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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One) The Company's primary customers include retailers, manufacturers,
and third party logistics providers.
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1998
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
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the registrant's definitive proxy statement
incorporated by reference in Part III of this Form 10-K. [X]
The aggregate market value of the shares of the registrant's $0.01 par value
common stock held by non-affiliates of the registrant as of March 15, 1999 was
$265,247,246 (based upon $16.19 per share being the average of the closing bid
and asked price on that date as reported by NASDAQ). In making this calculation
the issuer has assumed, without admitting for any purpose, that all executive
officers and directors of the registrant, and no other persons, are affiliates.
The number of shares outstanding of the Registrant's common stock as March 15,
1999 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 1999 annual meeting of
stockholders that will be filed no later than April 30, 1999.
1
Cross Reference Index
The following cross reference index indicates that document and location of the
information contained herein and incorporated by reference into the Form 10-K.
Document and Location
Part I
Item 1 Business Page 3-5 herein
Item 2 Properties Page 5 herein
Item 3 Legal Proceedings Page 6 herein
Item 4 Submission of Matters to a Vote of Stockholders Page 6 herein
Part II
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters Page 6 herein
Item 6 Selected Financial Data Page 7 herein
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations Page 8-12 herein
Item 8 Financial Statements and Supplementary Data Page 13 and
17-27 herein
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure Page 13 herein
Part III
Item 10 Directors and Executive Officers of the Registrant Pages 2 to 4 of
Proxy Statement
Item 11 Executive Compensation Pages 4 and 5 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 14 and 15
herein
This report contains "forward-looking statements" in paragraphs that
are marked with an asterisk. These statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
anticipated. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Cautionary Statement Regarding Forward-Looking
Statements" for additional information and factors to be considered concerning
forward-looking statements.
2
PART I
ITEM 1. BUSINESS
General
Heartland Express, Inc. ("Heartland" or the "Company") is a short-to
medium haul truckload carrier based near Iowa City, Iowa. The Company provides
nationwide transportation service to major shippers, using late-model equipment
and a balanced fleet of company-owned and owner-operator tractors. The Company's
primary traffic lanes are between customer locations east of the Rocky
Mountains, with selected service to the West. Management believes that the
Company's service standards and equipment accessibility have made it a core
carrier to many of its major customers.
Heartland was founded by Russell A. Gerdin in 1978 and became publicly
traded in November 1986. Over the twelve years from 1986 to 1998, Heartland has
grown to $263.5 million in revenue from $21.6 million and net income has
increased to $33.1 million from $3.0 million. Much of this growth has been
attributable to expanding service for existing customers, acquiring new
customers, and continued expansion of the Company's operating regions.
In addition to internal growth, Heartland has completed four
acquisitions since 1987. These acquisitions have enabled Heartland to solidify
its position within historical regions, expand its customer base in the East and
Northeast United States, and to pursue new customer relationships in new
markets. Most recently, in July 1997, Heartland increased its Eastern operations
by acquiring A & M Express, Inc. located in Kingsport, Tennessee. A & M Express,
Inc. is predominately a dry-van carrier that operates a primarily company-owned
fleet. A & M reported gross revenues of approximately $28 million in 1996. A & M
Express generates a small portion of its revenues from the flat bed market. The
Company is operating A & M Express as a separate subsidiary. However,
administrative functions are being performed at Heartland's corporate
headquarters. The purchase of A & M was funded by cash and investments.
Heartland Express, Inc. is a holding company incorporated in Nevada,
which owns, directly or indirectly, all of the stock of Heartland Express Inc.
of Iowa, Heartland Equipment, Inc., Munson Transportation, Inc., Munson
Transport Service, Inc., Munson Equipment, Inc., and A & M Express, Inc.
Operations
Heartland's operations department focuses on the successful execution
of customer expectations and providing consistent opportunity for the fleet of
employee drivers and independent contractors, while maximizing equipment
utilization. These objectives require a combined effort of marketing, customer
service, transportation planning, and fleet management.
The Company's customer service employees are responsible for
maintaining the continuity between the customer's needs and Heartland's ability
to meet those needs by communicating customer's expectations to the fleet
management group. They are charged with development of customer relationships,
ensuring service standards, coordinating proper freight-to-capacity balancing,
and trailer asset management.
Transportation planning employees are responsible for daily tactical
decisions pertaining to matching the Company's freight with the appropriate
capacity within geographical service areas. They assign orders to drivers based
on well-defined criteria, such as driver safety and DOT compliance, customer
needs and service requirements, equipment utilization, driver time at home,
operational efficiency, and equipment maintenance needs.
Fleet management employees are charged with the management and
development of their fleets of drivers. Additionally, they maximize the capacity
that is available to the organization to meet the service needs of the Company's
customers. Their responsibilities include meeting the needs of the drivers
within the standards that have been set by the organization and communicating
the requirements of the customers to the drivers on each order to ensure
successful execution.
Serving the short to medium haul market (592-mile average length of
haul in 1998) permits the Company to use primarily single, rather than team
drivers and dispatch most trailers directly from origin to destination without
an intermediate equipment change other than for driver scheduling purposes.
3
Heartland also operates 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. Freight transported for the
most part is non-perishable and predominantly does not require driver handling.
Heartland's reputation for quality service, reliable equipment, and equipment
availability makes it a core carrier to many of its customers.
Heartland seeks to transport freight that will complement traffic in
its existing service areas and remain consistent with the Company's focus on
short-to-medium haul and regional distribution markets. Management believes that
building additional service in the Company's primary traffic lanes will assist
in controlling empty miles and enhancing driver "home time."
The Company's 25, 10, and 5 largest customers accounted for 65%, 49%,
and 35% of revenue, respectively, in 1998. The Company's primary customers
include retailers, manufacturers, and third party logistics providers. The
distribution of customers is not significantly different from the previous year.
Sears Logistics Services accounted for 14% of revenue in 1998. 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, 1998, Heartland employed 1,213 persons.
