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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
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 000-20793
SMITHWAY MOTOR XPRESS CORP.
----------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 42-1433844
- ---------------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2031 QUAIL AVENUE
FORT DODGE, IOWA 50501
- ---------------------------------------- ------------------------------------
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 515/576-7418
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES [ ] NO [X]
As of September 30, 2004, the registrant had 3,848,821 shares of Class A Common
Stock and 1,000,000 shares of Class B Common Stock outstanding.
1
PAGE
NUMBER
------
PART I
FINANCIAL INFORMATION
Item 1 Financial Statements 3
Condensed Consolidated Balance Sheets as of December 31, 2003 and
September 30, 2004 (unaudited)........................................ 3-4
Condensed Consolidated Statements of Operations for the three and nine
months ended September 30, 2003 and 2004 (unaudited)................... 5
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2003 and 2004 (unaudited)................... 6
Notes to Condensed Consolidated Financial Statements (unaudited)......... 7-8
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 9-18
Item 3 Quantitative and Qualitative Disclosures About Market Risks.............. 18
Item 4 Controls and Procedures.................................................. 19
PART II
OTHER INFORMATION
Item 1 Legal Proceedings........................................................ 19
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds.............. 19
Item 3 Defaults Upon Senior Securities.......................................... 19
Item 4 Submission of Matters to a Vote of Security Holders...................... 20
Item 5 Other Information........................................................ 20
Item 6 Exhibits ................................................................ 20
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
DECEMBER 31, SEPTEMBER 30,
2003 2004
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 355 $ 5,260
Receivables:
Trade............................................... 14,231 17,918
Other............................................... 458 527
Recoverable income taxes............................ 8 -
Inventories............................................ 882 1,102
Deposits, primarily with insurers...................... 945 943
Prepaid expenses....................................... 1,037 1,014
Deferred income taxes.................................. 2,322 2,797
----------- ------------
Total current assets......................... 20,238 29,561
----------- ------------
Property and equipment:
Land................................................... 1,548 1,438
Buildings and improvements............................. 8,209 7,793
Tractors............................................... 69,384 68,015
Trailers............................................... 39,977 37,767
Other equipment........................................ 5,516 4,225
----------- ------------
124,634 119,238
Less accumulated depreciation......................... 70,235 67,534
----------- ------------
Net property and equipment................... 54,399 51,704
----------- ------------
Goodwill................................................. 1,745 1,745
Other assets............................................. 298 277
----------- ------------
$ 76,680 $ 83,287
=========== ============
See accompanying notes to condensed consolidated financial statements.
3
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
DECEMBER 31, SEPTEMBER 30,
2003 2004
----------- -------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.................. $ 10,582 $ 10,525
Accounts payable...................................... 4,827 7,566
Accrued loss reserves................................. 4,974 6,160
Accrued compensation.................................. 2,535 3,489
Checks in excess of cash balances..................... 672 -
Other accrued expenses................................ 430 473
Income taxes payable.................................. - 186
----------- -------------
Total current liabilities................... 24,020 28,399
Long-term debt, less current maturities................. 22,609 22,001
Deferred income taxes................................... 9,020 10,423
Line of credit.......................................... 426 -
----------- -------------
Total liabilities........................... 56,075 60,823
----------- -------------
Stockholders' equity:
Preferred stock....................................... - -
Common stock:
Class A............................................ 40 40
Class B............................................ 10 10
Additional paid-in capital............................ 11,393 11,393
Retained earnings..................................... 9,576 11,430
Reacquired shares, at cost............................ (414) (409)
----------- -------------
Total stockholders' equity Commitments...... 20,605 22,464
----------- -------------
$ 76,680 $ 83,287
=========== =============
See accompanying notes to condensed consolidated financial statements.
4
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2003 2004 2003 2004
----------- ----------- ----------- -----------
Operating revenue:
Freight .................................... $ 42,325 $ 48,469 $ 124,056 $ 138,338
Other ...................................... 136 189 532 599
----------- ----------- ----------- -----------
Operating revenue .................... 42,461 48,658 124,588 138,937
----------- ----------- ----------- -----------
Operating expenses:
Purchased transportation ................... 13,891 16,125 42,590 45,384
Compensation and employee benefits ......... 13,185 13,572 38,812 40,272
Fuel, supplies, and maintenance ............ 7,420 9,710 22,351 27,352
Insurance and claims ....................... 1,370 1,288 3,268 3,953
Taxes and licenses ......................... 893 906 2,573 2,778
General and administrative ................. 1,867 1,714 5,081 5,148
Communications and utilities ............... 337 282 1,130 962
Depreciation and amortization .............. 3,467 3,203 10,958 9,695
----------- ----------- ----------- -----------
Total operating expenses ............. 42,430 46,800 126,763 135,544
----------- ----------- ----------- -----------
(Loss) earnings from operations ........ 31 1,858 (2,175) 3,393
Financial (expense) income
Interest expense ........................... (443) (378) (1,389) (1,141)
Interest income ............................ 21 16 25 26
Other income ............................... - - - 727
----------- ----------- ----------- -----------
(Loss) earnings before income taxes..... (391) 1,496 (3,539) 3,005
Income tax (benefit) expense .................... (86) 642 (1,218) 1,151
----------- ----------- ----------- -----------
Net (loss) earnings ................... $ (305) $ 854 $ (2,321) $ 1,854
----------- ----------- ----------- -----------
Basic (loss) earnings per share ................. $ (0.06) $ 0.18 $ (0.48) $ 0.38
=========== =========== =========== ===========
Diluted (loss) earnings per share ............... $ (0.06) $ 0.17 $ (0.48) $ 0.38
=========== =========== =========== ===========
Basic weighted average shares outstanding ....... 4,846,821 4,848,821 4,846,821 4,847,609
Effect of dilutive stock options ...... - 120,068 - 92,883
----------- ----------- ----------- -----------
Diluted weighted average shares outstanding ..... 4,846,821 4,968,889 4,846,821 4,940,442
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
5
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2003 2004
-------- --------
Cash flows from operating activities:
Net (loss) earnings ............................................... $ (2,321) $ 1,854
-------- --------
Adjustments to reconcile net (loss) earnings to cash
provided by operating activities:
Depreciation and amortization ................................... 10,958 9,696
Deferred income tax (benefit) expense ........................... (1,244) 928
Change in:
Receivables .................................................. (2,269) (3,562)
Inventories .................................................. (161) (220)
Deposits, primarily with insurers ............................ (175) 2
Prepaid expenses ............................................. (172) 23
Accounts payable and other accrued liabilities ............... 3,294 4,922
-------- --------
Total adjustments .......................................... 10,231 11,789
-------- --------
Net cash provided by operating activities ................ 7,910 13,643
-------- --------
Cash flows from investing activities:
Purchase of property and equipment ................................ (287) (586)
Proceeds from sale of property and equipment ...................... 2,765 2,757
Other ............................................................. 251 21
-------- --------
Net cash provided by investing activities ................ 2,729 2,192
-------- --------
Cash flows from financing activities:
Net payments on line of credit .................................... (1,114) (426)
Principal payments on long-term debt .............................. (9,685) (9,837)
Change in checks issued in excess of cash balances ................ 224 (672)
Treasury stock reissued ........................................... - 5
-------- --------
Net cash used in financing activities .................... (10,575) (10,930)
-------- --------
Net increase in cash and cash equivalents ................ 64 4,905
Cash and cash equivalents at beginning of period .................... 105 355
Cash and cash equivalents at end of period .......................... $ 169 $ 5,260
======== ========
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest ....................................................... $ 1,353 $ 1,175
Income taxes ................................................... 23 28
======== ========
Supplemental schedules of noncash investing and
financing activities:
Notes payable issued for tractors and trailers ................... $ 3,705 $ 9,172
======== ========
See accompanying notes to condensed consolidated financial statements.
