and net
income has increased to $30.0 million from $3.0 million. Much of this
growth has been attributable to expanding service for existing customers,
acquiring new customers, and continued expansion of the Company's operating
regions.
In addition to internal growth, Heartland has completed four
acquisitions since 1987. These acquisitions have enabled Heartland to
solidify its position within historical regions, expand its customer base
in the East and Northeast United States, and to pursue new customer
relationships in new markets. Most recently, in July 1997, Heartland
increased its Eastern operations by acquiring A & M Express, Inc. located
in Kingsport, Tennessee. A & M Express, Inc. is predominately a dry-van
carrier that operates a primarily company-owned fleet. A & M reported gross
revenues of approximately $28 million in 1996. A & M Express generates a
small portion of its revenues from the flat bed market. The Company is
operating A & M Express as a separate subsidiary. However, administrative
functions are being performed at Heartland's corporate headquarters. The
purchase of A & M was funded by cash and investments.
Heartland Express, Inc. is a holding company incorporated in Nevada,
which owns, directly or indirectly, all of the stock of Heartland Express
Inc. of Iowa, Heartland Equipment, Inc., Munson Transportation, Inc.,
Munson Transport Services, Inc., Munson Equipment, Inc., and A & M Express,
Inc.
Operations
Heartland's operations department focuses on serving customer needs
and maximizing equipment utilization. The Company divides its operating
area into geographic regions and appoints a regional dispatcher for each
region. Regional dispatchers communicate with customers and drivers to
coordinate equipment resources with inbound and outbound load demand.
Dispatchers are responsible for monitoring the timeliness of all pickups
and deliveries within their regions. Frequent driver contact enables
dispatchers to closely monitor equipment and load positions to ensure
proper performance. Serving the short to medium haul market (590-mile
average length of haul in 1997) 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 three specialized regional distribution
operations for major customers near Atlanta, Georgia; Columbus, Ohio; and
Iowa City, Iowa. These short-haul operations concentrate on freight
movements generally within a 400-mile radius of the regional terminal, and
are designed to meet the needs of significant customers in those regions.
These operations are handled by dispatchers at the regional locations, and
the Company uses a centralized computer network and regular communication
to achieve system-wide load coordination.
The Company emphasizes customer satisfaction through on-time
performance, dependable late-model equipment, and consistent equipment
availability to serve large customers' volume requirements. The Company
also maintains a high trailer to tractor ratio, which facilitates the
stationing of trailers at customer locations for convenient loading and
unloading. This minimizes waiting time, which increases tractor
utilization and assists with driver retention.
Customers and Marketing
The Company targets customers in its operating area that require
multiple, time-sensitive shipments, including those employing
"just-in-time" manufacturing and inventory management. In seeking these
customers, Heartland has positioned itself as a provider of premium service
at compensatory rates, rather than competing solely on the basis of price.
The Company's primary customers include both retailers and manufacturers.
Freight transported for the most part is non-perishable and predominantly
does not require driver handling. Heartland's reputation for quality
service, reliable equipment and equipment availability makes it a core
carrier to many of its customers.
Heartland seeks to transport freight that will complement traffic in
its existing service areas and remain consistent with the Company's focus
on short-to-medium haul and regional distribution markets. Management
believes that building additional service in the Company's primary traffic
lanes will assist in controlling empty miles and enhancing driver "home
time."
The Company's 25, 10, and 5 largest customers accounted for 70%,
54%, and 39% of revenue, respectively, in 1997. Major customers of the
Company represent the consumer goods appliances, packaged food products,
and automotive industries. The distribution of customers is not
significantly different from the previous year. Sears Logistics Services
accounted for 15% of revenue in 1997. No other customer accounted for as
much as ten percent of revenue.
Drivers, Independent Contractors, and Other Personnel
Heartland's workforce is an essential ingredient in achieving its
business objectives. As of December 31, 1997, Heartland employed 1,353
persons. The Company also contracted with independent contractors to
provide and operate tractors. Independent contractors own their own
tractors and are responsible for all associated expenses, including
financing costs, fuel, maintenance, insurance, and taxes. The Company
historically has operated a balanced fleet of company and independent
contractor tractors. Management believes that a balanced fleet compliments
the Company's recruiting efforts and offers greater flexibility in
responding to fluctuations in shipper demand.
Management's strategy for both employee and independent contractor
drivers is to (1) hire the best; (2) promote retention through financial
incentives, positive working conditions, and targeting freight that
requires little or no handling; and (3) minimize safety problems through
careful screening, mandatory drug testing, continuous training, and
financial rewards for accident-free driving. Heartland also seeks to
minimize turnover of its employee drivers by providing modern, comfortable
equipment and of all drivers by regularly scheduling them to their homes.
All drivers are compensated for empty miles as well as loaded miles. This
provides an incentive for the Company to minimize empty miles and at the
same time does not penalize drivers for inefficiencies of operations that
are beyond their control.
Heartland is not a party to a collective bargaining agreement.
Management believes that the Company has good relationships with its
employees and independent contractors.
Revenue Equipment
Heartland's management believes that operating high-quality,
efficient equipment is an important part of providing excellent service to
customers. The Company's policy is to operate its tractors while under
warranty to minimize repair and maintenance cost and reduce service
interruptions caused by breakdowns. In addition, the Company's preventive
maintenance program is designed to minimize equipment downtime, facilitate
customer service, and enhance trade value when equipment is replaced.
Factors considered when purchasing new equipment include fuel economy,
price, technology, warranty terms, manufacturer support, driver comfort,
and resale value.
Competition
The truckload industry is highly competitive and includes thousands
of carriers, none of which dominates the market. The Company competes
primarily with other truckload carriers, and to a lesser extent with
railroads, intermodal service, less-than-truckload carriers, and private
fleets operated by existing and potential customers. Although intermodal
and rail service has improved in recent years, such service has not been a
major factor in the Company's short-to-medium haul traffic lanes (590-mile
average length of haul). Historically, competition has created downward
pressure on the truckload industry's pricing structure. Management
believes that competition for the freight targeted by the Company is based
primarily upon service and efficiency and to a lesser degree upon freight
rates.
