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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

U.S. XPRESS ENTERPRISES, INC.

        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 o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes x No o

        As of March 31, 2004, 11,022,407 shares of the registrant’s Class A common stock, par value $.01 per share, and 3,040,262 shares of the registrant’s Class B common stock, par value $.01 per share, were outstanding.

U.S. XPRESS ENTERPRISES, INC.

TABLE OF CONTENTS

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(See Accompanying Notes to Consolidated Financial Statements)

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(See Accompanying Notes to Consolidated Financial Statements)

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(See Accompanying Notes to Consolidated Financial Statements)

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(See Accompanying Notes to Consolidated Financial Statements)

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U.S.  XPRESS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share amounts)

1. Consolidated Financial Statements

        The interim consolidated financial statements contained herein reflect all adjustments that, in the opinion of management, are necessary for a fair statement of the financial condition and results of operations for the periods presented. They have been prepared by the Company, without audit, in accordance with the instructions to Form 10-Q and the rules and regulations of the Securities and Exchange Commission and do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements.

        Operating results for the three months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments consisted only of items that are of a normal recurring nature.

        These interim consolidated financial statements should be read in conjunction with the Company’s latest annual consolidated financial statements (which are included in the Company’s Form 10-K filed with the Securities and Exchange Commission on March 15, 2004).

2. Organization and Operations

    U.S.  Xpress Enterprises, Inc. (the “Company”) provides transportation services through two business segments, U.S. Xpress, Inc. (“U.S. Xpress”) and Xpress Global Systems, Inc. (“Xpress Global Systems”). U.S. Xpress is a truckload carrier serving the continental United States and parts of Canada and Mexico. Xpress Global Systems provides transportation, warehousing and distribution services to the floorcovering industry and also provides airport-to-airport transportation services to the airfreight and airfreight forwarding industries.

3. Earnings Per Share

        The difference in basic and diluted weighted average shares is due to the assumed conversion of outstanding options. The computation of basic and diluted earnings per share is as follows:

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4. Stock-Based Compensation

        The Company applies the intrinsic value based method of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations in accounting for its stock option plans. No stock-based compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant.

        Had compensation expense for stock option grants been determined based on fair value at the grant dates consistent with the method prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 123, the Company’s net income and earnings per share would have been adjusted to the pro forma amounts for the three months ended March 31, 2004 and 2003 as indicated below:

5. Commitments and Contingencies

        The Company is party to certain legal proceedings incidental to its business. The ultimate disposition of these matters, in the opinion of management, based in part upon the advice of legal counsel, is not expected to have a material adverse effect on the Company’s financial position or results of operations.

        The Company has letters of credit of $36.2 million outstanding at March 31, 2004. The letters of credit are maintained primarily to support the Company’s insurance program. Subsequent to quarter-end, the Company increased outstanding letters of credit to $37.0 million.

        The Company had commitments outstanding at March 31, 2004 to acquire revenue equipment for approximately $127.1 million in 2004, $43.5 million in 2005 and $40.7 million in 2006. These purchase commitments are expected to be financed by operating leases, long-term debt, proceeds from sales of existing equipment and cash flows from operations. 

        In addition, the Company had remaining commitments of $1.4 million as of March 31, 2004 under contracts relating to development and improvement of facilities and computer hardware.

6. Derivative Financial Instruments

        The Company uses derivative financial instruments to manage exposure to interest rate risks inherent in variable-rate debt and does not use them for trading or speculative purposes. On March 29, 2002, the Company entered into a new revolving credit agreement. Prior to that date, the Company designated its interest rate swap agreements as cash flow hedges, in which changes in fair value were recognized in other comprehensive income.

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        In connection with entering into the new revolving credit agreement, the outstanding interest rate swap agreements ceased to qualify as cash flow hedge instruments because they were not matched to the terms of the new debt. Accordingly, they were not designated as hedging instruments, resulting in the amounts included in other comprehensive income being amortized over the remaining term of the respective agreements with any future changes in the market value reflected as interest expense in the consolidated statements of operations. For the three months ended March 31, 2004 and 2003, the Company recognized $0 and $(69), respectively, to interest expense in conjunction with the de-designation of the interest rate swap agreements.

        As of March 31, 2004, the Company had no outstanding interest rate swap agreements. The agreements expired in February and September 2003.

7. Operating Segments

        The Company has two reportable segments based on the types of services it provides to its customers: U.S. Xpress which provides truckload operations throughout the continental United States and parts of Canada and Mexico, and Xpress Global Systems which provides transportation, warehousing and distribution services to the floorcovering industry and also provides airport-to-airport transportation services to the airfreight and airfreight forwarding industries. Substantially all intersegment sales prices are market based. The Company evaluates performance based on operating income of the respective business units.