6
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Smithway Motor Xpress Corp., a Nevada holding company, and its four wholly
owned subsidiaries (the "Company", "we", "us", or "our"). All significant
intercompany balances and transactions have been eliminated in
consolidation.
The condensed consolidated financial statements have been prepared,
without audit, in accordance with accounting principles generally accepted
in the United States of America, pursuant to the published rules and
regulations of the Securities and Exchange Commission. In our opinion, the
accompanying condensed consolidated financial statements include all
adjustments which are necessary for a fair presentation of the results for
the interim periods presented, such adjustments being of a normal
recurring nature. Certain information and footnote disclosures have been
condensed or omitted pursuant to such rules and regulations. The December
31, 2003, Condensed Consolidated Balance Sheet was derived from our
audited balance sheet as of that date. It is suggested that these
condensed consolidated financial statements and notes thereto be read in
conjunction with the consolidated financial statements and notes thereto
included in our Form 10-K for the year ended December 31, 2003. Results of
operations in interim periods are not necessarily indicative of results to
be expected for a full year.
Certain 2003 balances have been reclassified to conform to 2004
presentation.
NOTE 2. LIQUIDITY
Although there can be no assurance, we believe that cash generated by
operations and available sources of financing for acquisitions of revenue
equipment will be adequate to meet our currently anticipated working
capital requirements and other cash needs through September 30, 2005. To
the extent that actual results or events differ from our financial
projections or business plans, our liquidity may be adversely affected.
Specifically, our liquidity may be adversely affected by one or more of
the following factors: a decrease in freight demand or a loss in customer
relationships or volume; the ability to attract and retain sufficient
numbers of qualified drivers and owner-operators; elevated fuel prices and
the ability to collect fuel surcharges; costs associated with insurance
and claims; increased exposure with respect to accident claims as a result
of a reduction of our excess insurance coverage limit; inability to
maintain compliance with, or negotiate amendments to, loan covenants; and
the possibility of shortened payment terms by our suppliers and vendors
worried about our ability to meet payment obligations. We expect to fund
our cash requirements primarily with cash generated from operations and
revolving borrowings under our bank financing arrangement. At September
30, 2004, our borrowing availability under the financing arrangement was
approximately $6.0 million.
NOTE 3. NET EARNINGS PER COMMON SHARE
Basic earnings per share have been computed by dividing net earnings by
the weighted-average outstanding Class A and Class B common shares during
each of the quarters. Diluted earnings per share have been calculated by
also including in the computation the effect of employee stock options,
nonvested stock, and similar equity instruments granted to employees as
potential common shares. Because we suffered a net loss for the quarter
and nine months ended September 30, 2003, the effects of potential common
shares were not included in the calculation for that period as their
effects would be anti-dilutive. Stock options outstanding at September 30,
2003, and 2004, totaled 299,150 and 305,650, respectively.
NOTE 4. STOCK OPTION PLANS
We have three stock-based employee compensation plans:
(1) We have reserved 25,000 shares of Class A common stock for
issuance pursuant to an outside director stock option plan. The term
of each option shall be six years from the grant date. Options vest
on the first anniversary of the grant date. The exercise price of
each stock option is 85 percent of the fair market value of the
common stock on the date of grant. In July 2000 we granted outside
directors 12,000 stock options in the aggregate not covered by this
plan.
7
(2) We have reserved 500,000 shares of Class A common stock for
issuance pursuant to an incentive stock option plan. Any shares
which expire unexercised or are forfeited become available again for
issuance under the plan. Under this plan, no awards of incentive
stock options may be made after December 31, 2004.
(3) We have reserved 400,000 shares of Class A common stock for
issuance pursuant to a new employee incentive stock option plan
adopted during 2001. Any shares which expire unexercised or are
forfeited become available again for issuance under the plan. Under
this plan, no award of incentive stock options may be made after
August 6, 2011.
We account for these plans under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations. No stock-based
employee compensation cost is reflected in the statement of operations for
options granted under these plans with exercise price equal to the market
value of the common stock on the date of the grant. An immaterial amount
of compensation cost is reflected in the statement of operations for
directors' options granted under these plans with exercise price less than
the market value of the common stock on the date of the grant.
The following table illustrates the effect on net loss and loss per share
if we had applied the fair value recognition provisions of FASB Statement
No. 123, "Accounting for Stock-Based Compensation," to stock-based
employee compensation. We used the Black-Scholes option pricing model to
determine the fair value of stock options issued. There were no stock
options granted during the third quarter of 2003 and 2004. The following
assumptions were used in determining the fair value of options granted
during the second quarter of 2004: weighted average risk-free interest
rate, 3.23%; weighted average expected life, 3 years; weighted average
expected volatility, 69%; and no expected dividends. There were no stock
options granted during the second quarter of 2003. There were no stock
options granted during the first quarter of 2004. The following
assumptions were used in determining the fair value of options granted
during the first quarter of 2003: weighted average risk-free interest
rate, 2.54%; weighted average expected life, 5 years; weighted average
expected volatility, 66%; and no expected dividends. For purposes of pro
forma disclosures, the estimated fair value of options is amortized to
expense over the options' vesting periods.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ------------------------
2003 2004 2003 2004
------- ------ ------- -------
Net (loss) earnings, as reported $ (305) $ 854 $(2,321) $ 1,854
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (4) (4) (13) (11)
Pro forma net (loss) earnings $ (309) $ 850 $(2,334) $ 1,843
======= ====== ======= =======
Basic (loss) earnings per share - as reported $ (0.06) $ 0.18 $ (0.48) $ 0.38
- pro forma $ (0.06) $ 0.18 $ (0.48) $ 0.38
Diluted (loss) earnings per share - as reported $ (0.06) $ 0.17 $ (0.48) $ 0.38
- pro forma $ (0.06) $ 0.17 $ (0.48) $ 0.37
NOTE 5. LONG-TERM DEBT
During April 2004, we amended our financing arrangement with LaSalle Bank
solely to extend the maturity date from January 1, 2005 to January 1,
2006.
During July 2004, we amended our financing arrangement with LaSalle Bank
to reduce the interest rate on the debt and to reduce our total credit
limit to $20 million. The reduction of the credit limit allows us to avoid
fees related to the unused and unnecessary portion of credit available
under the arrangement.
During August 2004, we amended our financing arrangement with LaSalle Bank
to allow for operating leases of equipment.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
Except for the historical information contained herein, the discussion in
this quarterly report on Form 10-Q contains forward-looking statements that
involve risk, assumptions, and uncertainties that are difficult to predict.