The Company also contracted with independent contractors to provide and operate
tractors. Independent contractors own their own tractors and are responsible for
all associated expenses, including financing costs, fuel, maintenance,
insurance, and taxes. The Company historically has operated a balanced fleet of
company and independent contractor tractors. Management believes that a balanced
fleet compliments the Company's recruiting efforts and offers greater
flexibility in responding to fluctuations in shipper demand.
Management's strategy for both employee and independent contractor
drivers is to (1) hire the best; (2) promote retention through financial
incentives, positive working conditions, and targeting freight that requires
little or no handling; and (3) minimize safety problems through careful
screening, mandatory drug testing, continuous training, and financial rewards
for accident-free driving. Heartland also seeks to minimize turnover of its
employee drivers by providing modern, comfortable equipment and of all drivers
by regularly scheduling them to their homes. All drivers are compensated for
empty miles as well as loaded miles. This provides an incentive for the Company
to minimize empty miles and at the same time does not penalize drivers for
inefficiencies of operations that are beyond their control.
Heartland is not a party to a collective bargaining agreement.
Management believes that the Company has good relationships with its employees
and independent contractors.
4
Revenue Equipment
Heartland's management believes that operating high-quality, efficient
equipment is an important part of providing excellent service to customers. The
Company's policy is to operate its tractors while under warranty to minimize
repair and maintenance cost and reduce service interruptions caused by
breakdowns. In addition, the Company's preventive maintenance program is
designed to minimize equipment downtime, facilitate customer service, and
enhance trade value when equipment is replaced. Factors considered when
purchasing new equipment include fuel economy, price, technology, warranty
terms, manufacturer support, driver comfort, and resale value.
Competition
The truckload industry is highly competitive and includes thousands of
carriers, none of which dominates the market. The Company competes primarily
with other truckload carriers, and to a lesser extent with railroads, intermodal
service, less-than-truckload carriers, and private fleets operated by existing
and potential customers. Although intermodal and rail service has improved in
recent years, such service has not been a major factor in the Company's
short-to-medium haul traffic lanes (592-mile average length of haul).
Historically, competition has created downward pressure on the truckload
industry's pricing structure. Management believes that competition for the
freight targeted by the Company is based primarily upon service and efficiency
and to a lesser degree upon freight rates.
Regulation
The Company is a common and contract motor carrier of general
commodities. Historically, the Interstate Commerce Commission (the "ICC") and
various state agencies regulated motor carriers' operating rights, accounting
systems, mergers and acquisitions, periodic financial reporting, and other
matters. In 1995 federal legislation preempted state regulation of prices,
routes, and services of motor carriers and eliminated the ICC. Several ICC
functions were transferred to the Department of Transportation (the "DOT").
Management does not believe that regulation by the DOT or by the states in their
remaining areas of authority will have a material effect on the Company's
operations. The Company's employee and independent contractor drivers also must
comply with the safety and fitness regulations promulgated by the DOT, including
those relating to drug and alcohol testing and hours of service.
The Company's operations are subject to various federal, state, and
local environmental laws and regulations, implemented principally by the EPA and
similar state regulatory agencies, governing the management of hazardous wastes,
other discharge of pollutants into the air and surface and underground waters,
and the disposal of certain substances. Management believes that its operations
are in material compliance with current laws and regulations and does not know
of any existing condition that would cause compliance with applicable
environmental regulations to have a material effect on the Company's capital
expenditures, earnings and competitive position. In the event the Company should
fail to comply with applicable regulations, the Company could be subject to
substantial fines or penalties and to civil or criminal liability.
ITEM 2. PROPERTIES
Heartland's headquarters is located adjacent to Interstate 80, near
Iowa City, Iowa. The facilities include five acres of land, two office buildings
of approximately 25,000 square feet combined and a storage building, all leased
from the Company's president and principal stockholder. Company-owned facilities
at this location include three tractor and trailer maintenance garages totaling
approximately 26,500 square feet, and a safety and service complex adjacent to
Heartland's corporate offices. The adjacent facility provides the Company with
six acres of additional trailer parking space, a drive-through inspection bay,
an automatic truck wash facility, and 6,000 square feet of office space and
driver facilities. The Company also owns a motel located adjacent to its
corporate offices, which functions as a motel and driver training center.
The Company owns regional facilities in Ft. Smith, Arkansas; O'Fallon,
Missouri; Forest Park, Georgia; Columbus, Ohio; Jacksonville, Florida; and
Kingsport, Tennessee. The Company is leasing facilities in Murfreesboro,
Tennessee; 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. In March 1998, the Company sold a parcel of land at its O'Fallon,
Missouri terminal to an unrelated third party.
5
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to routine litigation incidental to its
business, primarily involving claims for personal injury and property damage
incurred in the transportation of freight. The Company believes that adverse
results in these cases, whether individual or in the aggregate, would not have a
material effect upon the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
During the fourth quarter of 1998, no matters were submitted to a vote
of securities holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Price Range of Common Stock
The Company's common stock has been traded on the NASDAQ National
Market under the symbol HTLD, since November 5, 1986, the date of the Company's
initial public offering. The following table sets forth for the calendar period
indicated the range of high and low price quotations for the Company's common
stock as reported by NASDAQ from January 1, 1997 to December 31,1998.
Period High Low
Calendar Year 1998
1st Quarter $29.00 $22.75
2nd Quarter 29.00 19.75
3rd Quarter 20.25 15.50
4th Quarter 20.25 12.38
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
The prices reported reflect interdealer quotations without retail
mark-ups, mark-downs or commissions, and may not represent actual transactions.
As of March 15, 1999 the Company had 270 stockholders of record of its common
stock. However, the Company estimates that it has a significantly greater number
of stockholders because a substantial number of the Company's shares are held of
record by brokers or dealers for their customers in street names.
Dividend Policy
The Company has never declared and paid a cash dividend. It is the
current intention of the Company's Board of Directors to retain earnings to
finance the growth of the Company's business. Future payments of cash dividends
will depend upon the financial condition, results of operations and capital
requirements of the Company, as well as other factors deemed relevant by the
Board of Directors.