        The difference in consolidated operating income as shown above and consolidated income before income tax provision on the consolidated statements of operations is net interest expense of $2,115 and $2,928 for the three months ended March 31, 2004 and 2003, respectively.

8. Comprehensive Income

        Comprehensive income consisted of the following components for the three months ended March 31, 2004 and 2003, respectively:

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9. Long-Term Debt

        The Company’s long-term debt primarily consists of equipment installment notes, mortgage notes, a revolving credit facility and capital lease obligations. As of March 31, 2004 and 2003, $120.2 million and $103.6 million, respectively, were outstanding under the equipment installment notes, with weighted average interest rates of 5.03% and 6.90%, respectively. The equipment installment notes are secured by the related revenue equipment and mature at various dates ranging from August 2004 to July 2011.

        The outstanding mortgage notes primarily relate to the Company’s corporate headquarters and certain terminal locations, which are secured by the related real estate and mature from August 2007 to October 2010. As of March 31, 2004 and 2003, $22.3 million and $24.0 million, respectively, were outstanding under the mortgage notes, with average interest rates of 5.62% and 5.59%, respectively. The Company also has capital lease obligations related to a terminal location and certain revenue equipment. As of March 31, 2004 and 2003, $3.2 million and $4.2 million were outstanding, respectively. The capital lease obligations mature from June 2004 to November 2007.

        On March 29, 2002, the Company entered into a $100.0 million senior secured revolving credit facility. Proceeds from this facility were used to repay the then existing revolving credit facility. The revolving credit facility provides for borrowings up to $100.0 million, with availability at any given time based on specified percentages of eligible receivables and revenue equipment, less reserves, under the facility’s Borrowing Base formula. Letters of credit under the facility are limited to $37.0 million. The facility matures in March 2007.

        The facility allows the Company to select interest rates for all or any portion of the outstanding balance, based on either a Base Rate (based on the domestic prime rate) plus an Applicable Margin or LIBOR plus an Applicable Margin. The Applicable Margin ranges from 0.75% to 1.50% for Base Rate Loans and from 2.25% to 3.00% for LIBOR Loans, based in each case on the aggregate availability as defined. At March 31, 2004, the Applicable Margin was 0.75% for Base Rate Loans and 2.25% for LIBOR Loans. The facility also prescribes additional fees for Letter of Credit transactions and a monthly commitment fee based on the difference between the total commitment and the total borrowing capacity utilized by the Company from time to time. The interest rate for the Base Rate and LIBOR loans as of March 31, 2004 and 2003 was 4.75% and 3.34% and 5.25% and 3.84%, respectively.

        At March 31, 2004, $14.0 million in borrowings and $36.2 million in letters of credit were outstanding under the facility with $43.8 million available to borrow. The facility is secured by substantially all assets of the Company, other than real estate and assets securing other debt of the Company. Subsequent to quarter-end, the Company increased outstanding letters of credit to $37.0 million.

        The facility requires, among other things, maintenance by the Company of prescribed minimum amounts of Consolidated Tangible Net Worth, Fixed Charge Coverage Ratios and Leverage Ratios. It also: (1) limits the Company’s future capital expenditures; (2) prohibits all acquisitions by the Company of its own capital stock or the payment of dividends on such stock; and (3) effectively prohibits future asset acquisitions or dispositions (except in the ordinary

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course of business) or other business combination transactions by the Company without the Lenders’ consent. As of March 31, 2004, the Company was in compliance with the revolving credit facility.

10. Leases

     The Company leases certain revenue and service equipment and office and terminal facilities under long-term non-cancelable operating lease agreements expiring at various dates through February 2011. Revenue equipment lease terms are generally 3 — 4 years for tractors and 5-7 years for trailers. Certain equipment leases provide for guarantees by the Company of a portion of the residual amount under certain circumstances at the end of the lease term. The maximum potential amount of future payments (undiscounted) under these guarantees is approximately $90.1 million at March 31, 2004. The residual value of a substantial portion of the leased revenue equipment is covered by repurchase or trade agreements in principle between the Company and the equipment manufacturer. In accordance with the provisions of Interpretation No. 45, management estimates the fair values of the guaranteed residual values for leased revenue equipment to be immaterial. Accordingly, the Company has no guaranteed liabilities accrued in the accompanying consolidated balance sheets.

11. Other Assets

        Other long-term assets consisted of the following at March 31, 2004 and December 31, 2003:

12. Recent Accounting Pronouncements

        In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51.” The Interpretation requires the consolidation of entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Currently, entities are generally consolidated by an enterprise when it has a controlling interest through ownership of a majority voting interest in the entity. In December 2003, the FASB issued a revision of the Interpretation, which deferred the effective date to the first reporting period after March 15, 2004. The Interpretation permits consolidation at historical carrying amounts as if the Interpretation had always been applied, or at fair value, if determining historical amounts is impracticable. The Interpretation may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative effective adjustment as of the beginning of the first year restated. The adoption of Interpretation No. 46 had no impact on the Company’s financial statements.