Words such as "anticipates," "believes," "estimates," "projects," "expects,"
variations of these words, and similar expressions, are intended to identify
such forward-looking statements. These statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Such
statements are based upon the current beliefs and expectations of the Company's
management and are subject to significant risks and uncertainties. Actual
results may differ from those set forth in forward-looking statements. The
following factors, among others, could cause actual results to differ materially
from those in forward-looking statements: failure to sustain the recent return
to quarterly operating profitability, which could result in violation of bank
covenants and acceleration of indebtedness at several financial institutions;
the ability to obtain financing on acceptable terms, and obtain waivers and
amendments to current financing in the event of default; economic recessions or
downturns in customers' business cycles; increases or rapid fluctuations in
inflation, interest rates, fuel prices, and fuel hedging; the availability and
costs of attracting and retaining qualified drivers and owner-operators;
increases in insurance premiums and deductible amounts, or changes in excess
coverage, relating to accident, cargo, workers' compensation, health, and other
claims; the resale value of used equipment and prices of new equipment; seasonal
factors such as harsh weather conditions that increase operating costs;
regulatory requirements that increase costs and decrease efficiency, including
emissions standards and hours-of-service regulations; changes in management;
excessive increases in capacity within truckload markets; surplus inventories;
decreased demand for transportation services offered by the Company; and the
ability to negotiate, consummate, and integrate acquisitions. Readers should
review and consider the various disclosures made by the Company in its press
releases, stockholder reports, and public filings, as well as the factors
explained in greater detail in the Company's annual report on Form 10-K.
The Company's fiscal year ends on December 31 of each year. Thus, this
report discusses the third quarter and first nine months of our 2003 and 2004
fiscal years.
We generate substantially all of our revenue by transporting freight for
our customers. Generally, we are paid by the mile for our services. We also
derive revenue from fuel surcharges, loading and unloading activities, equipment
detention, and other accessorial services. The main factors that affect our
revenue are the revenue per mile we receive from our customers, the percentage
of miles for which we are compensated, and the number of miles we generate with
our equipment. These factors relate, among other things, to the United States
economy, inventory levels, the level of capacity in the trucking industry,
specific customer demand, and driver availability. We monitor our revenue
production primarily through average revenue per tractor per week.
During the third quarter of 2004, our average revenue per tractor per week
(excluding fuel surcharge, brokerage, and other revenues) increased to $2,842
from $2,495 in the third quarter of 2003. We are encouraged by this improvement
and by the fact that our operating revenue increased $6.2 million (14.6%), while
weighted average tractors decreased 4% to 1,160 in the 2004 quarter from 1,208
in the 2003 quarter. This reduction was part of our planned disposition of
unseated company-owned tractors. In addition, we contracted with fewer
independent contractor providers of equipment.
The main factors that impact our profitability on the expense side are the
variable costs of transporting freight for our customers. These costs include
fuel expense, driver-related expenses, such as wages, benefits, training, and
recruitment, and independent contractor costs, which are recorded under
purchased transportation. Expenses that have both fixed and variable components
include maintenance and tire expense and our total cost of insurance and claims.
These expenses generally vary with the miles we travel, but also have a
controllable component based on safety, fleet age, efficiency, and other
factors. Our main fixed costs are the acquisition and financing of long-term
assets, such as revenue equipment and the compensation of non-driver personnel.
Effectively controlling our expenses is a key component of our profit
improvement plan.
9
For the three months ended September 30, 2004, operating revenue increased
14.6% to $48.7 million from $42.5 million during the same quarter in 2003. Net
earnings was $854,000, or $0.18 per basic share and $0.17 per diluted share,
compared with net loss of $305,000, or ($0.06) per basic and diluted share,
during the 2003 quarter.
For the nine months ended September 30, 2004, operating revenue increased
11.5% to $138.9 million from $124.6 million during the same period in 2003. Net
earnings was $1.9 million, or $0.38 per basic share and diluted share, compared
with net loss of $2.3 million, or ($0.48) per basic and diluted share, during
the first nine months of 2003. However, during the first quarter of 2004 we
recorded $727,000 of income from life insurance resulting from the death of
William G. Smith, our former President and Chief Executive Officer. This non
operating income is tax exempt and added $0.15 to our earnings per share for the
first nine months of 2004. This is a one time event which will not recur in the
future. Without the life insurance proceeds, our net earnings would have been
$1.1 million, or $0.23 per basic share and diluted share, during the 2004
period, compared with net loss of $2.3 million, or ($0.48) per basic and diluted
share, during the 2003 period. Our net earnings and earnings per share as
adjusted to exclude the life insurance proceeds are not in accordance with, or
an alternative for, generally accepted accounting principles. We believe that
the presentation of net earnings and the related per share amount excluding the
one-time effect of these life insurance proceeds provides useful information to
investors regarding business trends relating to our financial condition and
results of ongoing operations.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain
items to revenue for the three and nine months ended September 30, 2003 and
2004:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
2003 2004 2003 2004
------ ------ ------ ------
Operating revenue................................ 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Purchased transportation............... 32.7 33.1 34.2 32.7
Compensation and employee benefits...... 31.1 27.9 31.2 29.0
Fuel, supplies, and maintenance......... 17.5 20.0 17.9 19.7
Insurance and claims.................... 3.2 2.6 2.6 2.8
Taxes and licenses...................... 2.1 1.9 2.1 2.0
General and administrative.............. 4.4 3.5 4.1 3.7
Communication and utilities............. 0.8 0.6 0.9 0.7
Depreciation and amortization........... 8.2 6.6 8.8 7.0
----- ----- ----- -----
Total operating expenses................ 99.9 96.2 101.7 97.6
----- ----- ----- -----
(Loss) earnings from operations.................. 0.1 3.8 (1.7) 2.4
Interest expense, net............................ (1.0) (0.8) (1.1) (0.8)
Life insurance proceeds.......................... - - - 0.5
----- ----- ----- -----
(Loss) earnings before income taxes.............. (0.9) 3.1 (2.8) 2.2
Income tax (benefit) expense..................... (0.2) 1.3 (1.0) 0.8
----- ----- ----- -----
Net (loss) earnings.............................. (0.7)% 1.8% (1.9)% 1.3%
===== ===== ===== =====
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2004, WITH THREE MONTHS ENDED
SEPTEMBER 30, 2003
Operating revenue increased $6.2 million (14.6%), to $48.7 million in the
2004 quarter from $42.5 million in the 2003 quarter. The increase in operating
revenue resulted from increased average operating revenue per tractor per week
offset partially by a reduction in our weighted average tractors.