6
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below reflect the
consolidated financial position and results of operations of Heartland Express,
Inc., and its subsidiaries. The selected consolidated financial data are derived
from the Company's consolidated financial statements. This data should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's consolidated financial statements
and notes thereto included elsewhere herein.
Year Ended December 31,
(in thousands, except per share data)
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
Income Statement Data:
Operating revenue ............... $ 263,489 $ 262,504 $ 229,011 $ 191,507 $ 224,248
--------- --------- --------- --------- ---------
Operating expenses:
Salaries, wages, and benefits ... 51,995 49,535 40,261 40,715 56,440
Rent and purchased transportation 100,089 101,169 93,961 64,043 57,799
Operations and maintenance ...... 26,072 27,739 22,158 21,035 35,557
Taxes and licenses .............. 6,150 6,049 5,693 5,246 7,347
Insurance and claims ............ 6,810 10,404 9,976 7,967 11,872
Communications and utilities .... 2,684 2,681 2,158 2,562 2,618
Depreciation .................... 18,108 16,752 13,571 15,066 20,061
Other operating expenses ........ 5,872 5,048 4,534 3,745 5,468
(Gain) on sale of fixed assets .. (332) (59) (189) (27) (149)
Merger consummation and
integration costs ............. -- -- -- -- 3,494
--------- --------- --------- --------- ---------
217,448 219,318 192,123 160,352 200,507
--------- --------- --------- --------- ---------
Operating income .................. 46,041 43,186 36,888 31,155 23,741
Interest income/(expense), net ... 4,896 3,782 2,839 1,524 (1,930)
--------- --------- --------- --------- ---------
Income before income taxes ........ 50,937 46,968 39,727 32,679 21,811
Federal and state income taxes .... 17,828 16,895 14,697 12,094 11,734
--------- --------- --------- --------- ---------
Net income ........................ $ 33,109 $ 30,073 $ 25,030 $ 20,585 $ 10,077
========= ========= ========= ========= =========
Basic weighted average shares
outstanding ....................... 30,000 30,000 30,000 30,036 30,039
========= ========= ========= ========= =========
Basic earnings per share .......... $ 1.10 $ 1.00 $ 0.83 $ 0.69 $ 0.34
========= ========= ========= ========= =========
Balance sheet data:
Working capital ................... $ 127,989 $ 82,170 $ 69,845 $ 40,780 $ 2,542
Total assets ...................... $ 256,828 $ 225,467 $ 191,504 $ 158,146 $ 136,393
Long term debt .................... $ -- $ -- $ -- $ -- $ 705
Stockholders' equity .............. $ 186,848 $ 153,739 $ 123,666 $ 98,636 $ 78,050
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The following table sets forth the percentage relationship of expense
items to operating revenue for the periods indicated.
Year Ended December 31,
-----------------------
1998 1997 1996
------ ------ ------
Operating revenue 100.0% 100.0% 100.0%
------ ------ ------
Operating expenses:
Salaries, wages, and benefits 19.7% 18.9% 17.6%
Rent and purchased transportation 38.0 38.5 41.0
Operations and maintenance 9.9 10.5 9.7
Taxes and licenses 2.3 2.3 2.5
Insurance and claims 2.6 4.0 4.3
Communications and utilities 1.0 1.0 0.9
Depreciation 6.9 6.4 5.9
Other operating 2.2 1.9 2.0
expenses
(Gain) on sale of fixed assets (0.1) -- --
------ ------ ------
Total operating 82.5% 83.5% 83.9%
expenses ------ ------ ------
Operating income 17.5% 16.5% 16.1%
Interest income, net 1.9 1.4 1.2
------ ------ ------
Income before income taxes 19.4% 17.9% 17.3%
Federal and state income taxes 6.8 6.4 6.4
------ ------ ------
Net income 12.6% 11.5% 10.9%
====== ====== ======
Results of Operations
Year Ended December 31, 1998 Compared With Year Ended December 31, 1997
Operating revenue increased $1.0 million (0.4%), to $263.5 million in
1998 from $262.5 million in 1997. The Company's growth of operating revenues was
curtailed by the industry-wide shortage of experienced employee drivers and
independent contractors.
Salaries, wages, and benefits increased $2.5 million (5.0%), to $52.0
million in 1998 from $49.5 million in 1997. As a percentage of revenue,
salaries, wages, and benefits increased to 19.7% in 1998 from 18.9% in 1997. An
increase in the percentage of employee drivers operating the Company's tractor
fleet and a corresponding decrease in the percentage of the fleet being provided
by independent contractors was the primary cause. This increase in employee
driver miles was attributable to internal growth and the effect of a full year
of operations of A & M Express which was acquired in July, 1997 and primarily
relies on employee drivers. During 1998, employee drivers accounted for 45% and
independent contractors 55% of the total fleet miles, compared with 43% and 57%,
respectively, in 1997.
Rent and purchased transportation decreased $1.1 million (1.1%), to
$100.1 million in 1998 from $101.2 million in 1997. As a percentage of revenue,
rent and purchased transportation decreased to 38.0% in 1998 from 38.5% in 1997.
This reflected the Company's decreased reliance upon independent contractors. In
addition, an increased industry demand for independent contractors has negated
the Company's previous competitive advantage.
Operations and maintenance decreased $1.7 million (6.0%), to $26.1
million in 1998 from $27.7 million in 1997. As a percentage of revenue,
operations and maintenance decreased to 9.9% in 1998 from 10.5% in 1997. This
decrease is attributable to a decrease in fuel prices and lower repair and
maintenance costs due to the replacement of older tractors with newer models.
8
Taxes and licenses increased $0.1 million (1.7%), to $6.1 million in
1998 from $6.0 million 1997, primarily from an increase in fleet size. As a
percentage of revenue, taxes and licenses remained constant at 2.3% in 1998 and
in 1997.
Insurance and claims decreased $3.6 million (34.5%), to $6.8 million in
1998 from $10.4 million in 1997. As a percentage of revenue, insurance and
claims decreased to 2.6% in 1998 from 4.0% in 1997. The decrease was primarily
attributable to the favorable settlement of claims and the lessor severity of
incurred claims. Insurance and claims expense will vary as a percentage of
operating revenue from period to period based on the frequency and severity of
claims incurred in a given period as well as changes in claims development
trends.