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         In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. In particular, SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in SFAS No. 133 and it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003 and is to be applied prospectively. The adoption of SFAS No. 149 had no impact on the Company’s financial statements.

        In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”, which specifies that instruments within its scope are obligations of the issuer and, therefore, the issuer must classify them as liabilities. Financial instruments within the scope of the pronouncement include mandatory redeemable financial instruments, obligations to repurchase the issuer’s equity shares by transferring assets and certain obligations to issue a variable number of shares. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003. The adoption of SFAS No. 150 had no impact on the Company’s financial statements.

13. Reclassifications

        Certain reclassifications have been made to the 2003 financial statements to conform to the 2004 presentation.

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Item 2. Management’s Discussion and Analysis of Financial
              Condition and Results of Operations

General

    U.S. Xpress Enterprises, Inc. (the “Company”) provides transportation services through two business segments, U.S. Xpress, Inc. (“U.S. Xpress”) and Xpress Global Systems, Inc. (“Xpress Global Systems”). U.S. Xpress is a truckload carrier serving the continental United States and parts of Canada and Mexico. Xpress Global Systems provides transportation, warehousing and distribution services to the floorcovering industry and also provides airport-to-airport transportation services to the airfreight and airfreight forwarding industries.

Overview

        The Company’s truckload segment comprises the majority of its operations, representing 85.3% of consolidated revenues in the first quarter of 2004. Revenues are primarily earned by transporting freight for customers. Additionally, revenues are derived from fuel surcharges to customers and accessorial charges such as loading and unloading fees and equipment detention. The main factors that impact revenue include the revenue per mile earned from customers, number of miles driven and the percentage of miles driven for which the Company is compensated. The aforementioned factors relate primarily to the general level of economic activity in the United States, inventory levels, customer demand and the level of truck capacity.

        U.S. Xpress offers its customer base expertise within the specialized needs of medium to long-haul solo, team expedited and regional and dedicated contract carriage. In recent years U.S. Xpress has diversified its truckload services by focusing on growth in regional and dedicated contract services while reducing its dependency on long-haul solo freight. The approximate percentage of truckload revenue by service type in the first quarter of 2004 is medium to long-haul solo 57.0%, team expedited 16.0%, regional 14.0% and dedicated contract 13.0%.

        Xpress Global Systems’ offers its customer base expertise within the specialized needs of floorcovering logistic services and airport-to-airport transportation. The approximate percentage of Xpress Global Systems’ revenue by service type in the first quarter of 2004 is floorcovering logistic 65.0% and airport-to-airport 35.0%.

        Prior to the second half of 2003, the economic environment was sluggish which resulted in lower freight demand and excess capacity within the truckload industry. Accordingly, the truckload industry generally experienced declines in asset utilization, limited ability to improve rates and lower operating margins. However, in the second half of 2003 and during the first quarter of 2004, the U.S. economy and freight tonnage experienced stronger growth. This along with the reduction in capacity enabled the industry to increase pricing during fiscal 2003 and the first quarter of 2004. During the first quarter of 2004, U.S. Xpress achieved a 6.0% increase in the average rate per mile compared to the same period in 2003.

        The trucking industry and the Company continued to experience an increase in operating costs during the first quarter of 2004 including insurance premiums and claims and the cost of truck ownership including lower residual values for used trucks combined with the cost of the new EPA compliant truck engines. The industry also continues to experience an increasingly difficult driver and owner-operator environment.  The Company anticipates the driver and owner-operator supply to remain tight within the industry throughout 2004. In order to address this issue, the Company initiated various programs to enhance its recruiting and retention efforts and implemented an owner-operator pay increase of approximately $0.03 per mile and a driver increase of approximately 8.0% during the first quarter of 2004.

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        Effective January 4, 2004, the new federally mandated hours of service rules adopted by the DOT became effective for all drivers. During the fourth quarter of 2003, the Company implemented training for all drivers and operational personnel to ensure a smooth transition and continue to work very closely with customers to mitigate the impact. Effective January 2004, accessorial charges to customers were increased with a corresponding increase in accessorial pay rates for drivers to compensate for the anticipated adverse impact on utilization. Although it is too early to determine the full impact of the new rules, the Company has experienced minimal disruption to date in its operations. The Company believes that the effect of the new hours of service may adversely impact overall utilization to a degree. However, it has anticipated that the above described increases in assessorial charges and actions taken by customers to improve efficiency will largely mitigate the effect on the Company’s financial results.