Average operating revenue per tractor per week, one measure of asset
productivity, increased significantly to $3,227 in the 2004 quarter from $2,704
in the 2003 quarter. Operating revenue includes revenue from operating our
trucks as well as other, more volatile revenue items, including fuel surcharge,
brokerage, and other revenue. We believe the analysis of tractor productivity is
more meaningful if fuel surcharge, brokerage, and other revenue are excluded
from the computation. Average revenue per tractor per week (excluding fuel
surcharge, brokerage, and other revenue) increased to $2,842 in the 2004 quarter
from $2,495 in the 2003 quarter, primarily due to increased production from our
seated equipment and a lower number of unseated company tractors. Revenue per
loaded mile (excluding fuel surcharge, brokerage, and other revenue) increased
nine cents to $1.48 in the 2004 quarter from $1.39 in the 2003 quarter,
reflecting
10
improved lane and customer selection, increased trucking demand, and improved
general economic conditions. Fuel surcharge revenue increased $2.3 million to
$3.6 million in the 2004 quarter from $1.3 million in the 2003 quarter. During
the third quarter of 2004 and 2003, approximately $2.2 million and $942,000,
respectively, of the fuel surcharge revenue collected helped to offset our fuel
costs. The remainder was passed through to independent contractors.
Our weighted average tractors decreased to 1,160 in the 2004 quarter from
1,208 in the 2003 quarter. This reflects our planned reduction in fleet size
implemented during 2003 which reduced the number of unmanned company-owned
tractors. In addition, we contracted with fewer independent contractor providers
of equipment. The reduction in fleet size and yield enhancement efforts were
consistent with our strategy of focusing on asset productivity. We believe a
certain level of success has been achieved, as our weighted average number of
tractors decreased 4.0% while operating revenue increased 14.6%.
Purchased transportation consists primarily of payments to independent
contractor providers of revenue equipment, expenses related to brokerage
activities, and payments under operating leases of revenue equipment. Purchased
transportation increased $2.2 million (16.1%), to $16.1 million in the 2004
quarter from $13.9 million in the 2003 quarter. As a percentage of revenue,
purchased transportation increased to 33.1% in the 2004 quarter from 32.7% in
the 2003 quarter. The changes reflect an increase in the amount of fuel
surcharges paid to independent contractors partially offset by a decrease in the
percentage of the fleet supplied by independent contractors and in the number of
independent contractors. The percentage of total operating revenue provided by
independent contractors decreased to 33.4% in the 2004 quarter from 34.9% in the
2003 quarter. The decline in independent contractors slowed significantly after
September, 2003 as freight demand and the general economy improved.
Compensation and employee benefits increased $387,000 (2.9%), to $13.6
million in the 2004 quarter from $13.2 million in the 2003 quarter. As a
percentage of revenue, compensation and employee benefits decreased to 27.9% in
the 2004 quarter from 31.1% in the 2003 quarter, reflecting an increase in our
revenue per loaded mile and fuel surcharge revenue which increases revenue
without a corresponding increase in wages. These factors were partially offset
by an increase in the percentage of the fleet comprised of company-owned
tractors and an increase in drivers' pay rate, which was raised approximately
two cents per mile on August 1, 2004. The pay rate increase has improved our
ability to compete for new drivers, and to retain current drivers, reducing our
number of unfilled units. However, if we experience a shortage of drivers in the
near future, the increase in driver pay would negatively impact our results of
operations to the extent that corresponding freight rate increases are not
obtained. Finally, increases in health care costs continue to negatively impact
our health insurance and worker's compensation expense.
Fuel, supplies, and maintenance increased $2.3 million (30.9%), to $9.7
million in the 2004 quarter from $7.4 million in the 2003 quarter. As a
percentage of revenue, fuel, supplies, and maintenance increased to 20.0% of
revenue in the 2004 quarter compared with 17.5% in the 2003 quarter. This
reflects higher fuel prices and an increase in the percentage of the fleet
comprised of company-owned tractors, partially offset by an increase in our rate
per loaded mile which increases revenue without a corresponding increase in
maintenance costs. Fuel prices increased approximately 27% to an average of
$1.76 per gallon in the 2004 quarter from $1.39 per gallon in the 2003 quarter.
The increase in fuel prices was partially offset by a $1.2 million increase in
fuel surcharge revenue attributable to company-owned tractors which is included
in operating revenue.
Insurance and claims decreased $82,000 (6.0%), to $1.3 million in the 2004
quarter from $1.4 million the 2003 quarter. As a percentage of revenue,
insurance and claims decreased to 2.6% of revenue in the 2004 quarter compared
with 3.2% in the 2003 quarter, reflecting an increase in our revenue per loaded
mile and fuel surcharge revenue which increases revenue without a corresponding
increase in insurance and claims. The insurance policies were renewed on July 1,
2004 resulting in no changes in our self-insured retention level or our excess
insurance coverage limit.
Taxes and licenses increased $13,000 (1.5%) to $906,000 in the 2004
quarter from $893,000 in the 2003 quarter. The decrease in the number of
company-owned tractors subject to annual license and permit costs was offset by
an increase in the need for over-dimensional and other permits. As a percentage
of revenue, taxes and licenses decreased to 1.9% of revenue in the 2004 quarter
compared with 2.1% of revenue in the 2003 quarter, reflecting an increase in our
revenue per loaded mile and fuel surcharge revenue which increases revenue
without a corresponding increase in taxes and licenses.
General and administrative expenses decreased $153,000 (8.2%), to $1.7
million in the 2004 quarter from $1.9 million in the 2003 quarter. As a
percentage of revenue, general and administrative expenses decreased to 3.5% in
the 2004 quarter from 4.4% in the 2003 quarter, reflecting lower legal and
consulting fees and an increase in our revenue per
11
loaded mile and fuel surcharge revenue which increases revenue without a
corresponding increase in general and administrative expense.
Communications and utilities decreased $55,000 (16.3%), to $282,000 in the
2004 quarter from $337,000 in the 2003 quarter, reflecting a decrease in our
weighted average tractors. As a percentage of revenue, communications and
utilities decreased to 0.6% of revenue in the 2004 quarter from 0.8% of revenue
in the 2003 quarter, reflecting an increase in our revenue per loaded mile and
fuel surcharge revenue which increases revenue without a corresponding increase
in communications and utilities expense.
Depreciation and amortization decreased $264,000 (7.6%), to $3.2 million
in the 2004 quarter from $3.5 million in the 2003 quarter. In accordance with
industry practices, the gain or loss on retirement, sale, or write-down of
equipment is included in depreciation and amortization. In the 2004 and 2003
quarter, depreciation and amortization included net gain from the sale of
equipment of $5,000 and $76,000, respectively. As a percentage of revenue,
depreciation and amortization decreased to 6.6% of revenue in the 2004 quarter
compared with 8.2% in the 2003 quarter, reflecting increased average revenue per
tractor and reduction of unseated tractors, which more efficiently spreads
depreciation expense, and an increase in our revenue per loaded mile and fuel
surcharge revenue which increases revenue without a corresponding increase in
depreciation and amortization expense. Additionally, some of our older equipment
still generates revenue but is no longer being depreciated. In the short-term,
we expect that the presence of older equipment which is not being depreciated
will more than offset increases in depreciation resulting from the addition of
new equipment to our fleet. Over the long-term, as we continue to upgrade our
equipment fleet, we expect depreciation or rent expense to increase.
Interest expense, net, decreased $60,000 (14.2%), to $362,000 in the 2004
quarter from $422,000 in the 2003 quarter. This decrease was attributable to
lower average debt outstanding. As a percentage of revenue, interest expense,
net, decreased to 0.8% of revenue in the 2004 quarter compared with 1.0% in the
2003 quarter.