Regulation
The Company is a common and contract motor carrier of general
commodities. Historically, the Interstate Commerce Commission (the "ICC")
and various state agencies regulated motor carriers' operating rights,
accounting systems, mergers and acquisitions, periodic financial reporting,
and other matters. In 1995 federal legislation preempted state regulation
of prices, routes, and services of motor carriers and eliminated the ICC.
Several ICC functions were transferred to the Department of Transportation
(the "DOT"). Management does not believe that regulation by the DOT or by
the states in their remaining areas of authority will have a material
effect on the Company's operations. The Company's employee and independent
contractor drivers also must comply with the safety and fitness regulations
promulgated by the DOT, including those relating to drug and alcohol
testing and hours of service.
The Company's operations are subject to various federal, state, and
local environmental laws and regulations, implemented principally by the
EPA and similar state regulatory agencies, governing the management of
hazardous wastes, other discharge of pollutants into the air and surface
and underground waters, and the disposal of certain substances.
Management believes that its operations are in material compliance with
current laws and regulations and does not know of any existing condition
that would cause compliance with applicable environmental regulations to
have a material effect on the Company's capital expenditures, earnings or
competitive position. In the event the Company should fail to comply with
applicable regulations, the Company could be subject to substantial fines
or penalties and to civil or criminal liability.
ITEM 2. FACILITIES AND 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 recruiting and
driver training center. In March 1998, the Company sold a parcel of land
at its O'Fallon, Missouri terminal to an unrelated third party.
The Company owns regional facilities in Ft. Smith, Arkansas;
O'Fallon, Missouri; Forest Park, Georgia; Columbus, Ohio; Jacksonville,
Florida; and Kingsport, Tennessee. The Company is leasing facilities in
Decatur, Illinois and Rochester, New York. A facility in Dubois,
Pennsylvania is being leased to an unrelated third party. The Company
closed facilities in Woodville, Ohio and Monmouth, Illinois during 1994 and
1995 and is attempting to dispose of such facilities. The carrying amount
of the closed facilities were reduced in years prior to 1996 to reflect
fair market value less costs to sell.
ITEM 3. LEGAL PROCEEDINGS AND INSURANCE
The Company is a party to routine litigation incidental to its
business, primarily involving claims for personal injury and property
damage incurred in the transportation of freight. The Company believes
that adverse results in these cases, whether individual or in the
aggregate, would not have a material effect upon the Company's financial
position or results of operations. The Company's exposure is minimized by
setting self-insured retention levels based on historical claim experience
and through maximizing safe driving with driver hiring and training
practices. Heartland maintains insurance covering public liability,
property damage, workers compensation, cargo loss or damage, fire, general
liability and other risks, with a $500,000 self insured retention ("SIR")
for liability arising from personal injury and property damage claims. A &
M Express, however, has a $5,000 SIR. The Company has a $300,000 SIR for
workers' compensation in states where an SIR is allowed. Liability
insurance coverage has been established with aggregate limits of
$25,000,000 per occurrence. During 1994 the Company was granted
self-insured status by the ICC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
During the fourth quarter of 1997, no matters were submitted to a
vote of securities 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. During October 1996 the Company
effected a stock split in the form of a dividend that increased the number
of shares outstanding from 20,000,000 to 30,000,000. The following table
sets forth for the calendar period indicated the range of high and low bid
quotations for the Company's common stock as reported by NASDAQ from
January 1, 1996 to December 31, 1997. All quotations have been adjusted to
give effect to the stock dividend.
Period High Low
Calendar Year 1997
1st Quarter $27.38 $18.50
2nd Quarter 26.00 19.00
3rd Quarter 27.75 21.50
4th Quarter 30.88 22.88
Calendar Year 1996
1st Quarter $18.67 $13.17
2nd Quarter 20.83 16.75
3rd Quarter 20.17 16.50
4th Quarter 26.50 18.17
The prices reported reflect interdealer quotations without retail
mark-ups, mark-downs or commissions, and may not represent actual
transactions. As of March 3, 1998 the Company had 257 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 selected consolidated financial data presented below reflect the
consolidated financial position and results of operations of Heartland
Express, Inc., and its subsidiaries. The selected consolidated financial
data are derived from the Company's consolidated financial statements.
This data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Company's consolidated financial statements and notes thereto included
elsewhere herein.
Year Ended December 31,
(in thousands, except per share data)
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
Income Statement Data:
Operating revenue $ 262,504 $ 229,011 $ 191,507 $ 224,248 $ 236,017
--------- --------- --------- --------- ---------
Operating expenses:
Salaries, wages, and benefits 49,535 40,261 40,715 56,440 63,551
Rent and purchased transportation 101,169 93,961 64,043 57,799 51,478
Operations and maintenance 27,739 22,158 21,035 35,557 45,370
Taxes and licenses 6,049 5,693 5,246 7,347 7,790
Insurance and claims 10,404 9,976 7,967 11,872 10,969
Communication and utilities 2,681 2,158 2,562 2,618 3,077
Depreciation 16,752 13,571 15,066 20,061 22,818
Other operating expenses 5,048 4,534 3,745 5,468 8,301
(Gain) on sale of fixed assets (59) (189) (27) (149) (360)
Merger consummation and
integration costs -- -- -- 3,494 --
--------- --------- -------- --------- ---------
219,318 192,123 160,352 200,507 212,994
--------- --------- -------- --------- ---------
Operating income 43,186 36,888 31,155 23,741 23,023
Interest income/(expense), net 3,782 2,839 1,524 (1,930) (4,747)
--------- --------- -------- --------- ---------
Income before income taxes
and cumulative effect of
change in accounting for
income taxes 46,968 39,727 32,679 21,811 18,276
Federal and state income taxes 16,895 14,697 12,094 11,734 8,028
Cumulative effect of change in
method of accounting for
income tax -- -- -- -- (700)
--------- ---------- ---------- --------- ---------
Net income $ 30,073 $ 25,030 $ 20,585 $ 10,077 $ 10,948
========= ========== ========== ========= =========
Basic Weighted Average shares
outstanding 30,000 30,000 30,036 30,039 30,039
========= ========== ========== ========= =========
Basic earnings per share $ 1.00 $ 0.83 $ 0.69 $ 0.34 $ 0.36
========= ========== ========== ========= =========
Balance sheet data:
Working capital $ 82,170 $ 69,845 $ 40,780 $ 2,542 $(11,084)
Total assets $ 225,467 $ 191,504 $ 158,146 $ 136,393 $ 168,934
Long term debt $ -- $ -- $ -- $ 705 $ 21,403
Stockholders' equity $ 153,739 $ 123,666 $ 98,636 $ 78,050 $ 67,974
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The following table sets forth the percentage relationship of
expense items to operating revenue for the periods indicated.