Consolidated Results of Operations

        The following table sets forth the percentage relationships of expense items to total revenue, excluding fuel surcharge, for each of the periods indicated below. Fuel surcharge revenue is offset against fuel and fuel taxes. Management believes that eliminating the impact of this source of revenue provides a more consistent basis for comparing results of operations form period to period.

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Comparison of the Three Months Ended March 31, 2004 to the Three Months Ended March 31, 2003

Operating revenues net of fuel surcharges, increased 7.1% to $225.4 million during the three months ended March 31, 2004 compared to $210.4 million during the same period in 2003. U.S. Xpress revenue, net of fuel surcharges, increased 4.2% to $197.9 million during the three months ended March 31, 2004 compared to $189.9 million during the same period in 2003, due primarily to an increase of 6.0% in average revenue per mile to $1.352 from $1.275. The increase in average revenue per mile is due to increased rates, offset by a 1.2% decline in average trucks and a 0.4% decline in average revenue miles per tractor per period. Xpress Global Systems’ revenue increased 18.2% to $34.4 million during the three months ended March 31, 2004 compared to $29.1 million during the same period in 2003. Within Xpress Global Systems, floorcovering revenue increased 23.7% to $22.5 million, due to new and additional business with large floorcovering retailers and manufacturers combined with increased rates and  airport-to-airport revenues increased 9.0% to $11.9 million.

Salaries, wages and benefits remained relatively consistent as a percentage of revenue at 36.0% during the three months ended March 31, 2004 compared to 35.9% during the same period in 2003. Salaries, wages and benefits increased 7.4% to $81.2 million during the three months ended March 31, 2004 compared to $75.6 million during the same period in 2003. The increase is primarily due to a driver pay increase of approximately 8.0% in February 2004 and an increase in workers’ compensation and group health insurance costs combined with a growth in headcount to support the expansion of facilities and additional volume of business at Xpress Global Systems.

Fuel and fuel taxes net of fuel surcharges, as a percentage of revenue, was 11.9% during the three months ended March 31, 2004 compared to 12.9% during the same period in 2003. The fuel prices net of fuel surcharges during the three months ended March 31, 2004 were relatively consistent with the same period in 2003.  The decrease is due primarily to an approximate 4.7% decline in company tractor miles during the three months ended March 31, 2004 compared to the same period in 2003, offset by the lower fuel efficiency of the new EPA compliant engines.

Vehicle rents as a percentage of revenue, was 8.3% during the three months ended March 31, 2004 compared to 8.5% during the same period in 2003. Vehicle rents increased 3.9% to $18.6 million during the three months ended March 31, 2004 compared to $17.9 million during the same period in 2003. The increase is primarily due to an increase in the average number of trailers financed under operating leases to 8,056 compared to 6,962 during the three months ended March 31, 2004 and 2003, respectively.

Depreciation and amortization as a percentage of revenue, was 4.6% during the three months ended March 31, 2004 compared to 4.3% during the same period in 2003. The increase is primarily due to the increased cost of the new EPA compliant engines combined with an increase in the average number of owned tractors and trailers to 1,607 and 7,270, respectively, during the period ending March 31, 2004 compared to 1,374 and 6,194, respectively, during the same period in 2003.

Purchased transportation, as a percentage of revenue, was 18.4% during the three months ended March 31, 2004 compared to 17.2% during the same period in 2003. The increase is due to the increased use of rail transportation for certain long-haul truckload freight in 2004. The increase was offset by a decrease in the average number of owner-operators during the three months ended March 31, 2004 to 852, or 15.7% of the total fleet, compared to 1,000, or 18.2% of the total fleet, for the same period in 2003.

Operating expenses and supplies, as a percentage of revenue, was 7.0% during the three months ended March 31, 2004 compared to 7.5% during the same period in 2003. The decrease is due to a reduction in maintenance expense due to a decline in the average age of the Company's tractor fleet to approximately 23 months during the three months ended March 31, 2004 compared to approximately 29 months during the same period in 2003.

Insurance premiums and claims remained consistent as a percentage of revenue, at 5.2% during the three months ended March 31, 2004 and 2003. Insurance premiums and claims increased 6.4% to $11.6 million during the three

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months ended March 31, 2004 compared to $10.9 million during the same period in 2003. The increase is due to an increase in insurance rates combined with an increase in liability claims, offset by a decrease in cargo and physical damage claims. The Company is self-insured up to certain limits for cargo loss, physical damage and liability (personal injury and property damage). The current retention level per occurrence for cargo loss is $250,000 ($200,000 for the same period in 2003) and the retention level for liability is $2.0 million per occurrence ($500,000 for the same period in 2003 with the risk for the $1.0 million to $3.0 million level of cost per occurrence). The Company maintains insurance with licensed insurance companies above amounts for which it is self-insured for cargo and liability. The Company accrues for the uninsured portion of pending claims, plus any incurred but not reported claims. The accruals are estimated based on the Company’s evaluation of the type and severity of individual claims and future development based on historical trends combined with the assistance of independent actuaries. Insurance premiums and claims expense will fluctuate based on claims experience, premium rates and self-insurance retention levels.