As a result of the foregoing, our pre-tax margin increased to 3.1% in the
2004 quarter from (0.9%) in the 2003 quarter.
Our income tax expense in the 2004 quarter was $642,000, or 42.9% of
earnings before income taxes. Our income tax benefit in the 2003 quarter was
$86,000, or 22.0% of loss before income taxes. In both years, the effective tax
rate is different from the expected combined tax rate for a company
headquartered in Iowa because of the cost of nondeductible driver per diem
expense absorbed by us. The impact of paying per diem travel expenses varies
depending upon the ratio of drivers to independent contractors and the level of
our pre-tax earnings or loss.
As a result of the factors described above, net earnings was $854,000 in
the 2004 quarter (1.8% of revenue), compared with net loss of $305,000 in the
2003 quarter (0.7% of revenue). In addition, our operating ratio (operating
expenses as a percentage of operating revenue) was 96.2% during the third
quarter of 2004 as compared with 99.9% during the third quarter of 2003.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2004, WITH NINE MONTHS ENDED
SEPTEMBER 30, 2003
Operating revenue increased $14.3 million (11.5%), to $138.9 million in
the first nine months of 2004 (the 2004 period) from $124.6 million in the first
nine months of 2003 (the 2003 period). The increase in operating revenue
resulted from increased average operating revenue per tractor per week offset
partially by a reduction in our weighted average tractors.
Average operating revenue per tractor per week, one measure of asset
productivity, increased significantly to $3,034 in the 2004 period from $2,556
in the 2003 period. Operating revenue includes revenue from operating our trucks
as well as other, more volatile revenue items, including fuel surcharge,
brokerage, and other revenue. We believe the analysis of tractor productivity is
more meaningful if fuel surcharge, brokerage, and other revenue are excluded
from the computation. Average revenue per tractor per week (excluding fuel
surcharge, brokerage, and other revenue) increased to $2,725 in the 2004 period
from $2,345 in the 2003 period, primarily due to increased production from our
seated equipment and a lower number of unseated company tractors. Revenue per
loaded mile (excluding fuel surcharge, brokerage, and other revenue) increased
eight cents to $1.45 in the 2004 period from $1.37 in the 2003 period,
reflecting improved lane and customer selection, increased trucking demand, and
improved general economic conditions. Fuel surcharge revenue increased $3.6
million to $8.1 million in the 2004 period from $4.5 million in the 2003 period.
During
12
the first nine months of 2004 and 2003, approximately $5.1 million and $3.0
million, respectively, of the fuel surcharge revenue collected helped to offset
our fuel costs. The remainder was passed through to independent contractors.
Our weighted average tractors decreased to 1,174 in the 2004 period from
1,250 in the 2003 period. This reflects our planned reduction in fleet size
implemented during 2003 which reduced the number of unmanned company-owned
tractors. In addition, we contracted with fewer independent contractor providers
of equipment. The reduction in fleet size and yield enhancement efforts were
consistent with our strategy of focusing on asset productivity. We believe a
certain level of success has been achieved, as our weighted average number of
tractors decreased 6.1% while operating revenue increased 11.5%.
Purchased transportation consists primarily of payments to independent
contractor providers of revenue equipment, expenses related to brokerage
activities, and payments under operating leases of revenue equipment. Purchased
transportation increased $2.8 million (6.6%), to $45.4 million in the 2004
period from $42.6 million in the 2003 period. As a percentage of revenue,
purchased transportation decreased to 32.7% in the 2004 period from 34.2% in the
2003 period. The changes reflect a decrease in the percentage of the fleet
supplied by independent contractors and in the number of independent
contractors. The percentage of total operating revenue provided by independent
contractors decreased to 34.0% in the 2004 period from 36.5% in the 2003 period.
The decline in independent contractors slowed significantly after September,
2003 as freight demand and the general economy improved.
Compensation and employee benefits increased $1.5 million (3.8%), to $40.3
million in the 2004 period from $38.8 million in the 2003 period. As a
percentage of revenue, compensation and employee benefits decreased to 29.0% in
the 2004 period from 31.2% in the 2003 period. This reflects an increase in our
rate per loaded mile and fuel surcharge revenue which increases revenue without
a corresponding increase in wages and a $448,000 decrease in wages paid to
non-driver employees. These factors were partially offset by an increase in the
percentage of the fleet comprised of company-owned tractors and an increase in
drivers' pay rate, which was raised approximately two cents per mile on August
1, 2004. The pay rate increase has improved our ability to compete for new
drivers, and to retain current drivers, reducing our number of unfilled units.
However, if we experience a shortage of drivers in the near future, the increase
in driver pay would negatively impact our results of operations to the extent
that corresponding freight rate increases are not obtained. Finally, increases
in health care costs continue to negatively impact our health insurance and
worker's compensation expense.
Fuel, supplies, and maintenance increased $5.0 million (22.4%), to $27.4
million in the 2004 period from $22.4 million in the 2003 period. As a
percentage of revenue, fuel, supplies, and maintenance increased to 19.7% of
revenue in the 2004 period compared with 17.9% in the 2003 period. This reflects
higher fuel prices and an increase in the percentage of the fleet comprised of
company-owned tractors, partially offset by an increase in our rate per loaded
mile which increases revenue without a corresponding increase in maintenance
costs. Fuel prices increased approximately 14% to an average of $1.63 per gallon
in the 2004 period from $1.43 per gallon in the 2003 period. The increase in
fuel prices was partially offset by a $2.1 million increase in fuel surcharge
revenue attributable to company-owned tractors which is included in operating
revenue.
Insurance and claims increased $685,000 (21.0%), to $4.0 million in the
2004 period from $3.3 million in the 2003 period. As a percentage of revenue,
insurance and claims increased to 2.8% of revenue in the 2004 period compared
with 2.6% in the 2003 period. During the first period of 2003 we exercised an
option to retroactively increase the deductible for our auto liability policy to
$125,000 per incident beginning July 1, 2001 through June 30, 2002 which reduced
our expense by $467,000. This did not recur in the first period of 2004.
Generally higher insurance premiums and claims were offset by the elimination of
premiums for excess insurance coverage which we discontinued in July 2003, due
to our financial condition and the rising cost of insurance, leaving $2 million
of primary coverage with a $250,000 self-insured retention. The lack of excess
coverage and high self-insured retention increases our risk associated with
frequency and severity of accidents and could increase our expenses or make them
more volatile from period to period. Furthermore, if we experience claims that
exceed the limits of our insurance coverage, or if we experience claims for
which coverage is not provided, our financial condition and results of
operations could suffer a materially adverse effect. The insurance policies were
renewed on July 1, 2004 resulting in no changes in our self-insured retention
level or our excess insurance coverage limit.
Taxes and licenses increased $205,000 (8.0%) to $2.8 million in the 2004
period from $2.6 million in the 2003 period. The decrease in the number of
company-owned tractors subject to annual license and permit costs was offset by
an increase in the need for over-dimensional permits. As a percentage of
revenue, taxes and licenses remained relatively constant at 2.0% of revenue in
the 2004 period compared with 2.1% of revenue in the 2003 period.