Year Ended December 31,
1997 1996 1995
------- ------ ------
Operating revenue 100.0% 100.0% 100.0%
------- ------ ------
Operating expenses:
Salaries, wages, and benefits 18.9% 17.6% 21.2%
Rent and purchased transportation 38.5 41.0 33.4
Operations and maintenance 10.6 9.7 11.0
Taxes and licenses 2.3 2.5 2.7
Insurance and claims 4.0 4.4 4.2
Communications and utilities 1.0 0.9 1.3
Depreciation 6.4 5.9 7.9
Other operating expenses 1.9 2.0 2.0
(Gain) on sale of fixed assets -- -- --
------- ------ ------
Total operating expenses 83.5% 83.9% 83.7%
------- ------ ------
Operating income 16.5% 16.1% 16.3%
Interest income, net 1.4 1.2 0.8
------- ------ ------
Income before income taxes 17.9% 17.3% 17.1%
Federal and state income taxes 6.4 6.4 6.4
------- ------ ------
Net income 11.5% 10.9% 10.7%
======= ====== ======
Results of Operations
Year Ended December 31, 1997 Compared With Year Ended December 31, 1996
Operating revenue increased $33.5 million (14.6%), to $262.5 million
in 1997 from $229.0 million in 1996, as a result of the Company's
acquisition of A & M Express, Inc. and expansion of the customer base and
increased volume from existing customers.
Salaries, wages, and benefits increased $9.3 million ( 23.0%), to
$49.5 million in 1997 from $40.3 million in 1996. As a percentage of
revenue, salaries, wages and benefits increased to 18.9% in 1997 from 17.6%
in 1996. An increase in the percentage of employee drivers operating the
Company's tractor fleet and a corresponding decrease in the percentage of
the fleet being provided by independent contractors was the primary cause.
This increase in employee driver miles was attributable to internal growth
and the acquisition of A & M Express which primarily relies on employee
drivers. During 1997, employee drivers accounted for 43% and independent
contractors 57% of the total fleet miles, compared with 40% and 60%,
respectively, in 1996. Rent and purchased transportation increased $7.2
million (7.7%), to $101.2 million in 1997 from $94.0 million in 1996. As a
percentage of revenue, rent and purchased transportation decreased to 38.5%
in 1997 from 41.0% in 1996. This reflected the Company's decreased reliance
upon independent contractors.
Operations and maintenance increased $5.6 million (25.2%), to $27.7
million in 1997 from $22.2 million in 1996. As a percentage of revenue,
operations and maintenance increased to 10.6% in 1997 from 9.7% in 1996.
This increase is attributable to the aforementioned increased reliance on
employee drivers operating the Company's tractor fleet.
Taxes and licenses increased $0.3 million (6.3%), to $6.0 million in
1997 from $5.7 million in 1996. As a percentage of revenue, taxes and
licenses decreased to 2.3% in 1997 from 2.5% in 1996. The cost increase
was primarily attributable to the increase in fleet size. The reduction in
percentage of revenue can be attributed to improved utilization of
equipment.
Insurance and claims increased $0.4 million (4.3%), to $10.4 million
in 1997 from $10.0 million in 1996. As a percentage of revenue, insurance
and claims decreased to 4.0% in 1997 from 4.4% in 1996. 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. Management
believes that the change as a percentage of revenue was insignificant.
Communications and utilities increased $0.5 million (24.2%), to $2.7
million in 1997 from $2.2 in 1996. As a percentage of revenue,
communications and utilities increased to 1.0% in 1997 from 0.9% in 1996
primarily due to the increase in percentage of the Company's fleet being
operated by employee drivers.
Depreciation increased $3.2 million (23.4%), to $16.8 million in
1997 from $13.6 million in 1996. As a percentage of revenue, depreciation
increased to 6.4% in 1997 from 5.9% in 1996. The increase resulted from
the growth in the company owned fleet.
Other operating expenses increased $0.5 million (11.3%), to $5.0
million in 1997 from $4.5 million in 1996. As a percentage of revenue,
other operating expenses decreased to 1.9% in 1997 from 2.0% in 1996.
Other operating expenses consists of pallet cost, driver recruiting
expenses and administrative costs.
Primarily as a result of the foregoing, the Company's operating
ratio was 83.5% in 1997 compared with 83.9% in 1996.
Interest income (net) increased $1.0 million (34%), to
$3.8 million in 1997 from $2.8 million in 1996. As a percentage of
revenue, interest income (net) increased to 1.4% in 1997 from 1.2% in 1996.
At December 31, 1997, the Company had repaid all debt. The Company had
$96.0 million in cash, cash equivalents, and municipal bonds at
December 31, 1997.
The Company's effective tax rate was 36% in 1997 and 37% in 1996.
This decrease is primarily attributable to the increase in tax-exempt
interest earned.
As a result of the foregoing, net income increased $5.0 million
(20.1%), to $30.1 million in 1997 (11.5% of revenue) from $25.0 million in
1996 (10.9% of revenue) .
Year Ended December 31, 1996 Compared With Year Ended December 31, 1995
Operating revenue increased $37.5 million (19.6%), to $229.0 million
in 1996 from $191.5 million in 1995, as a result of the Company's expansion
of the customer base as well as increased volume from existing customers.
Salaries, wages, and benefits decreased $0.4 million (1.1%), to
$40.3 million in 1996 from $40.7 million in 1995. As a percentage of
revenue, salaries, wages and benefits decreased to 17.6% in 1996 from 21.2%
in 1995.