Interest expense decreased $813,000 or 27.6%, to $2.1 million during the three months ended March 31, 2004 compared to $2.9 million during the same period in 2003. The decrease is primarily attributable to a decline in average borrowings, combined with a decrease in the weighted average interest rate to 5.04% during the period ended March 31, 2004 compared to 6.30% during the same period in 2003.

The effective tax rate was 46.0% for the three months ended March 31, 2004. The rate is higher than the federal statutory rate of 35.0%, primarily as a result of per diems paid to drivers which are not fully deductible for federal income tax purposes. The Company initiated the per diem driver pay plan in February 2002.

Liquidity and Capital Resources

Cash Flows

Cash used in operations was $497,000 during the three months ended March 31, 2004 compared to cash provided by operating activities of $3.4 million for the same period in 2003. The change can be attributed to an increase in accounts receivable combined with a decline in accounts payable and other accrued liabilities.

Cash used in investing activities was $11.8 million during the three months ended March 31, 2004 compared to cash provided by investing activities of $11.7 million during the same period in 2003. The cash used during the 2004 period related to the financing of tractors, which had previously been financed through operating leases, using proceeds from the revolving line of credit, combined with the purchase of trailers to support the expansion of the Company’s regional truckload business and the expedited rail program. Net cash provided by investing activities during the same period in 2003 can be attributed to the Company selling significantly more revenue equipment generating cash proceeds, while the replacement of revenue equipment was primarily funded through the use of operating leases.

Cash provided by financing activities was $12.3 million during the three months ended March 31, 2004 compared to cash used in financing activities of $14.9 million during the same period in 2003. During the first quarter of 2004, the Company financed the purchase of revenue equipment through long-term debt resulting in net borrowings of $7.5 million during the three months ended March 31, 2004 compared to net repayments of $9.2 million for the same period in 2003. Current maturities of long-term debt at March 31, 2004 of $24.4 million include $7.0 million in balloon payments related to maturing revenue equipment installment notes. The balloon payments are expected to be funded primarily with proceeds from the sale of the related revenue equipment, which is generally covered by repurchase and/or trade agreements in principle between the Company and the equipment manufacturer.

Revolving Credit Agreement

On March 29, 2002, the Company entered into a $100.0 million senior secured revolving credit facility. Proceeds from this new facility were used to repay the then existing revolving credit facility. The revolving credit facility provides for

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borrowings up to $100.0 million, with availability at any given time based on specified percentages of eligible receivables and revenue equipment, less reserves, under the facility’s Borrowing Base formula. Letters of credit under the facility are limited to $37.0 million. The facility matures in March 2007.

The facility allows the Company to select interest rates for all or any portion of the outstanding balance, based on a Base Rate (based on the domestic prime rate) plus an Applicable Margin or LIBOR plus an Applicable Margin. The Applicable Margin ranges from 0.75% to 1.50% for Base Rate Loans and from 2.25% to 3.00% for LIBOR Loans, based in each case on the aggregate availability as defined. At March 31, 2004, the Applicable Margin was 0.75% for Base Rate Loans and 2.25% for LIBOR Loans. The facility also prescribes additional fees for Letter of Credit transactions and a monthly commitment fee based on the difference between the total commitment and the total borrowing capacity utilized by the Company from time to time. The interest rate for the Base Rate and LIBOR loans as of March 31, 2004 was 4.75% and 3.34%, respectively.

The facility requires, among other things, maintenance by the Company of prescribed minimum amounts of Consolidated Tangible Net Worth, Fixed Charge Coverage Ratios and Leverage Ratios. It also: (1) limits the Company’s future capital expenditures; (2) prohibits all acquisitions by the Company of its own capital stock or the payment of dividends on such stock; and (3) effectively prohibits future asset acquisitions or dispositions (except in the ordinary course of business) or other business combination transactions by the Company without the Lenders’ consent. The Company was in compliance with these covenants as of March 31, 2004.

At March 31, 2004, $14.0 million in borrowings and $36.2 million in letters of credit were outstanding under the facility, with $43.8 million available to borrow. The facility is secured by substantially all assets of the Company, other than real estate and assets securing other debt. Subsequent to quarter-end, the Company increased outstanding letters of credit to $37.0 million.