13
General and administrative expenses increased $67,000 (1.3%), compared to
$5.1 million in the 2003 period, as lower legal and consulting fees were offset
by higher advertising and training expenses. As a percentage of revenue, general
and administrative expenses decreased to 3.7% of revenue in the 2004 period from
4.1% of revenue in the 2003 period, reflecting an increase in our revenue per
loaded mile and fuel surcharge revenue which increases revenue without a
corresponding increase in general and administrative expense.
Communications and utilities decreased $168,000 (14.2%), to $962,000 in
the 2004 period from $1.1 million in the 2003 period, reflecting a decrease in
our weighted average tractors. As a percentage of revenue, communications and
utilities decreased to 0.7% of revenue in the 2004 period from 0.9% of revenue
in the 2003 period, reflecting an increase in our revenue per loaded mile and
fuel surcharge revenue which increases revenue without a corresponding increase
in communications and utilities expense.
Depreciation and amortization decreased $1.3 million (11.5%), to $9.7
million in the 2004 period from $11.0 million in the 2003 period. In accordance
with industry practices, the gain or loss on retirement, sale, or write-down of
equipment is included in depreciation and amortization. In the 2004 and 2003
period, depreciation and amortization included net gains from the sale of
equipment of $153,000 and $355,000, respectively. As a percentage of revenue,
depreciation and amortization decreased to 7.0% of revenue in the 2004 period
compared with 8.8% in the 2003 period, partly due to increased average revenue
per tractor and reduction of unseated tractors, which more efficiently spreads
depreciation expense. Additionally, some of our older equipment still generates
revenue but is no longer being depreciated. In the short-term, we expect that
the presence of older equipment which is not being depreciated will more than
offset increases in depreciation resulting from the addition of new equipment to
our fleet. Over the long-term, as we continue to upgrade our equipment fleet, we
expect depreciation or rent expense to increase.
Interest expense, net, decreased $249,000 (18.3%), to $1.1 million in the
2004 period from $1.4 million in the 2003 period. This decrease was attributable
to lower average debt outstanding, partially offset by higher interest rates,
especially during the first six months of 2004. As a percentage of revenue,
interest expense, net, decreased to 0.8% of revenue in the 2004 period compared
with 1.1% in the 2003 period.
During the first quarter of 2004 we recorded $727,000 of income from life
insurance resulting from the death of William G. Smith, our former President and
Chief Executive Officer. This non operating income is tax exempt and added $0.15
to our earnings per share for the first nine months of 2004. This is a one time
event which will not recur in the future.
As a result of the foregoing, our pre-tax margin increased to 2.2% in the
2004 period from (2.8%) in the 2003 period.
Our income tax expense in the 2004 period was $1.2 million, or 50.5% of
earnings before life insurance proceeds and income taxes. Our income tax benefit
in the 2003 period was $1.2 million, or 34.4% of loss before income taxes. In
both years, the effective tax rate is different from the expected combined tax
rate for a company headquartered in Iowa because of the cost of nondeductible
driver per diem expense absorbed by us. The impact of paying per diem travel
expenses varies depending upon the ratio of drivers to independent contractors
and the level of our pre-tax earnings or loss.
As a result of the factors described above, net earnings was $1.9 million
in the 2004 period (1.3% of revenue), compared with net loss of $2.3 million in
the 2003 period (1.9% of revenue). Without the life insurance proceeds, our net
earnings would have been $1.1 million (0.8% of revenue) in the 2004 period. In
addition, our operating ratio (operating expenses as a percentage of operating
revenue) was 97.6% during the first nine months of 2004 as compared with 101.7%
during the first nine months of 2003.
14
LIQUIDITY AND CAPITAL RESOURCES
USES AND SOURCES OF CASH
We require cash to fund working capital requirements and to service our
debt. We have historically financed acquisitions of new equipment with
borrowings under installment notes payable to commercial lending institutions
and equipment manufacturers, borrowings under lines of credit, cash flow from
operations, and equipment leases from third-party lessors. We also have obtained
a portion of our revenue equipment fleet from independent contractors who own
and operate the equipment, which reduces overall capital expenditure
requirements compared with providing a fleet of entirely company-owned
equipment.
Our primary sources of liquidity have been funds provided by operations
and borrowings under credit arrangements with financial institutions and
equipment manufacturers. Cash flow has improved dramatically as we have returned
to profitability. As of the date of this report, we have adequate borrowing
availability on our line of credit to finance any near-term needs for working
capital. We purchased or leased 192 new tractors during the first nine months of
2004 and plan to lease 60 new tractors throughout the remainder of 2004,
allowing for the replacement of older, high mileage tractors. In October 2004 we
also purchased 20 late-model used tractors as the number of newly hired drivers
exceeded the number of available tractors in our fleet. Our ability to fund cash
requirements in future periods will depend on our ability to comply with
covenants contained in financing arrangements and the availability of other
financing options, as well as our financial condition and results of operations.
Our financial condition and results of operations will depend on insurance and
claims experience, general shipping demand by our customers, fuel prices, the
availability of drivers and independent contractors, continued success in
implementing our profit improvement plan, and other factors.
During the third quarter and first nine months of 2004, our truck
production increased dramatically compared to 2003. Going forward, we believe
that shipping demand will remain high and that freight rates will increase as
truckload capacity tightens. These factors and continued focus on the profit
improvement plan should improve our financial performance. However, there is no
assurance the improvements will occur as planned. Assuming the improvements do
occur as planned, we believe there will be sufficient cash flow to meet our
liquidity requirements at least through September 30, 2005. To the extent that
actual results or events differ from our financial projections or business
plans, our liquidity may be adversely affected and we may be unable to meet our
financial covenants. In such event, we believe we could renegotiate the terms of
our debt or that alternative financing would be available, although this cannot
be assured.
We will require additional sources of financing over the long-term to
upgrade our tractor and trailer fleets. To the extent that actual results or
events differ from our financial projections or business plans, our liquidity
may be adversely affected and we may be unable to meet our financial covenants.
Specifically, our short- and long-term liquidity may be adversely affected by
one or more of the following factors: costs associated with insurance and
claims; weak freight demand or a loss in customer relationships or volume; the
impact of new hours-of-service regulations on asset productivity; the ability to
attract and retain sufficient numbers of qualified drivers and independent
contractors; elevated fuel prices and the ability to collect fuel surcharges;
inability to maintain compliance with, or negotiate amendments to, loan
covenants; and the ability to finance the tractors and trailers delivered and
scheduled for delivery. Based upon our improving results, anticipated future
cash flows, current availability under the financing arrangement with LaSalle
Bank, and sources of equipment financing that we expect to be available, we do
not expect to experience significant liquidity constraints in the foreseeable
future.
Net cash provided by operating activities was $13.7 million for the nine
months ended September 30, 2004, compared to $7.9 million for the nine months
ended September 30, 2003, reflecting improved operating results and $727,000 of
life insurance proceeds received in the first quarter 2004. Historically, our
principal use of cash from operations is to service debt and to internally
finance acquisitions of revenue equipment. Total receivables increased $3.6
million for the nine months ended September 30, 2004. The average age of our
trade accounts receivable was approximately 34.0 days in the 2003 period and
33.1 days in the 2004 period.