A reduction in the percentage of employee drivers operating the
Company's tractor fleet and a corresponding increase in the percentage of
the fleet being provided by independent contractors was the primary cause.
During 1996, employee drivers accounted for 40% and independent contractors
60% of the total fleet miles, compared with 51% and 49%, respectively, in
1995. Rent and purchased transportation increased $29.9 million (46.7%),
to $94.0 million in 1996 from $64.0 million in 1995. As a percentage of
revenue, rent and purchased transportation increased to 41.0% in 1996 from
33.4% in 1995. This reflected the Company's increased reliance upon
independent contractors.
Operations and maintenance increased $1.1 million (5.3%), to $22.2
million in 1996 from $21.0 million in 1995. As a percentage of revenue,
operations and maintenance decreased to 9.7% in 1996 from 11.0% in 1995.
Higher fuel prices incurred in 1996 were offset as a result of the increase
in the percentage of the Company's fleet being operated by independent
contractors, who pay their own fuel, maintenance, and repair cost.
Taxes and licenses increased $0.4 million (8.5%), to $5.7 million in
1996 from $5.2 million in 1995. As a percentage of revenue, taxes and
licenses decreased to 2.5% in 1996 from 2.7% in 1995. The cost increase
was primarily attributable to the increase in fleet size. The reduction in
percentage of revenue can be attributed to improved utilization of
equipment.
Insurance and claims increased $2.0 million (25.2%), to $10.0
million in 1996 from $8.0 million in 1995. As a percentage of revenue,
insurance and claims increased to 4.4% in 1996 from 4.2% in 1995.
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.
Management believed that the change as a percentage of revenue was
insignificant.
Communications and utilities decreased $0.4 million (15.8%), to $2.2
million in 1996 from $2.6 in 1995. As a percentage of revenue,
communications and utilities decreased to 0.9% in 1996 from 1.3% in 1995
primarily due to the increase in percentage of the Company's fleet being
operated by independent contractors.
Depreciation decreased $1.5 million (9.9%), to $13.6 million in 1996
from $15.1 million in 1995. As a percentage of revenue, depreciation
decreased to 5.9% in 1996 from 7.9% in 1995. The decrease resulted from
the growth in the independent contractor fleet.
Other operating expenses increased $0.8 million (21.1%), to $4.5
million in 1996 from $3.7 million in 1995. As a percentage of revenue,
other operating expenses remained unchanged from 1996 to 1995. Other
operating expenses consists of pallet cost, driver recruiting expenses and
administrative costs.
Primarily as a result of the foregoing, the Company's operating
ratio was 83.9% in 1996 compared with 83.7% in 1995.
Interest income (net) increased $1.3 million (86.3%), to $2.8
million in 1996 from $1.5 million in 1995. As a percentage of revenue,
interest income (net) increased to 1.2% in 1996 from 0.8% in 1995. At
December 31, 1996, the Company had repaid all debt. The Company had
$91.1 million in cash, cash equivalents, and municipal bonds at
December 31, 1996.
The Company's effective tax rate remained at 37% in 1996 and in
1995.
As a result of the foregoing, net income increased $4.4 million
(21.6%), to $25.0 million in 1996 (10.9% of revenue) from $20.6 million in
1995 (10.7% of revenue) .
Liquidity and Capital Resources
The growth of the Company's business requires significant
investments in new revenue equipment. Historically the Company has been
debt-free, financing revenue equipment through cash flow from operations.
The Company also obtains tractor capacity by utilizing independent
contractors, who provide a tractor and bear all associated operating and
financing expenses.
Cash and cash equivalents and municipal notes increased to $96.0
million as of December 31, 1997 from $91.1 million at December 31, 1996.
The Company's policy is to purchase only high quality liquid investments.
Net cash provided by operations was $46.8 million in 1997, $48.3
million in 1996, and $38.1 million in 1995. The primary source of funds in
1997 was net income of $30.1 million increased by non-cash adjustments
including depreciation and amortization of $17.5 million.
Net cash used in investment and financing activities was $30.1
million in 1997, $34.9 million in 1996, and $1.9 million in 1995. Such
amounts were used primarily to acquire A & M Express, purchase municipal
bonds, purchase revenue equipment, and to pay off long term debt. The
Company expects to finance future growth in its company-owned fleet
primarily through cash flow from operations and cash equivalents currently
on hand.(*)
Trade receivables increased to $24.2 million as of December 31, 1997
from $15.7 million as of December 31, 1996 primarily due to a 17.5%
increase in fourth quarter operating revenue and the acquisition of A & M
Express. Cash paid for income taxes increased to $19.9 million in 1997
from $15.3 million in 1996. Higher income taxes on a cash basis are
primarily due to increased income and non-deductible insurance accruals.
Accounts payable and accrued liabilities decreased to $8.9 million
as of December 31, 1997 from $11.4 million as of December 31, 1996 due
mostly to a decrease in payables due to revenue equipment suppliers.
Insurance accruals increased to $34.7 million as of December 31, 1997 from
$30.1 million as of December 31, 1996 due to the significant increase of
the Company's fleet in recent years. The Company's insurance program for
liability, physical damage and cargo damage involves self insurance
retentions for the first $500,000. Claims in excess of the risk retention
are covered by insurance in amounts which management considers adequate.
The Company accrues the estimated cost of the uninsured portion of the
pending claims. These accruals are estimated based on management's
evaluation of the nature and severity of individual claims and an estimate
of future claims development based on historical claim development trends.
If adjustments to previously established accruals are required, such
amounts are included in operating expenses. In 1997, 1996 and 1995, such
adjustments were not significant.
The Company has one customer who accounted for more than 10% of the
Company's sales for the year ended December 31, 1997. As disclosed in
footnote three to the financial statements, historically a small number of
customers generate a substantial percentage of revenue. In 1997 the
Company's largest customer generated approximately 15% of operating
revenue. The loss of a major customer could negatively impact the Company.