Off Balance Sheet Arrangements

The Company leases certain revenue and service equipment and office and terminal facilities under long-term non-cancelable operating leases. In making the decision to finance revenue equipment or facilities through long-term debt or by entering into non-cancelable lease agreements, the Company considers interest rates, capital requirements and the tax advantages of leasing versus owning the equipment or facilities. At March 31, 2004, the Company leased approximately 3,500 tractors, 8,100 trailers and 50 office and terminal facilities under non-cancelable operating leases with termination dates ranging from April 2004 to February 2011. Lease payments on revenue equipment and office and terminal facilities are included in vehicle rents and general and other operating expenses in the consolidated statement of operations, respectively. Rental expense related to revenue equipment and facilities was $20.2 million in the first quarter of 2004. The remaining obligation as of March 31, 2004 was $198.8 million, with $54.5 million due in the next twelve months.

Certain equipment leases provide for guarantees by the Company of a portion of the residual amount under certain circumstances at the end of the lease term. The maximum potential amount of future payments (undiscounted) under these guarantees is approximately $90.1 million at March 31, 2004. The residual value of a substantial portion of the leased revenue equipment is covered by repurchase or trade agreements in principle between the Company and the equipment manufacturer. Management estimates the fair value of the guaranteed residual values for leased revenue equipment to be immaterial. Accordingly, the Company has no guaranteed liabilities accrued in the accompanying consolidated balance sheets.

Cash Requirements

Management believes that funds provided by operations, borrowings under its line of credit, equipment installment loans and long-term operating lease financing will be sufficient to fund its cash needs and anticipated capital expenditures for the next twelve months. The Company’s business will continue to require over the long-term, significant capital

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investments in revenue equipment, which may require the Company to seek additional borrowings or equity capital. The availability of additional capital will depend upon prevailing market conditions, the market price of the Company’s common stock of which we have limited control, as well as our financial condition and results of operations. Based on recent operating results, anticipated future cash flows and sources of financing expected to be available, the Company does not expect any significant liquidity constraints in the foreseeable future.

The following table represents the Company’s outstanding contractual obligations at March 31, 2004 excluding letters of credit of $36.2 million. The letters of credit are maintained primarily to support the Company’s insurance program and are renewed on an annual basis.

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Critical Accounting Policies and Estimates

In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of its financial statements in conformity with generally accepted accounting principles. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes that the following discussion addresses the Company’s most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Recognition of Revenue

The Company generally recognizes revenue and direct costs when shipments are completed. Certain revenue of Xpress Global Systems, representing approximately 10.0% of consolidated revenues at March 31, 2004, is recognized upon manifest. Manifest refers to the time when the trailer of the independent carrier is loaded, sealed and ready to leave the dock. Estimated expenses are recorded simultaneous to the recognition of revenue. Had revenue been recognized using another method, such as completed shipment, the impact would have been insignificant to the Company’s consolidated financial statements.

Income Taxes

Significant management judgment is required in determining the Company’s provision for income taxes and in determining whether deferred tax assets will be realized in full or in part. Deferred tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income in years in which the temporary differences are expected to be recovered or settled. When it is more likely than not that all or some portion of specific deferred tax assets, such as state tax credit carry-forwards or state net operating loss carry-forwards will not be realized, a valuation allowance must be established for the amount of the deferred tax assets that are determined not realizable. A valuation allowance for deferred tax assets has not been deemed necessary due to the Company’s profitable operations on both a consolidated and separate legal entity basis. However, if the facts or financial results were to change, thereby impacting the likelihood of the realization of the deferred tax assets, judgment would be applied to determine the amount of the valuation allowance required at that time for that period.

The determination of the combined tax rate used to calculate the Company’s provision for income taxes for both current and deferred income taxes also requires significant judgment by management. FAS 109 requires that the net deferred tax asset or liability be valued using enacted tax rates that management believes will be in effect when these temporary differences reverse. The Company uses the combined tax rates in effect at the time the financial statements are prepared since no better information is available. If changes in the federal statutory rate or significant changes in the statutory state and local tax rates occur prior to or during the reversal of these items or if the filing obligations of the Company were to change materially, this could change the combined rate and, by extension, the Company’s provision for income taxes.

Depreciation

Property and equipment are carried at cost. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the related assets (net of estimated salvage value or trade-in value). The Company generally uses estimated useful lives of 4-5 years and 7-10 years for tractors and trailers, respectively, with estimated salvage values ranging from 30% - 50% of the capitalized cost. The residual value of a substantial portion of the Company’s equipment is covered by repurchase or trade agreements in principle between the Company and the equipment manufacturer.

Periodically, the Company evaluates the useful lives and salvage values of its revenue equipment and other long-lived assets based upon, but not limited to, its experience with similar assets including gains or losses upon dispositions of such assets, conditions in the used equipment market and prevailing industry practices. Changes in useful lives or

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salvage value estimates, or fluctuations in market values that are not reflected in the Company’s estimates, could have a material impact on financial results. Further, if the Company’s equipment manufacturer was unable to perform under the terms of the agreement for guaranteed trade-in values, it could have a materially negative impact on financial results.