Net cash provided by investing activities was $2.2 million for the nine
months ended September 30, 2004, compared to $2.7 million for the nine months
ended September 30, 2003. Such amounts related primarily to proceeds from the
sale of revenue equipment and other fixed assets, offset by down payments made
for the purchase of new equipment.
15
Net cash used in financing activities was $10.9 million for the nine
months ended September 30, 2004, compared to $10.6 million for the nine months
ended September 30, 2003. Such amounts consisted primarily of net payments of
principal under our long-term debt agreements.
We have a financing arrangement with LaSalle Bank, which expires on
January 1, 2006, and provides for automatic month-to-month renewals under
certain conditions after that date. LaSalle may terminate the arrangement prior
to January 1, 2006, in the event of default, as discussed below, and may
terminate at anytime during the month-to- month renewal periods. Since the
beginning of 2004, the financing arrangement has been amended to allow for
changes in management and voting control resulting from the death of William G.
Smith, to provide for a remaining term of at least one year, to reduce the
applicable interest rate, and to allow for the leasing of new tractors. The
arrangement provides for a term loan, a revolving line of credit, a capital
expenditure loan, and financing for letters of credit. The combination of all
loans with LaSalle Bank cannot exceed the lesser of $20 million or a specified
borrowing base.
At September 30, 2004, the term loan had a principal balance of $5.7
million, payable in 39 remaining equal monthly principal installments of
$147,000. The revolving line of credit allows for borrowings up to 85 percent of
eligible receivables. At September 30, 2004, we had no borrowings under the
revolving line of credit. The capital expenditure loan allows for borrowings up
to 80 percent of the purchase price of revenue equipment purchased with such
advances, provided borrowings under the capital expenditure loan are limited to
$2.0 million annually, and $4.0 million over the term of the arrangement. At
September 30, 2004, the amount owed under capital expenditure notes was
$788,000. At September 30, 2004, we had outstanding letters of credit totaling
$7.7 million for self-insured amounts under our insurance programs. These
letters of credit directly reduce the amount of potential borrowings available
under the financing arrangement. Any increase in self-insured retention, as well
as increases in claim reserves, may require additional letters of credit to be
posted, which would negatively affect our liquidity. At September 30, 2004, our
borrowing limit under the financing arrangement was $19.9 million, leaving
approximately $5.7 million in remaining availability at such date.
We are required to pay a facility fee on the LaSalle financing arrangement
of .25% of the maximum loan limit ($20 million). Borrowings under the
arrangement are secured by liens on revenue equipment, accounts receivable, and
certain other assets. The interest rate on outstanding borrowings under the
arrangement is equal to LaSalle's prime rate plus 25 basis points.
The LaSalle financing arrangement requires compliance with certain
financial covenants, including compliance with a minimum tangible net worth,
capital expenditure limits, and a fixed charge coverage ratio. We were in
compliance with these covenants at September 30, 2004 and we believe we will
remain in compliance, although there can be no assurance that the required
financial performance will be achieved. In addition, equipment financing
provided by a manufacturer contains a minimum tangible net worth requirement. We
were in compliance with the required minimum tangible net worth requirement for
September 30, 2004 and we expect to remain in compliance going forward. If we
fail to maintain compliance with these financial covenants, or to obtain a
waiver of any noncompliance, the lenders will have the right to declare all sums
immediately due and pursue other remedies. In such event, we believe we could
renegotiate the terms of our debt or that alternative financing would be
available, although this cannot be assured. As of the filing date, we were in
compliance with all financial covenants.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
On August 6, 2004 we entered into a Master Lease Agreement with LaSalle
National Leasing Corporation. This agreement provides for the lease of new
tractors delivered between July 1, 2004 and December 31, 2004 up to a maximum
original cost of $10 million. The lease is an operating lease and has a term of
48 months. The following tables set forth the contractual obligations and other
commercial commitments as of September 30, 2004:
PAYMENTS (IN THOUSANDS) DUE BY PERIOD
Less than After
Total One year 2-3 years 4-5 years 5 years
------- --------- --------- --------- -------
Contractual Obligations
Long-term debt $32,526 $10,525 $14,163 $ 7,838 $ -
Operating leases 5,790 1,128 2,220 2,393 49
Total contractual cash obligations $38,316 $11,653 $16,383 $10,231 $49
The Company had no other commercial commitments at September 30, 2004.
16
RECENT REGULATION
The U.S. Department of Transportation adopted revised hours-of-service
regulations for drivers that became effective on January 4, 2004. These revised
regulations represent the most significant changes to the hours-of-service
regulations in over 60 years. We anticipated that the new regulations could have
an overall negative impact on our average miles per tractor due to operational
changes; however, average revenue per tractor has increased as we successfully
increased our rate per mile, accessorial charges to customers for multiple stop
shipments, and rates for tractor detention during the first quarter of 2004. We
also raised driver pay for multiple stop shipments, unanticipated delays, and
other non-driving tasks.
On July 16, 2004, the United States District Circuit Court of Appeals for
the District of Columbia vacated the new hours of service rules in their
entirety because the Federal Motor Carrier Safety Administration of the U.S.
Department of Transportation did not address driver health issues in
promulgating the rules. On September 30, 2004, federal legislation (Public Law
108-310) was enacted that keeps the new hours of service rules in place until
September 30, 2005, or until the Federal Motor Carrier Safety Administration
completes a new rulemaking as ordered by the federal court in July. Any changes
in the current rules governing hours of service could impact the Company's
operations.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make decisions based upon estimates, assumptions, and factors we consider as
relevant to the circumstances. Such decisions include the selection of
applicable accounting principles and the use of judgment in their application,
the results of which impact reported amounts and disclosures. Changes in future
economic conditions or other business circumstances may affect the outcomes of
our estimates and assumptions. Accordingly, actual results could differ from
those anticipated. A summary of the significant accounting policies followed in
preparation of the financial statements included in this Form 10-Q is contained
in Note 1 of the consolidated financial statements included in our Form 10-K for
the year ended December 31, 2003. Other footnotes in the Form 10-K describe
various elements of the financial statements included in this Form 10-Q and the
assumptions on which specific amounts were determined.
Our critical accounting policies include the following:
REVENUE RECOGNITION
We generally recognize operating revenue when the freight to be
transported has been loaded. We operate primarily in the short-to-medium length
haul category of the trucking industry; therefore, our typical customer delivery
is completed one day after pickup. Accordingly, this method of revenue
recognition is not materially different from recognizing revenue based on
completion of delivery. We recognize operating revenue when the freight is
delivered for longer haul loads where delivery is completed more than one day
after pickup. Amounts payable to independent contractors for purchased
transportation, to Company drivers for wages, and other direct expenses are
accrued when the related revenue is recognized.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided by
use of the straight-line and declining-balance methods over lives of 5 to 39
years for buildings and improvements, 5 years for tractors, 7 years for
trailers, and 3 to 10 years for other equipment. Tires purchased as part of
revenue equipment are capitalized as a cost of the equipment. Replacement tires
are expensed when placed in service. Expenditures for maintenance and minor
repairs are charged to operations, and expenditures for major replacements and
betterments are capitalized. The cost and related accumulated depreciation on
property and equipment retired, traded, or sold are eliminated from the property
accounts at the time of retirement, trade, or sale. The gain or loss on
retirement or sale is included in depreciation and amortization in the
consolidated statements of operation. Gains on trade-ins are included in the
basis of the new asset. Judgments concerning salvage values and useful lives can
have a significant impact.