Any negative impact would be mitigated by two factors: (1) the strong
overall financial position of the Company (no long term debt at December
31, 1997 and $96.0 million in cash, cash equivalents and municipal notes)
and (2) the flexibility inherent in having a substantial percentage of
fleet miles being generated by independent contractors who provide their
own tractors.(*)
Based on the Company's strong financial position (current ratio of
2.47 and no debt), management foresees no significant barriers to obtaining
sufficient financing, if necessary, to continue with growth plans. (*)
(*) Forward - looking statements
Inflation and Fuel Cost
Most of the Company's operating expenses are inflation-sensitive,
with inflation generally producing increased costs of operation. During
the past three years, the most significant effects of inflation have been
on revenue equipment prices and the compensation paid to drivers.
Innovations in equipment technology and comfort have resulted in higher
tractor prices, and there has been an industry-wide increase in wages paid
to attract and retain qualified drivers. The Company historically has
limited the effects of inflation through increases in freight rates and
certain cost control efforts. The failure to obtain rate increases in the
future could have an adverse effect on profitability. In addition to
inflation, fluctuations in fuel prices can affect profitability. Most of
the Company's contracts with customers contain fuel surcharge provisions.
Although the Company historically has been able to pass through most
long-term increases in fuel prices and taxes to customers in the form of
surcharges and higher rates, shorter-term increases are not fully
recovered. (*)
Seasonality
The nature of the Company's primary traffic (appliances, automotive
parts, paper products, electrical equipment, and packaged foodstuffs)
causes it to be distributed with relative uniformity throughout the year.
However, earnings have historically been affected adversely during the
fourth quarter as a result of reduced shipments by customers during the
winter holiday season. In addition, the Company's operating expenses
historically have been higher during the winter months due to increased
operating costs in colder weather and higher fuel consumption due to
increased engine idling.
Year 2000
The Company has assessed the key financial, informational and
operational systems. Management does not anticipate that the Company will
encounter significant operational issues related to the year 2000.
Furthermore, the financial impact of making required systems changes is not
expected to be material to the Company's consolidated financial position,
results of operations or cash flows.
Forward-Looking Information
Certain matters discussed in this annual report and marked with an
asterisk are "forward-looking statements" intended to qualify for the safe
harbors from liability established by Private Securities Litigation Reform
Act of 1995. Such statements address future plans, objectives,
expectations and events or conditions concerning various matters such as
capital expenditures, litigation, liquidity and capital resources, and
accounting matters. Actual results in each case could differ materially
from those currently anticipated in such statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's audited financial statements, including its
consolidated balance sheets and consolidated statements of operations, cash
flows, and stockholders' equity, and notes related thereto, are contained
at pages 16 to 26 of this report. Selected quarterly data is contained at
page 26. Such information is incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
(*) Forward - looking statement
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information respecting executive officers and directors set
forth under the caption "Election of Directors- Information Concerning
Executive Officers and Directors" and "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" on pages 2 through 4 and 6 of the
registrant's proxy statement relating to its 1997 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange
Commission in accordance with Rule 14a-6 promulgated under the Securities
Exchange Act of 1934 (the "Proxy Statement"), is incorporated by reference.
With the exception of the foregoing information and other information
specifically incorporated by reference into this Form 10-K report, the
Proxy Statement is not being filed as a part hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information respecting executive compensation set forth under
the caption "Executive Compensation" on pages 5 and 6 of the Proxy
Statement is incorporated herein by reference; provided, however, that the
"Compensation Committee Report on Executive Compensation" is not
incorporated by reference here.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information respecting security ownership of certain beneficial
owners and management included under the caption "Principal Stockholders
and Stockholdings of Management" on page 7 of the Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information respecting certain relationships and transactions of
management set forth under the captions "Board of Directors Interlocks and
Insider Participation / Certain Transactions and Relationships" on page 4
of the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON
FORM 8-K
(a) 1. Financial Statements and Schedules
The Company's audited financial statements are set forth on the
following pages of this report:
Page
Reports of Independent Public Accountants . . . . . . . . . . . . . . . 16
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . 17
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . 18
Consolidated Statements of Stockholders' Equity . . . . . . . . . . . . 19
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . 20
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . 21-26
(a) 2. Financial Statement Schedule
Page
Valuation and Qualifying Accounts and Reserves . . . . . . . . . . . . 26
(a) 3. Exhibits required by Item 601 of Regulation S-K are listed
below.
(b) Reports on Form 8-K
The Company did not file a Form 8-K during the last quarter
of 1997.
(c) Exhibits
Exhibit No. Document Page of Method of Filing
3.1 Articles of Incorporation Incorporated by reference to the
Company's registration statement
on Form S-1, Registration No. 33-8165,
effective November 5, 1986.
3.2 Bylaws Incorporated by reference to the
Company's registration statement on
Form S-1, Registration No. 33-8165,
effective November 5, 1986.
3.3 Certificate of Amendment Incorporated by reference to the
to Articles of Incorporation 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.
4.3 Certificate of Amendment Incorporated by reference to the
to Articles of Incorporation Company's Form 10-QA, for the quarter
ended June 30, 1997, dated
March 20, 1998.
9.1 Voting Trust Agreement dated Filed Herwewith.
June 6, 1997 among the
Gerdin Educational Trusts and
Larry Crouse voting trustee.
10.1 Business Property Lease Incorporated by reference to the
between Russell A. Gerdin as Company's Form 10-K for the
Lessor and the Company as year ended December 31, 1996.
Lessee, regarding the Commission file no.0-15087,
Company's headquarters at dated March 27, 1997.
2777 Heartland Drive,
Coralville, Iowa 52241
10.2 Form of Independent Incorporated by reference to the
Contractor Operating Company's Form 10-K for the
Agreement Between the year ended December 31, 1993.
Company and its Commission file no. 0-15087.
Independent contractor
providers of tractors
10.3 Description of Key Incorporated by reference to the
Management Deferred Incentive Company's Form 10-K for the
Compensation Arrangement year ended December 31, 1993.
Commission file no. 0-15087.