Communications and utilities remained constant at $2.7 million in 1998 and
1997. As a percentage of revenue, communications and utilities remained constant
at 1.0% in 1998 and in 1997.
Depreciation increased $1.4 million (8.1%), to $18.1 million in 1998
from $16.8 million in 1997. As a percentage of revenue, depreciation increased
to 6.9% in 1998 from 6.4% in 1997. The increase resulted from the growth in the
company owned fleet, as a percentage of the total fleet.
Other operating expenses increased $0.9 million (16.3%), to $5.9
million in 1998 from $5.0 million in 1997. As a percentage of revenue, other
operating expenses increased to 2.2% in 1998 from 1.9% in 1997. Other operating
expenses consists of pallet cost, driver recruiting expenses, goodwill, and
administrative costs. The primary area of increase was higher costs associated
with the recruitment of qualified employee drivers and independent contractors.
Primarily as a result of the foregoing, the Company's operating ratio
improved to 82.5% in 1998 compared with 83.5% in 1997.
Interest income (net) increased $1.1 million (29.5%), to $4.9 million
in 1998 from $3.8 million in 1997. As a percentage of revenue, interest income
(net) increased to 1.9% in 1998 from 1.4% in 1997. The Company had $143 million
in cash, cash equivalents, and investments at December 31, 1998 compared with
$96.0 million at December 31, 1997. Interest income earned is primarily exempt
from federal taxes and therefore earned at a lower pre-tax rate.
The Company's effective tax rate was 35% in 1998 and 36% in 1997. This
decrease is primarily attributable to the increase of tax-exempt interest
earned.
As a result of the foregoing, net income increased $3.0 million (10.1%), to
$33.1 million in 1998 (12.6% of revenue) from $30.1 million in 1997 (11.5% of
revenue).
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.
9
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 4.3% 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 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).
Liquidity and Capital Resources
The growth of the Company's business requires significant investments
in new revenue equipment. Historically the Company has been debt-free, financing
revenue equipment through cash flow from operations. The Company also obtains
tractor capacity by utilizing independent contractors, who provide a tractor and
bear all associated operating and financing expenses.
Cash and cash equivalents and investments increased to $143.4 million
as of December 31, 1998 from $96.0 million at December 31, 1997. The Company's
policy is to purchase only high quality liquid investments. Cash equivalents and
investments primarily consists of municipal demand bonds and municipal demand
bond funds.
Net cash provided by operations was $52.7 million in 1998, $46.8
million in 1997, and $48.3 million in 1996. The primary source of funds in 1998
was net income of $33.1 million increased by non-cash adjustments, including
depreciation and amortization of $19.2 million.
10
Net cash provided by (used in) investing and financing activities was
$14.5 million in 1998, ($30.1) million in 1997, and ($34.9) million in 1996.
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 decreased to $21.4 million as of December 31, 1998
from $24.2 million as of December 31, 1997 primarily due to a 11.6% decrease in
fourth quarter operating revenue. Cash paid for income taxes decreased to $18.9
million in 1998 from $19.9 million in 1997. Lower income taxes on a cash basis
are primarily due to increased interest income exempt from federal taxes.
Accounts payable and accrued liabilities decreased to $7.6 million as
of December 31, 1998 from $8.9 million as of December 31, 1997 due mostly to a
decrease in payables to revenue equipment suppliers.
Insurance accruals increased to $35.5 million as of December 31, 1998
from $34.7 million as of December 31, 1997 due to the increase in the Company's
fleet miles. The Company's insurance program for liability, physical damage and
cargo damage involves self insurance retentions for the first $500,000. Claims
in excess of the risk retention are covered by insurance in amounts which
management considers adequate. The Company accrues the estimated cost of the
uninsured portion of the pending claims. These accruals are estimated based on
management's evaluation of the nature and severity of individual claims and
estimate of future claims development based on historical claim development
trends. If adjustments to previously established accruals are required, such
amounts are included in operating expenses.
The Company has one customer who accounted for more than 10% of the
Company's revenue for the year ended December 31, 1998. As disclosed in footnote
two to the financial statements, historically a small number of customers
generate a substantial percentage of revenue. In 1998 the Company's largest
customer generated approximately 14% of operating revenue. The loss of a major
customer could negatively impact the Company. Any negative impact would be
mitigated by two factors: (1) the strong overall financial position of the
Company (no long term debt at December 31, 1998 and $143.4 million in cash, cash
equivalents and investments) and (2) the flexibility inherent in having a
substantial percentage of fleet miles being generated by independent contractors
who provide their own tractors.(*)
Based on the Company's strong financial position (current ratio of 3.4
and no debt), management foresees no significant barriers to obtaining
sufficient financing, if necessary, to continue with growth plans. (*)
Inflation and Fuel Cost
Most of the Company's operating expenses are inflation-sensitive, with
inflation generally producing increased costs of operations. During the past
three years, the most significant effects of inflation have been on revenue
equipment prices and the compensation paid to the drivers. Innovations in
equipment technology and comfort have resulted in higher tractor prices, and
there has been an industry-wide increase in wages paid to attract and retain
qualified drivers. The Company historically has limited the effects of inflation
through increases in freight rates and certain cost control efforts. In addition
to inflation, fluctuations in fuel prices can affect profitability. Most of the
Company's contracts with customers contain fuel surcharge provisions. Although
the Company historically has been able to pass through most long-term increases
in fuel prices and taxes to customers in the form of surcharges and higher
rates, shorter-term increases are not fully recovered. (*)
Seasonality
The nature of the Company's primary traffic (appliances, automotive
parts, paper products, retail goods, and packaged foodstuffs) causes it to be
distributed with relative uniformity throughout the year. However, earnings have
historically been affected adversely during the fourth quarter as a result of
reduced shipments by customers during the winter holiday season. In addition,
the Company's operating expenses historically have been higher during the winter
months due to increased operating costs in colder weather and higher fuel
consumption due to increased engine idling.