Goodwill

The excess of the consideration paid by the Company over the estimated fair value of identifiable net assets acquired has been recorded as goodwill and prior to 2002, had been amortized on the straight-line basis over periods ranging from 20 to 40 years. The Company previously evaluated whether subsequent events and circumstances occurred that indicated the remaining estimated useful life of goodwill might warrant revision or that the remaining balance may not have been recoverable. When factors indicated that goodwill should be evaluated for possible impairment, the Company used an estimate of the future undiscounted net cash flows of the related businesses over the remaining life of the goodwill in measuring whether goodwill is recoverable.

In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires that goodwill not be amortized, and that amounts recorded as goodwill are to be tested for impairment. The Company adopted SFAS No. 142 effective January 1, 2002. The Company tested goodwill for impairment using the two-step process prescribed in SFAS No. 142. The first step is a screen for potential impairment, while the second step measures impairment, if any. The Company completed the required impairment tests of goodwill and noted no impairment of goodwill in 2003. The impairment tests for fiscal 2004 will be conducted during the fourth quarter to determine any impairment issues.

A significant amount of judgment is required in performing goodwill impairment tests. Such tests include estimating the fair value of the Company’s reporting units. As required by SFAS No. 142, the Company compared the estimated fair value of the reporting units with their respective carrying amounts including goodwill. The Company defines a reporting unit as an operating segment. Under SFAS No. 142, fair value refers to the amount for which the entire reporting unit could be bought or sold. The Company’s methods for estimating reporting unit values include asset and liability fair values and other valuation techniques, such as discounted cash flows and multiples of earnings, or other financial measures. Each of these methods involve significant estimates and assumptions, including estimates of future financial performance and the selection of appropriate discount rates and valuation multiples.

Claims Reserves and Estimates

Claims reserves consist of estimates of cargo loss, physical damage, liability (personal injury and property damage), employee medical expenses and workers’ compensation claims within the Company’s established retention levels. Claims in excess of retention levels are generally covered by insurance in amounts the Company considers adequate. Claims accruals represent the uninsured portion of pending claims including estimates of adverse development of known claims, plus an estimated liability for incurred but not reported claims. Accruals for cargo loss, physical damage, liability and workers’ compensation claims are estimated based on the Company’s evaluation of the type and severity of individual claims and historical information primarily its own claims experience along with assumptions about future events combined with the assistance of independent actuaries. Changes in assumptions as well as changes in actual experience could cause these estimates to change in the near future.

Workers’ compensation and liability claims are particularly subject to a significant degree of uncertainty due to the potential for growth and development of the claims over time. Claims and insurance reserves related to workers’ compensation are estimated by an independent third-party actuary and the Company refers to these estimates in establishing the reserve. Liability reserves are estimated based on historical experience and trends, the type and severity of individual claims and assumptions about future costs. Further, in establishing the workers’ compensation and liability reserves, the Company must take into account and estimate various factors, including, but not limited to, assumptions concerning the nature and severity of the claim, the effect of the jurisdiction on any award or settlement, the length of time until ultimate resolution, inflation rates in health care and in general, interest rates, legal expenses and other factors. The

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Company’s actual experience may be different than its estimates, sometimes significantly. Additionally, changes in assumptions made in actuarial studies could potentially have a material effect on the provision for workers’ compensation claims.

The Company has experienced significant increases in insurance premiums and claims expense since September 2001 primarily related to workers’ compensation and liability insurance. The increases can be attributed to an increase in excess insurance premiums, adverse development in prior year losses, unfavorable accident experience and an increase in retention levels. The Company’s insurance and claims expense will vary based on the frequency and severity of claims, the premium expense and the level of self-insured retention. The increase in self-insured retention in September 2003 may cause insurance and claims expense to be higher or more volatile in future periods than in historical periods.

Recent Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51.” The Interpretation requires the consolidation of entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Currently, entities are generally consolidated by an enterprise when it has a controlling interest through ownership of a majority voting interest in the entity. In December 2003, the FASB issued a revision of the Interpretation, which deferred the effective date to the first reporting period after March 15, 2004. The Interpretation permits consolidation at historical carrying amounts as if the Interpretation had always been applied, or at fair value, if determining historical amounts is impracticable. The Interpretation may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative effective adjustment as of the beginning of the first year restated. The adoption of Interpretation No. 46 had no impact on the Company’s financial statements.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. In particular, SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in SFAS No. 133 and it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003 and is to be applied prospectively. The adoption of SFAS No. 149 had no impact on the Company’s financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”, which specifies that instruments within its scope are obligations of the issuer and, therefore, the issuer must classify them as liabilities. Financial instruments within the scope of the pronouncement include mandatory redeemable financial instruments, obligations to repurchase the issuer’s equity shares by transferring assets and certain obligations to issue a variable number of shares. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003. The adoption of SFAS No. 150 had no impact on the Company’s financial statements.