21 Subsidiaries of the Filed herewith.
Registrant
27 Financial Data Schedule Filed herewith.
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 24, 1998 By: /s/ Russell A. Gerdin
Russell A. Gerdin
President and Secretary
Pursuant to the Securities Act of 1934, this report has been signed
below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
Signature Title Date
/s/ Russell A. Gerdin Chairman, President and Chief
Russell A. Gerdin Executive Officer(Principal
Executive Officer), Secretary March 24, 1998
/s/ John P. Cosaert
John P. Cosaert Vice President of Finance
(Principal Financial Officer and
Principal Accounting Officer) and
Treasurer March 24, 1998
/s/ Richard O. Jacobson
Richard O. Jacobson Director March 24, 1998
/s/ Michael J. Gerdin
Michael J. Gerdin Director March 24, 1998
/s/ Benjamin J. Allen
Benjamin J. Allen Director March 24, 1998
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, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. 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 generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Heartland
Express, Inc. and Subsidiaries, as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. Schedule II is presented for
purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly state in all material
respects the financial data required to be set forth therein in relation to
the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Kansas City, Missouri
January 23, 1998
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31
ASSETS 1997 1996
CURRENT ASSETS
Cash and cash equivalents $ 76,240,422 $ 59,593,468
Trade receivables, less allowance: 1997 $491,971; 1996 $402,812 24,247,307 15,696,591
Prepaid tires and tubes 1,617,464 1,213,210
Investments 19,769,765 31,461,259
Deferred income taxes 15,841,000 13,057,000
Other current assets 280,243 395,594
----------- -----------
Total current assets 137,996,201 121,417,122
----------- -----------
PROPERTY AND EQUIPMENT
Land and land improvements 3,936,823 2,401,010
Buildings 9,215,477 6,886,615
Furniture and fixtures 1,982,818 2,125,847
Shop and service equipment 1,351,440 1,245,337
Revenue equipment 118,819,981 97,433,211
----------- -----------
135,306,559 110,092,020
Less accumulated depreciation and amortization 54,336,481 41,697,199
----------- -----------
Property and equipment, net 80,970,078 68,394,821
----------- -----------
OTHER ASSETS 6,500,395 1,692,279
----------- -----------
$225,466,674 $191,504,222
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 8,857,820 $ 11,384,188
Compensation and benefits 4,992,714 3,878,002
Income taxes payable 4,224,150 3,913,871
Insurance accruals 34,671,707 30,085,809
Other accruals 3,080,223 2,310,185
----------- -----------
Total current liabilities 55,826,614 51,572,055
----------- -----------
DEFERRED INCOME TAXES 15,901,000 16,266,000
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY
Capital Stock:
Preferred, par value 1997 $.01; 1996 $.10; authorized 5,000,000
shares; none issued -- --
Common, par value 1997 $.01; 1996 $.10; authorized shares 1997
395,000,000; 1996 35,000,000; issued and outstanding 30,000,000 300,000 3,000,000
Additional paid-in capital 6,608,170 3,908,170
Retained earnings 146,830,890 116,757,997
----------- -----------
153,739,060 123,666,167
----------- -----------
$225,466,674 $191,504,222
The accompanying notes are an integral part of these financial statements.
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31
1997 1996 1995
------------- ------------- -------------
Operating revenue $ 262,504,156 $ 229,011,108 $ 191,506,741
------------- ------------- -------------
Operating expenses:
Salaries, wages and benefits 49,534,386 40,260,524 40,714,787
Rent and purchased transportation 101,169,061 93,961,180 64,043,296
Operations and maintenance 27,739,355 22,158,279 21,035,067
Taxes and licenses 6,049,155 5,692,592 5,246,427
Insurance and claims 10,404,326 9,975,716 7,966,760
Communications and utilities 2,681,489 2,158,489 2,562,142
Depreciation 16,751,384 13,571,284 15,065,539
Other operating expenses 5,047,624 4,534,472 3,745,381
Gain on sale of fixed assets (58,903) (189,041) (27,134)
------------- ------------- -------------
219,317,877 192,123,495 160,352,265
------------- ------------- -------------
Operating income 43,186,279 36,887,613 31,154,476
Interest income 3,846,157 2,871,089 1,609,572
Interest expense (64,571) (30,943) (85,173)
------------- ------------- -------------
Income before income taxes 46,967,865 39,727,759 32,678,875
Federal and state income taxes 16,894,972 14,697,268 12,093,401
------------- ------------- -------------
Net income $ 30,072,893 $ 25,030,491 $ 20,585,474
============= ============= =============
Basic earnings per share $ 1.00 $ 0.83 $ 0.69
============= ============= =============
Basic weighted average shares
outstanding 30,000,000 $ 30,000,000 $ 30,035,943
============= ============= =============
The accompanying notes are an integral part of these financial statements.
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31
Capital Additional
Stock, Paid-In Retained
Common Capital Earnings Total
---------- ----------- ------------ ------------
Balance, December 31, 1994 $3,003,921 $ 3,904,249 $ 71,142,032 $ 78,050,202
Shares retired (3,921) 3,921 -- --
Net income -- -- 20,585,474 20,585,474
---------- ----------- ------------ ------------
Balance, December 31, 1995 3,000,000 3,908,170 91,727,506 98,635,676
Net income 25,030,491 25,030,491
---------- ----------- ------------ ------------
Balance, December 31, 1996 3,000,000 3,908,170 116,757,997 123,666,167
Reduction of par value (2,700,000) 2,700,000
Net income -- -- 30,072,893 30,072,893
---------- ----------- ------------ ------------
Balance, December 31, 1997 $ 300,000 $ 6,608,170 $146,830,890 $153,739,060
========== =========== ============ ============
The accompanying notes are an integral part of these financial statements.