(*) Forward - looking statements
11
Year 2000
The Company has completed a comprehensive inventory and assessment of
its risk associated with the Year 2000 problem. The position of the Company is
to ensure successful operation of business processes without interruption
before, during, and after December 31, 1999. A formal Year 2000 team was
established in 1998 to identify exposures, develop a compliance plan, correct
problems, test results and monitor progress on a monthly basis, and develop a
contingency plan in the event of any system failures. All internal systems (both
information technology "IT" and non-IT) have been assessed for risk, including
operational software, operational platforms, desktop systems, telephony
equipment, data communications, systems assurance, and facility management
systems. Critical business processes have been assessed for risk, such as
customer service, voice telecommunications, order entry, transportation capacity
planning, logistical balance planning, driver load assignment, driver satellite
communications, rating and invoicing, payment remittance, financial
transactions, and electronic data interchange (EDI) communications for load
tendering, shipment status, and freight invoicing. The Company's operational
platform and enterprise software were upgraded in 1998 and are Year 2000
compliant. The Company will be testing systems by simulating the transition to
the Year 2000. This testing should be completed prior to June 30, 1999. In 1998
the Company spent approximately $775,000 on Year 2000 compliance. Future
estimated compliance costs are not expected to be material to the Company's
consolidated financial position, results of operations, or cash flows.
As part of the Company's comprehensive review, it is continuing to
verify the year 2000 readiness of third parties (vendors and customers) with
whom the Company has material business relationships. These relationships
include providers of such services as telecommunications, natural gas and
electricity, diesel fuel, satellite communications, and financial transactions.
Formal communications have been initiated with significant customers and
suppliers. These customers and suppliers indicate that they expect to achieve
compliance and do not expect any business interruptions. In addition, engine
manufacturers have confirmed the year 2000 readiness of our company-owned
tractor fleet.
At present the Company is not able to determine with certainty the
effect on the Company's results of operations, liquidity, and financial
condition in the event the Company's material suppliers and customers are not
Year 2000 compliant. There can be no assurance that the Company will properly
identify all Year 2000 issues or that certain external customers or suppliers
will not experience disruption of IT functions or actual services provided. The
Company will continue to monitor the progress of its material suppliers and
customers. Contingency plans are being developed to address Year 2000 issues
that may arise in the event of system failures or loss of material suppliers or
customers.
Forward - Looking Information
Certain matters discussed in this annual report and marked with an
asterisk are "forward-looking statements" intended to qualify for the safe
harbors from liability established by Private Securities Litigation Reform Act
of 1995. Such statements address future plans, objectives, expectations and
events or conditions concerning various matters such as capital expenditures,
litigation, liquidity and capital resources, and accounting matters. Actual
results in each case could differ materially from those currently anticipated in
such statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company purchases only high quality liquid investments. All
investments as of December 31, 1998 have an original maturity of three months or
less. The Company holds all investments to maturity and therefore, is exposed to
minimal market risk related to its cash equivalents and municipal bonds.
The Company has no debt outstanding as of December 31, 1998 and
therefore, has no market risk related to debt.
The Company does not engage in fuel hedging with financial instruments
and therefore, has no market risk related to fuel price movements. The Company
does use purchase contracts for bulk fuel purchases.
12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's audited financial statements, including its consolidated
balance sheets and consolidated statements of operations, cash flows, and
stockholders' equity, and notes related thereto, are contained at pages 17 to 27
of this report. Selected quarterly data is contained at page 26. Such
information is incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information respecting executive officers, directors, and director
nominee, set forth under the caption "Election of Directors-Information
Concerning Executive Officers and Directors" and "Compliance with Section 16(a)
of the Securities Exchange Act of 1934" on pages 2 through 4 and 6 of the
registrant's proxy statement relating to its 1999 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission in
accordance with Rule 14a-6 promulgated under the Securities Exchange Act of 1934
(the "Proxy Statement"), is incorporated by reference. With the exception of the
foregoing information and other information specifically incorporated by
reference into this Form 10-K report, the Proxy Statement is not being filed as
a part hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information respecting executive compensation set forth under the
caption "Executive Compensation" on pages 4 and 5 of the Proxy Statement is
incorporated herein by reference; provided, however, that the "Board of
Directors' Report on Executive Compensation" is not incorporated by reference
here.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information respecting security ownership of certain beneficial
owners and management included under the caption "Principal Stockholders and
Stockholdings of Management" on page 7 of the Proxy Statement is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information respecting certain relationships and transactions of
management set forth under the captions "Board of Directors Interlocks and
Insider Participation / Certain Transactions and Relationships" on page 4 of the
Proxy Statement is incorporated herein by reference.
13
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements and Schedules
The Company's audited financial statements are set forth
on the following pages of this report:
Page
Reports of Independent Public Accountants ............................... 17
Consolidated Balance Sheets ............................................. 18
Consolidated Statements of Operations ................................... 19
Consolidated Statements of Stockholders' Equity ......................... 20
Consolidated Statements of Cash Flows ................................... 21
Notes to Consolidated Financial Statements .............................. 22-27
(a) 2 Financial Statement Schedule
Page
Valuation and Qualifying Accounts and Reserves .......................... 27
(a) 3 Exhibits required by Item 601 of Regulation S-K are listed below.
(b) Reports on Form 8-K
The Company did not file a Form 8-K during the last quarter of 1998
(c) Exhibits
14
Exhibit No. Document Page of Method of Filing
3.1 Articles of Incorportion Incorporated by reference to the
Company's registration statement
on Form S-1, Registration No.
33-8165,effective November 5,1986
3.2 Bylaws Incorporated by reference to the
Company's registration statement
on Form S-1, Registration No.
33-8165,effective November 5,1986
3.3 Certificate of Amendment to Incorporated by reference to the
Articles of Incorporation Company's Form 10-QA, for the
quarter ended June 30, 1997,
dated March 26, 1998.
4.1 Articles of Incorporation Incorporated by reference to the
Company's registration statement
on Form S-1, Registration No.