Inflation

Inflation could have an adverse impact on the Company’s costs of operations. A period of inflation may cause interest rates, revenue equipment prices, wages paid to attract and retain qualified drivers and fuel prices to increase, which would adversely affect results of operations unless corresponding increases in freight rates could be achieved. However, inflation has not had a material effect on the Company’s results of operations or financial condition during the past three years.

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Seasonality

In the trucking industry, results of operations generally show a seasonal pattern as customers increase shipments prior to and reduce shipments during and after the winter holiday season. Additionally, shipments can be adversely impacted by winter weather conditions. The Company’s operating expenses have historically been higher in the winter months due primarily to decreased fuel efficiency, increased maintenance costs of revenue equipment in colder weather and increased insurance and claims costs due to adverse winter weather conditions. Revenue can also be affected by bad weather and holidays, since revenue is directly related to available working days of shippers.

This Quarterly Report contains certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements may be identified by their use of terms or phrases such as “expects”, “estimates”, “projects”, “believes”, “anticipates”, “intends”, and similar terms and phrases, and may include, but not be limited to projections of revenues, income or loss, capital expenditures, acquisitions, plans for growth and future operations, financing needs or plans or intentions relating to acquisitions by the Company, as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by or underlying the forward-looking statements. The following factors among others, could cause actual results to differ materially from those in forward looking statements: excess tractor or trailer capacity in the trucking industry; decrease in demand for the Company’s services; inventory levels; recessionary economic cycles and downturns in customers’ business cycles; increases or rapid fluctuations in fuel prices, interest rates, fuel taxes, tolls and license and registration fees; increases in the prices paid for new revenue equipment; resale value of used revenue equipment; the ability to obtain long-term debt financing and the continued availability of financing in the amounts and on the terms necessary to support the Company’s future business; difficulty in attracting and retaining qualified drivers and owner-operators; increased experience in the severity and frequency of claims relating to liability, cargo loss, physical damage, workers’ compensation and health insurance related claims; increased premiums and deductibles; seasonal factors such as weather conditions; regulatory requirements including the new hours of service rules. The Company disclaims any obligation to update or revise any forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking information.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

The Company has interest rate exposure arising from the Company’s line of credit and other installment notes, which have variable interest rates. At March 31, 2004, the Company had $51.6 million of variable rate debt. If interest rates on the Company’s existing variable rate debt were to increase by 10% from their March 31, 2004 rates for the next twelve months, there would be no material adverse impact on the Company’s results of operations related to existing debt obligations.

Commodity Price Risk

Fuel is one of the Company’s largest expenditures. The price and availability of diesel fuel fluctuates due to changes in production, seasonality and other market factors generally outside the Company’s control. Many of the Company’s customer contracts contain fuel surcharge provisions to mitigate increases in the cost of fuel. Fuel surcharges to customers do not fully recover all of fuel increases due to engine idle time and out-of-route and empty miles not billable to the customer.

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Item 4. Controls and Procedures

As of the end of the period covered by this Form 10-Q, an evaluation under Rule 13a-15 of the Securities Exchange Act of 1934 was performed under the supervision and with the participation of our management, including our principal executive and financial officers, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our principal executive and financial officers concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. There have been no changes in our internal controls over financial reporting that materially affected or are reasonably likely to materially affect internal control over financial reporting during the first fiscal quarter of the period covered by this report.

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U.S. XPRESS ENTERPRISES, INC.

PART II — OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a)        Exhibits

(b)       Reports on Form 8-K

            The following items were reported:

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SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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EXHIBIT 31.1

CERTIFICATIONS

I, Ray M. Harlin, certify that:

1.     I have reviewed this Quarterly Report on Form 10-Q of U.S. Xpress Enterprises, Inc.;

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EXHIBIT 31.2

CERTIFICATIONS

I, Patrick E. Quinn, certify that:

EXHIBIT 31.3

CERTIFICATIONS

I, Max L. Fuller, certify that:

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

        In connection with the Quarterly Report of U.S. Xpress Enterprises, Inc. (the “Company”) on Form 10-Q for the three months ending March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to 18 U.S.C. § 1350 (as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002) that he is the President (the Chief Executive Officer) of the Company and that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/Patrick E. Quinn
——————————————
Patrick E. Quinn
Co-Chairman of the Board of Directors,
President and Treasurer

Date: May 10, 2004

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

        In connection with the Quarterly Report of U.S. Xpress Enterprises, Inc. (the “Company”) on Form 10-Q for the three months ending March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to 18 U.S.C. § 1350 (as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002) that he is the Chief Financial Officer of the Company and that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/Ray M. Harlin
——————————————
Ray M. Harlin
Executive Vice President of Finance,
and Chief Financial Officer

Date: May 10, 2004