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
1997 1996 1995
------------ ------------ ------------
OPERATING ACTIVITIES
Net Income $ 30,072,893 $ 25,030,491 $ 20,585,474
Adjustments to reconcile to net cash provided by
operating activities:
Depreciation and amortization 17,488,602 13,956,088 15,902,128
Deferred income taxes (3,149,000) (2,807,000) 905,000
Gain on sale of fixed assets (58,903) (189,041) (27,134)
Changes in certain working capital items:
Trade receivables (4,623,019) 2,338,411 (591,568)
Other current assets 446,071 (14,758) 316,568
Prepaids 1,031,682 2,605,830 2,339,937
Accounts payable and accrued expenses 5,413,840 5,159,151 (135,813)
Accrued income taxes 138,279 2,235,057 (1,187,088)
------------ ------------ ------------
Net cash provided by operating activities 46,760,445 48,314,229 38,107,504
------------ ------------ ------------
INVESTING ACTIVITIES
Proceeds from sale of property and equipment 271,721 393,513 47,085
Capital additions (22,384,516) (7,491,563) (382,181)
Net sale (purchase) of municipal bonds 11,691,494 (26,941,798) (1,662,903)
Other (1,150,055) (137,619) 538,275
------------ ------------ ------------
Net cash used in investment activities (11,571,356) (34,177,467) (1,459,724)
------------ ------------ ------------
FINANCING ACTIVITIES
Principal payments on long-term notes (18,542,135) (705,437) (450,531)
------------ ------------ ------------
Net cash used in financing activities (18,542,135) (705,437) (450,531)
------------ ------------ ------------
Net increase in cash and cash equivalents 16,646,954 13,431,325 36,197,249
CASH AND CASH EQUIVALENTS
Beginning of year 59,593,468 46,162,143 9,964,894
------------ ------------ ------------
End of year $ 76,240,422 $ 59,593,468 $ 46,162,143
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 64,571 $ 30,943 $ 85,174
Income taxes $ 19,905,693 $ 15,269,211 $ 12,372,064
Noncash investing activities:
Book value of revenue equipment traded $ 3,062,392 $ 5,585,217 $ 23,572,701
The accompanying notes are an integral part of these financial statements.
Note 1. Nature of Business and Significant Accounting Policies
Nature of Business:
Heartland Express, Inc., (the "Company") is a short-to-medium-haul,
irregular route, truckload carrier of general commodities. The Company's
primary traffic lanes are between customer locations east of the Rocky
Mountains, with selected service to the West.
Significant Accounting Policies:
Principles of Consolidation:
The accompanying consolidated financial statements include parent company,
Heartland Express, Inc., and its subsidiaries, all of which are wholly
owned. All material intercompany items and transactions have been
eliminated in consolidation.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principals 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 cash results could differ from these
estimates.
Cash and Cash Equivalents:
Cash equivalents are short-term, highly liquid investments with original
maturities of three months or less. Cash equivalents consists of municipal
demand bonds, funds and trusts investing in those notes and auction
preferred stocks.
Investments:
Substantially all investments represent municipal bonds or municipal bond
funds with a maturity of one year or less. These investments are
held-to-maturity and stated at amortized cost. Investment income received
is generally exempt from federal income taxes.
Revenue and Expense Recognition:
Operating revenues are recognized on the date the freight is delivered and
expenses recognized as incurred.
Property and Equipment:
Property and equipment are stated at cost. Generally, at the time of
trade-in, the cost of new equipment is recorded at an amount equal to the
net book value of the traded equipment plus cash paid. Depreciation is
computed by the straight-line method for all assets other than tractors,
which are depreciated by the 125% declining balance method. Trailers are
depreciated to a 30% salvage value except for trailers purchased after
January 1, 1996 which have no salvage value. Lives of the assets are as
follows:
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTED TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Land improvements and building 3-30
Furniture and fixtures 2-3
Shop and service equipment 3-5
Revenue equipment 5-7
Assets to be disposed of are measured at the lower of carrying amount or
fair market value, as estimated by management, less costs to sell.
Tires and Tubes:
The cost of tires and tubes on new revenue equipment is carried as a
prepayment and amortized over the estimated tire life of two years.
Replacement tires (including recapped tires) are expensed when purchased.
Earnings Per Share:
In February, 1997 the Financial Accounting Standards Board issued
Statements of Financial Accounting Standard No. 128, (SFAS 128) "Earnings
Per Share", effective for periods ending after December 15, 1997, requiring
presentation of basic and diluted earnings per share. SFAS 128 superceeds
Accounting Principals Board Opinion (APB) No. 15 and related pronouncements
and replaces the computations of primary and fully diluted earnings per
share (EPS) with basic and diluted EPS respectively. Basic earnings per
share is based upon the weighted average common and common equivalent
shares outstanding during each year. Heartland has no common stock
equivalents. There is no effect of this accounting change on previously
reported earnings per share.
Reclassifications:
Certain reclassifications have been made to the prior year financial
statements to conform with the current year presentation.
Note 2. Concentrations of Credit Risk and Major Customers
The Company's major customers
The Company's major customers represent the consumer appliances, food
products and automotive industries. Credit is usually granted to customers
on an unsecured basis. The Company's five largest customers account for
39%, 44%, and 48% of revenues for the years ended December 31, 1997, 1996
and 1995 respectively. Operating revenue from customers with revenue
exceeding 10% of total gross revenues in 1997, 1996 or 1995 approximated:
CUSTOMER 1997 1996 1995
- -------- ---- ---- ----
1 $39,000,000 $35,000,000 $28,000,000
2 $16,000,000 $22,000,000 $21,000,000
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Acquisition
On July 14, 1997, the Company acquired the outstanding stock of A & M
Express, Inc., ( A & M) a Kingsport, Tennessee based truckload carrier.
A & M, a dry van carrier, operates primarily in the eastern half of the
United States. The acquisition was accounted for by the purchase method of
accounting. The results of A & M's operations are reflected beginning with
the effective date of the acquisition (July 1, 1997). In 1997, the Company
repaid approximately $18.5 million in debt which was assumed in connection
with the acquisition. The acquisition of A & M did not have a material
impact on the results of operations for the year ending December 31, 1997.
Note 4. Income Taxes
Deferred income taxes are determined based upon the differences between the
financial reporting and tax basis of the Company's assets and liabilities.
Deferred taxes are provided at the enacted tax rates to be in effect when
the differences reverse.