33-8165, effective
November 5, 1986.
4.2 Bylaws Incorporated by reference to the
Company's registration statement
on Form S-1, Registration No.
33-8165, effective
November 5, 1986.
4.3 Certificate of Amendment Incorporated by reference to the
to Articles of Incorporation Company's Form 10-QA, for the
quarter ended June 30, 1997,
dated March 26, 1998.
9.1 Voting Trust Agreement dated Incorporated by reference to the
June 6, 1997 between Larry Company's Form 10-K for the year
as trustee under the Gerdin ended December 31, 1997.
Educational Trusts and Commission file no. 0-15087.
Larry Crouse voting trustee.
10.1 Business Property Lease between Incorporated by reference to the
Russell A. Gerdin as Lessor and Company's Form 10-K for the year
the Company as Lessee, regarding ended December 31, 1996.
the Company's headquarters at Commission file no.0-15087.
2777 Heartland Drive, Coralville,
Iowa 52241
10.2 Form of Independent Contractor Incorporated by reference to the
Operating Agreement between the Company's Form 10-K for the year
Company and its independent ended December 31, 1993.
contractor providers of tractors Commission file no. 0-15087.
10.3 Description of Key Management Incorporated by reference to the
Deferred Incentive Compensation Company's Form 10-K for the year
Arrangement ended December 31, 1993.
Commission file no. 0-15087.
21 Subsidiaries of the Registrant Incorporated by reference to the
Company's Form 10-K for the year
ended December 31, 1997.
Commission file no. 0-15087.
27 Financial Data Schedule Filed herewith.
15
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Act of 1934, the registrant has duly caused the report to be signed on its
behalf by the undersigned thereunto duly authorized.
HEARTLAND EXPRESS, INC.
Date: March 26, 1999 By: /s/ Russell A. Gerdin
-------------- ----------------------
Russell A. Gerdin
President and Secretary
Pursuant to the Securities Act of 1934, this report has been signed below by the
following persons on behalf of the registrant in the capacities and on the dates
indicated.
Signature Title Date
/s/ Russell A. Gerdin Chairman, President and Chief
Russell A. Gerdin Executive Officer (Principal
Executive Officer), Secretary March 26, 1999
/s/ John P. Cosaert Vice President of Finance
John P. Cosaert (Principal Financial Officer
and Principal Accounting
Officer) and Treasurer March 26, 1999
/s/ Richard O. Jacobson Director
Richard O.Jacobson March 26, 1999
/s/ Michael J. Gerdin Director
Michael J.Gerdin March 26, 1999
/s/ Benjamin J. Allen Director
Benjamin J.Allen March 26, 1999
16
REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Heartland Express, Inc.:
We have audited the accompanying consolidated balance sheets of
Heartland Express, Inc. (a Nevada corporation) and Subsidiaries as of December
31, 1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. 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 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 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 22, 1999
17
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1998 1997
------------ ------------ ------------
CURRENT ASSETS
Cash and cash equivalents .................... $143,434,594 $ 76,240,422
Trade receivable, less allowance:
1998 $402,812; 1997 $491,971 ................. 21,391,206 24,247,307
Prepaid tires and tubes ...................... 1,039,405 1,617,464
Investments .................................. -- 19,769,765
Deferred income taxes ........................ 16,082,000 15,841,000
Other current assets ......................... 306,142 280,243
------------ ------------
Total current assets ....................... 182,253,347 137,996,201
------------ ------------
PROPERTY AND EQUIPMENT
Land and land improvements ................... 3,830,779 3,936,843
Buildings .................................... 9,214,397 9,215,477
Furniture and fixtures ....................... 2,535,343 1,982,818
Shop and service equipment ................... 1,444,764 1,351,440
Revenue equipment ............................ 112,162,731 118,819,981
------------ ------------
129,188,014 135,306,559
Less accumulated depreciation and amortization 60,618,544 54,336,481
------------ ------------
Property and equipment, net .................. 68,569,470 80,970,078
------------ ------------
OTHER ASSETS ................................... 6,005,191 6,500,395
------------ ------------
$256,828,008 $225,466,674
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities ..... $ 7,615,143 $ 8,857,820
Compensation and benefits .................... 4,431,905 4,992,714
Income taxes payable ......................... 3,578,501 4,224,150
Insurance accruals ........................... 35,503,314 34,671,707
Other accruals ............................... 3,135,232 3,080,223
------------ ------------
Total current liabilities .................. 54,264,095 55,826,614
------------ ------------
DEFERRED INCOME TAXES .......................... 15,716,000 15,901,000
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY
Capital Stock
Preferred, par value $.01; authorized
5,000,000 shares; none issued ................ -- --
Common par value $.01; authorized
395,000,000 shares; issued and outstanding
30,000,000 shares ............................ 300,000 300,000
Additional paid-in capital ................... 6,608,170 6,608,170
Retained earnings ............................ 179,939,743 146,830,890
------------ ------------
186,847,913 153,739,060
------------ ------------
$256,828,008 $225,466,674
============ ============
The accompanying notes are an integral part of these financial statements
18
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
-------------
1998 1997 1996
------------- ------------- -------------
Operating revenue ............ $ 263,489,156 $ 262,504,156 $ 229,011,108
------------- ------------- -------------
Operating expenses:
Salaries, wages, and benefits 51,994,959 49,534,386 40,260,524
Rent and purchased
transportation .............. 100,089,165 101,169,061 93,961,180
Operations and maintenance .. 26,072,323 27,739,355 22,158,279
Taxes and licenses .......... 6,150,407 6,049,155 5,692,592
Insurance and claims ........ 6,809,819 10,404,326 9,975,716
Communications and utilities 2,684,310 2,681,489 2,158,489
Depreciation ................ 18,107,708 16,751,384 13,571,284
Other operating expenses .... 5,871,671 5,047,624 4,534,472
Gain on sale of fixed assets (332,255) (58,903) (189,041)
------------- ------------- -------------
217,448,107 219,317,877 192,123,495
------------- ------------- -------------
Operating income ............ 46,041,049 43,186,279 36,887,613
Interest income .............. 4,895,651 3,846,157 2,871,089
Interest expense ............. -- (64,571) (30,943)
------------- ------------- -------------
Income before income taxes 50,936,700 46,967,865 39,727,759
Federal and state income taxes 17,827,847 16,894,972 14,697,268
------------- ------------- -------------
Net income ................ $ 33,108,853 $ 30,072,893 $ 25,030,491
============= ============= =============
Basic earnings per share ...... $ 1.10 $ 1.00 $ 0.83
============= ============= =============
Basic weighted average shares
outstanding .................. 30,000,000 30,000,000 30,000,000
============= ============= =============
The accompanying notes are an integral part of these financial statements.