17
ESTIMATED LIABILITY FOR INSURANCE CLAIMS
Losses resulting from auto liability, physical damage, workers'
compensation, and cargo loss and damage are covered by insurance subject to
certain self-retention levels. Losses resulting from uninsured claims are
recognized when such losses are incurred. We estimate and accrue a liability for
our share of ultimate settlements using all available information. We accrue for
claims reported, as well as for claims incurred but not reported, based upon our
past experience. Expenses depend on actual loss experience and changes in
estimates of settlement amounts for open claims which have not been fully
resolved. However, final settlement of these claims could differ materially from
the amounts we have accrued. Our judgment concerning the ultimate cost of claims
and modification of initial reserved amounts is an important part of
establishing claims reserves, and is of increasing significance with higher
self-insured retention and lack of excess coverage.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net undiscounted cash
flows expected to be generated by the asset. Our judgment concerning future cash
flows is an important part of this determination. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less the costs to sell.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of market risks, most importantly the effects
of the price and availability of diesel fuel and changes in interest rates.
Commodity Price Risk
Our operations are heavily dependent upon the use of diesel fuel. The
price and availability of diesel fuel can vary and are subject to political,
economic, and market factors that are beyond our control. Significant increases
in diesel fuel prices could materially and adversely affect our results of
operations and financial condition.
We presently use fuel surcharges to address the risk of increasing fuel
prices. We believe these fuel surcharges are an effective means of mitigating
the risk of increasing fuel prices, although the competitive nature of our
industry prevents us from recovering the full amount of fuel price increases
through the use of such surcharges.
In the past, we have used derivative instruments, including heating oil
price swap agreements, to reduce a portion of our exposure to fuel price
fluctuations. Since 2000 we have had no such agreements in place. We do not
trade in such derivatives with the objective of earning financial gains on price
fluctuations.
Interest Rate Risk
We also are exposed to market risks from changes in certain interest rates
on our debt. Our financing arrangement with LaSalle Bank carries a variable
interest rate based on LaSalle's prime rate plus 25 basis points, provided there
has been no default. In addition, approximately $18.0 million of our other debt
carries variable interest rates. This variable interest exposes us to the risk
that interest rates may rise. Assuming borrowing levels at September 30, 2004, a
one-point increase in the prime rate would increase interest expense by
approximately $245,000. The remainder of our other debt carries fixed interest
rates and exposes us to the risk that interest rates may fall. At September 30,
2004, approximately 75% of our debt carries a variable interest rate and the
remainder is fixed.
18
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the
"Exchange Act"), we have carried out an evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report.
This evaluation was carried out under the supervision and with the participation
of our management, including our Chief Executive Officer and our Chief Financial
Officer. Based upon that evaluation, our Chief Executive Officer and our Chief
Financial Officer concluded that our disclosure controls and procedures were
effective as of September 30, 2004. During our third fiscal quarter, there were
no changes in our internal control over financial reporting that have materially
affected, or that are reasonably likely to materially affect, our internal
control over financial reporting. We intend to periodically evaluate our
disclosure controls and procedures as required by the Exchange Act rules.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in the
Company's reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer as appropriate, to allow timely decisions regarding
disclosures.
We have confidence in our internal controls and procedures. Nevertheless,
our management, including our Chief Executive Officer and our Chief Financial
Officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent all errors or intentional fraud. An internal
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of such internal
controls are met. Further, the design of an internal control system must reflect
the fact that there are resource constraints, and the benefits of controls must
be considered relative to their costs. Because of the inherent limitations in
all internal control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within the
Company have been detected.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No reportable events or material changes occurred during the quarter for
which this report is filed.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
3.1 * Articles of Incorporation.
3.2 ** Amended and Restated Bylaws.
10.19 # 12th Amendment to Amended and Restated Loan and Security Agreement dated July 7, 2004,
between LaSalle Bank National Association, Smithway Motor Xpress, Inc., as Borrower,
and East West Motor Express, Inc., as Borrower.
10.20 # 13th Amendment to Amended and Restated Loan and Security Agreement dated August 23,
2004, between LaSalle Bank National Association, Smithway Motor Xpress, Inc., as
Borrower, and East West Motor Express, Inc., as Borrower.
10.21 # Master Lease Agreement dated August 6, 2004 between LaSalle National Leasing
Corporation, as Lessor, and Smithway Motor Xpress Corp. and Smithway Motor Xpress,
Inc., as Lessee.
10.22 # Form of Stock Option Agreement for Outside Director Stock Plan.
10.23 # Form of Stock Option Agreement for Incentive Stock Plan.
10.24 # Form of Stock Option Agreement for New Employee Incentive Stock Plan.
31.1 # Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2 # Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1 # Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, by G. Larry Owens, the Company's principal executive
officer.
32.2 # Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, by Douglas C. Sandvig, the Company's principal
financial officer.
- ---------------------
* Incorporated by reference from the Company's Registration Statement on Form
S-1, Registration No. 33-90356, effective June 27, 1996.
** Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 2003.
# Filed herewith.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SMITHWAY MOTOR XPRESS CORP.
Date: November 12, 2004 By: /s/ Douglas C. Sandvig
--------------------------------------
Douglas C. Sandvig
Senior Vice President, Treasurer,
and Chief Financial Officer, in his
capacity as such and on behalf of the
issuer
21
Exhibit Index
Exhibit Method of
Number Description Filing
- ------- -------------------------------------------------------------------------- ---------------
3.1 Articles of Incorporation. Incorporated
by reference.
3.2 Amended and Restated Bylaws. Incorporated
by reference.
10.19 12th Amendment to Amended and Restated Loan and Security Agreement dated Filed herewith.
July 7, 2004, between LaSalle Bank National Association, Smithway Motor
Xpress, Inc., as Borrower, and East West Motor Express, Inc., as
Borrower.
10.20 13th Amendment to Amended and Restated Loan and Security Agreement dated Filed herewith.
August 23, 2004, between LaSalle Bank National Association, Smithway
Motor Xpress, Inc., as Borrower, and East West Motor Express, Inc., as
Borrower.
10.21 Master Lease Agreement dated August 6, 2004 between LaSalle National Filed herewith.
Leasing Corporation, as Lessor, and Smithway Motor Xpress Corp. and
Smithway Motor Xpress, Inc., as Lessee.
10.22 Form of Stock Option Agreement for Outside Director Stock Plan. Filed herewith.
10.23 Form of Stock Option Agreement for Incentive Stock Plan. Filed herewith.
10.24 Form of Stock Option Agreement for New Employee Incentive Stock Plan. Filed herewith.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. Filed herewith.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. Filed herewith.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Filed herewith.
Section 906 of the Sarbanes-Oxley Act of 2002, by G. Larry Owens, the
Company's principal executive officer.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Filed herewith.
Section 906 of the Sarbanes-Oxley Act of 2002, by Douglas C. Sandvig, the
Company's principal financial officer.