Deferred tax assets and liabilities as of December 31 are as follows:
1997 1996
----------- ----------
Deferred income tax liabilities, related to
property and equipment $15,901,000 $16,266,000
=========== ===========
Deferred income tax assets:
Allowance for doubtful accounts $ 153,000 $ 153,000
Accrued expenses 2,428,000 1,914,000
Insurance accruals 12,740,000 10,938,000
Other 520,000 52,000
----------- -----------
Deferred income tax assets $15,841,000 $13,057,000
=========== ===========
The income tax provision is as follows:
1997 1996 1995
----------- ----------- -----------
Current income taxes:
Federal $18,697,215 $16,523,897 $10,792,272
State 1,346,757 980,371 396,129
----------- ----------- -----------
$20,043,972 $17,504,268 $11,188,401
=========== =========== ===========
Deferred income taxes:
Federal $(3,023,040) $(2,689,106) $ 873,000
State (125,960) (117,894) 32,000
----------- ----------- -----------
$(3,149,000) $(2,807,000) $905,000
----------- ----------- -----------
Total $16,894,972 $14,697,268 $12,093,401
=========== =========== ===========
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The income tax provision differs from the amount determined by applying the
U.S. federal tax rate as follows:
1997 1996 1995
----------- ----------- -----------
Federal tax at statutory rate (35%) $16,438,753 $13,904,716 $11,437,606
State taxes, net of federal benefit 875,000 648,000 340,000
Non-taxable interest income (1,105,000) (797,000) (441,000)
Other 686,219 941,552 756,795
----------- ----------- -----------
$16,894,972 $14,697,268 $12,093,401
=========== =========== ===========
Note 5. 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 $23,500 plus
the payment of all property taxes, insurance and maintenance. The lease
expires May 31, 2000 and contains a five year renewal option.
The total minimum rental commitment under the building lease is as follows:
Year ending December 31:
1998 282,000
1999 282,000
2000 117,500
========
$681,500
========
Rent expense to the Company's president totaled $282,000 for the years
ended December 31, 1997 and 1996, and $239,500 for the year ended December
31,1995. Rentals paid were increased in June, 1995 as a result of
additional buildings being added to the lease agreement. The Company also
maintains cash accounts with a bank owned by the Company's president. The
Company sold a subsidiary to a stockholder and former director for
$150,000, which approximated book value, in 1996. The Company also paid
this shareholder $242,000 in connection with the settlement of an
employment agreement and the shareholder repaid a note due to the Company
for $340,000, plus accrued interest, in 1996.
Note 6. Accident and Workers' Compensation Claims
Accident and workers' compensation claims include the estimated
settlements, settlement expenses and an allowance for claims incurred but
not yet reported for property damage, personal injury and public liability
losses from vehicle accidents and cargo losses as well as workers'
compensation claims for amounts not covered by insurance.
Accrued claims are determined based on estimates of the ultimate cost of
settling reported and unreported claims, including expected settlement
expenses. Such estimates are based on management's evaluation of the
nature and severity of individual claims and an estimate of future claims
development based on historical claims development trends. Since the
reported liability is an estimate, the ultimate liability may be more or
less than reported. If adjustments to previously established accruals are
required, such amounts are included in operating expenses. In 1997, 1996
and 1995, such adjustments were not significant.
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company acts as a self-insurer for liability up to $500,000 for any
single occurrence involving cargo, personal injury or property damage.
Liability in excess of this amount is assumed by an insurance underwriter.
The Company acts as a self-insurer for workers' compensation liability up
to a maximum liability of $300,000 per claim. Liability in excess of this
amount is assumed by an insurance underwriter. The State of Iowa has
required the Company to deposit $700,000 into a trust fund as part of the
self-insurance program. This deposit has been classified with other
long-term assets on the balance sheet. In addition, the Company has
provided its insurance carriers with letters of credit and deposits of
approximately $7.0 million in connection with its liability and workers'
compensation insurance arrangements.
Note 7. Stockholders' Equity
On February 18, 1997, the Company amended its articles of incorporation to
increase authorized capital to four hundred million (400,000,000) shares of
capital stock (395,000,000 shares of common stock and 5,000,000 shares of
preferred stock) and reduced the par value from $0.10 to $0.01 per share.
On September 12, 1996 the Company's Board of Directors approved a 1.5 for
1.0 split of the Company's common stock effected in the form of a 50% stock
dividend for stockholders of record as of September 23, 1996. A total of
10,000,000 common shares were issued. On October 26, 1995, the Company's
Board of Directors approved a 1.54 for 1.0 split of the Company's common
stock effected in the form of a 54% stock dividend for stockholders of
record as of November 20, 1995. A total of 7,009,540 common shares were
issued. All share and per share amounts, and capital accounts, have been
restated to retroactively reflect the stock splits.
Note 8. Profit Sharing Plan and Retirement Plan
The Company has a profit sharing plan with 401(k) plan features whereby the
Company may make contributions to the plan at its discretion. Individual
employees may make voluntary contributions to the plan. Company
contributions totaled $541,000, $529,000 and $434,000 for the years ended
December 31, 1997, 1996, and 1995, respectively.
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Note 9. Commitments and Contingencies
Various claims and legal actions are pending against the Company. In
management's opinion, the resolution of these matters will not materially
impact the Company's financial condition or results of operations
Note 10. Quarterly Financial Information (Unaudited)
First Second Third Fourth
------- ------- ------- -------
(In Thousands, Except Per Share Data)
Year ended December 31, 1997
Operating revenue $59,887 $65,381 $70,180 $67,056
Operating income 9,642 11,196 12,084 10,264
Income before income taxes 10,521 12,269 12,928 11,250
Net income 6,628 7,729 8,403 7,313
Basic earnings per share 0.22 0.26 0.28 0.24
Year ended December 31, 1996
Operating revenue $54,363 $59,384 $58,178 $57,086
Operating income 8,480 9,607 9,761 9,040
Income before income taxes 9,096 10,207 10,460 9,965
Net income 5,731 6,431 6,589 6,279
Basic earnings per share 0.19 0.21 0.22 0.21
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A Column B Column C Column D Column E
- ------------------------------- --------- --------------------- --------- ---------
Charged 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, 1997 $ 402,812 $ 79,526 $ 250,000* $ 240,367 $ 491,971
Year ended December 31, 1996 $ 402,812 $ 33,710 $ -- $ 33,710 $ 402,812
Year ended December 31, 1995 $ 402,812 $ 7,428 $ -- $ 7,428 $ 402,812
(*) Acquired A & M Express reserves.