19
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Capital Additional
Stock, Paid-In Retained
Common Capital Earnings Total
------------ ------------ ------------ ------------
Balance, December 31, 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 in par value .......... (2,700,000) 2,700,000 -- --
Net income ...................... -- -- 30,072,893 30,072,893
------------ ------------ ------------ ------------
Balance, December 31, 1997 ...... 300,000 6,608,170 146,830,890 153,739,060
Net income ...................... -- -- 33,108,853 33,108,853
------------ ------------ ------------ ------------
Balance, December 31, 1998 ...... 300,000 6,608,170 $179,939,743 $186,847,913
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
20
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-------------
1998 1997 1996
------------- ------------- -------------
OPERATING ACTIVITIES
Net income ........................... $ 33,108,853 $ 30,072,893 $ 25,030,491
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization ....... 19,227,213 17,488,602 13,956,088
Deferred income taxes ............... (426,000) (3,149,000) (2,807,000)
Gain on sale of fixed assets ........ (272,893) (58,903) (189,041)
Changes in certain working capital items:
Trade receivable .................. 2,856,101 (4,623,019) 2,338,411
Other current assets .............. (769,666) 446,071 (14,758)
Prepaids .......................... 502,214 1,031,682 2,605,830
Accounts payable and
accrued expenses.................. (844,817) 5,413,840 5,159,151
Accrued income taxes .............. (645,649) 138,279 2,235,057
------------- ------------- -------------
Net cash provided by operating
activities............................ 52,735,356 46,760,445 48,314,229
------------- ------------- -------------
INVESTING ACTIVITIES
Proceeds from sale of property
and equipment......................... 483,668 271,721 393,513
Capital additions .................... (5,511,705) (22,384,516) (7,491,563)
Net maturities (purchases) of
municipal bonds ...................... 19,769,765 11,691,494 (26,941,798)
Other ................................ (282,912) (1,150,055) (137,619)
------------- ------------- -------------
Net cash provided (used in) by
investing activities ................. 14,458,816 (11,571,356) (34,177,467)
------------- ------------- -------------
FINANCING ACTIVITIES
Principal payments on long-term
notes ................................ -- (18,542,135) (705,437)
------------- ------------- -------------
Net cash used in financing activities -- (18,542,135) (705,437)
------------- ------------- -------------
Net increase in cash and cash
equivalents .......................... 67,194,172 16,646,954 13,431,325
CASH AND CASH EQUIVALENTS
Beginning of year .................... 76,240,422 59,593,468 46,162,143
------------- ------------- -------------
End of year .......................... $ 143,434,594 $ 76,240,422 $ 59,593,468
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period
for:
Interest ............................ $ -- $ 64,571 $ 30,943
Income taxes ........................ $ 18,899,496 $ 19,905,693 $ 15,269,211
Noncash investing activities:
Book value of revenue equipment traded $ 9,658,636 $ 3,062,392 $ 5,585,217
The accompanying notes are an integral part of these financial statements.
21
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of business and Significant Accounting Policies
Nature of Business:
Heartland Express, Inc., (the "Company") is a short-to-medium-haul, irregular
route, truckload carrier of general commodities. The Company's primary traffic
lanes are between customer locations east of the Rocky Mountains, with selected
service to the West. The Company operates the business as one reportable
segment.
Significant Accounting Policies:
Principles of Consolidation:
The accompanying consolidated financial statements include the parent company,
Heartland Express, Inc., and its subsidiaries, all of which are wholly owned.
All material intercompany items and transactions have been eliminated in
consolidation.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents:
Cash equivalents are short-term, highly liquid investments with original
maturities of three months of less. Cash equivalents consist of municipal demand
bonds and notes, 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 are recognized as incurred.
Property and Equipment:
Property and equipment are stated at cost. Generally, at the time of trade-in,
the cost of new equipment is recorded at an amount equal to the net book value
of the traded equipment plus cash paid. Depreciation is computed by the
straight-line method for all assets other than tractors, which are depreciated
by the 125% declining balance method. Trailers are depreciated to a 30% salvage
value except for trailers purchased after January 1, 1996 which have no salvage
value. Lives of the assets are as follows:
22
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Land improvements and building 3-30
Furniture and fixtures 2-3
Shop and service equipment 3-5
Revenue equipment 5-7
Assets to be disposed of are measured at the lower of carrying amount or fair
market value, as estimated by management, less costs to sell.
Tires and Tubes:
The cost of tires and tubes on new revenue equipment is carried as a prepayment
and amortized over the estimated tire life of two years. Replacement tires
(including recapped tires) are expensed when purchased.
Earnings Per Share:
The Company reports earnings per share in accordance with Statement of Financial
Accounting Standard No. 128, (SFAS 128) "Earnings per share." Basic earnings per
share is based upon the weighted average common shares outstanding during each
year. Diluted earnings per share is based upon the weighted average common and
common equivalent shares outstanding during each year. Heartland has no common
stock equivalents.
Reclassifications:
Certain reclassifications have been made to the prior year consolidated
financial statements to conform with the current year presentation.
Note 2. Concentrations of Credit Risk and Major Customers
The Company's major customers represent the consumer goods, appliances, food
products and automotive industries. Credit is usually granted to customers on an
unsecured basis. The Company's five largest customers accounted for 35%, 39%,
and 44% of revenues for the years ended December 31, 1998, 1997, and 1996,
respectively. Operating revenue from one customer exceeded 10% of total gross
revenues in 1998, 1997 or 1996. Annual revenues for this customer were $37.0
million, $39.0 million, and $35.0 million for the years ended December 31, 1998,
1997, and 1996, respectively.
23
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Acquisition
On July 14, 1997, the Company acquired the outstanding stock of A & M Express,
Inc., (A & M) a Kingsport, Tennessee based truckload carrier. A & M, a dry van
carrier, operated primarily in the eastern half of the United States. The
acquisition was accounted for by the purchase method of accounting. The results
of A & M's operations are reflected beginning with the effective date of the
acquisition (July 1, 1997). In 1997, The company repaid approximately $18.5
million in debt which was assumed in connection with the acquisition. The
acquisition of A & M did not have a material impact on the results of operations
for the years ending December 31, 1998 and 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:
1998 1997
------------ ------------
Deferred income tax liabilities,
related to property and equipment .............. $ 15,716,000 $ 15,901,000
============ ============
Deferred income tax assets:
Allowance for doubtful accounts ............. $ 153,000 $ 153,000
Accrued expenses............................. 2,270,000 2,428,000
Insurance accruals........................... 13,186,000 12,740,000
Other........................................ 473,000 520,000
------------ ------------
Deferred income tax assets .................. $ 16,082,000 $ 15,841,000
============ ============
The income tax provision is as follows:
1998 1997 1996
------------ ------------ ------------
Current income taxes:
Federal ...................... $ 16,983,674 $ 18,697,215 $ 16,523,897
State......................... 1,270,173 1,346,757 980,371
------------ ------------ ------------
$ 18,253,847 $ 20,043,972 $ 17,504,268
------------ ------------ ------------
Deferred income taxes:
Federal ...................... $ (408,960) $ (3,023,040) $ (2,689,106)
State......................... (17,040) (125,960) (117,894)
------------ ------------ ------------
$ (426,000) $ (3,149,000) $ (2,807,000)
------------ ------------ ------------
Total ........................ $ 17,827,847 $ 16,894,972 $ 14,697,268
============ ============ ============
24
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The income tax provision differs from the amount determined by applying the
U.S.federal tax rate as follows:
1998 1997 1996
------------ ------------ ------------
Federal tax at statutory
rate (35%) ........... $ 17,827,845 $ 16,438,753 $ 13,904,716
State taxes, net of federal
benefit ........................ 826,000 875,000 648,000
Non-taxable interest income (1,398,000) (1,105,000) (797,000)
Other .......................... 572,002 686,219 941,552
------------ ------------ ------------
$ 17,827,847 $ 16,894,972 $ 14,697,268
============ ============ ============
Note 5. Related Party Transactions
The Company leases two office buildings and a storage building from its
president under a lease which provided for monthly rentals of $23,500 plus the
payment of all property taxes, insurance and maintenance. The lease expires May
31, 2000 and contains a five year renewal option.
The total minimum rental commitment under the building lease is as follows:
Year ending December 31:
1999 282,000
2000 117,500
----------
$ 399,500
==========
Rent expense paid to the Company's president totaled $282,000 for the years
ended December 31, 1998, 1997, and 1996. The Company also maintains cash
accounts with a bank owned by the Company's president.
Note 6. Accident and Workers' Compensation Claims
Accident and workers' compensation claims include the estimated settlements,
settlement expenses and an allowance for claims incurred but not yet reported
for property damage, personal injury and public liability losses from vehicle
accidents and cargo losses as well as workers' compensation claims for amounts
not covered by insurance.
Accrued claims are determined based on estimates of the ultimate cost of
settling reported and unreported claims, including expected settlement expenses.
Such estimates are based on management's evaluation of the nature and severity
of individual claims and an estimate of future claims development based on
historical claims development trends. Since the reported liability is an
estimate, the ultimate liability may be more or less than reported. If
adjustments to previously established accruals are required, such amounts are
included in operating expenses.
25
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company acts as a self-insurer for liability up to $500,000 for any single
occurrence involving cargo, personal injury or property damage. Liability in
excess of this amount is assumed by an insurance underwriter. A & M Express,
however, had a $5,000 self-insurance retention.
The Company acts as a self-insurer for workers' compensation liability up to a
maximum liability of $300,000 per claim. Liability in excess of this amount is
assumed by an insurance underwriter. The State of Iowa has required the Company
to deposit $700,000 into a trust fund as part of the self-insurance program.
This deposit has been classified with other long-term assets on the balance
sheet. In addition, the Company has provided its insurance carriers with letters
of credit and deposits of approximately $6.3 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. All share and per share amounts, and capital
accounts, have been restated to retroactively reflect the stock split.
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 $491,000, $541,000, and $529,000 for the years ended December 31, 1998,
1997 and 1996, respectively.
26
HEARTLAND EXPRESS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Note 9. Commitments and Contingencies
Various claims and legal actions are pending against the Company. In
management's opinion, the resolution of these matters will not materially impact
the Company's financial condition or results of operations
The Company has entered into fuel purchase contracts through March 2000. The
contracts represent approximately 25% of annual fuel usage. The aggregate
commitment under the contracts is $1,324,527 as of December 31, 1998.
The Company has entered into an equipment purchase agreement to acquire new
tractors. As of December 31, 1998 the Company was committed to purchase tractors
at an aggregate purchase price of $24.4 million.
Note 10. Quarterly Financial Information (Unaudited)
First Second Third Fourth
------- ------- ------- -------
(In Thousands, Except Per Share Data)
Year ended December 31, 1998
Operating revenue .................... $66,840 $69,223 $65,015 $62,411
Operating income ..................... 10,954 11,976 11,675 11,436
Income before income taxes ........... 12,009 13,104 12,973 12,851
Net income ........................... 7,806 8,518 8,430 8,355
Basic earnings per share ............. 0.26 0.28 0.28 0.28
Year end 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
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, 1998 $491,971 $ 37,078 $ -- $126,237 $402,812
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
(*) Acquired A & M reserves
27