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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the Fiscal Year Ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ___________ to _______________
Commission file number 000-20793
SMITHWAY MOTOR XPRESS CORP.
(Exact name of registrant as specified in its charter)
Nevada 42-1433844
- ---------------------------- -----------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of 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
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: $0.01 Par Value
Class A Common
Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [ ] NO [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $3,590,739 as of March 17, 2003 (based upon the $1.43 per share
closing price on that date as reported by Nasdaq). In making this calculation
the registrant has assumed, without admitting for any purpose, that all
executive officers, directors, and holders of more than 10% of a class of
outstanding common stock, and no other persons, are affiliates, and has excluded
stock options.
As of March 17, 2003, the registrant had 3,846,821 shares of Class A Common
Stock and 1,000,000 shares of Class B Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: The information set forth under Part III,
Items 10, 11, 12, and 13 of this Report is incorporated by reference from the
registrant's definitive proxy statement for the 2003 annual meeting of
stockholders that will be filed no later than April 30, 2003.
1
Cross Reference Index
The following cross reference index indicates the document and location of
the information contained herein and incorporated by reference into the Form
10-K.
Document and Location
Part I
Item 1 Business Page 3 through 7 herein
Item 2 Properties Page 7 herein
Item 3 Legal Proceedings Page 7 herein
Item 4 Submission of Matters to a Vote of Security Holders Page 7 herein
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters Page 8 herein
Item 6 Selected Financial and Operating Data Page 9 herein
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations Page 10 through 20 herein
Item 7A Quantitative and Qualitative Disclosures About Market Risk Page 20 herein
Item 8 Financial Statements and Supplementary Data Page 21 herein
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure Page 21 herein
Part III
Item 10 Directors and Executive Officers of the Registrant Proxy Statement
Item 11 Executive Compensation Proxy Statement
Item 12 Security Ownership of Certain Beneficial Owners and
Management Page 22 herein and Proxy Statement
Item 13 Certain Relationships and Related Party Transactions Proxy Statement
Item 14 Controls and Procedures Page 22 herein
Part IV
Item 15 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K Page 23 through 24 herein
- -----------------------------
This report contains "forward-looking statements." These statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those anticipated. See "Management Discussion and
Analysis of Financial Condition and Results of Operations - Factors That May
Affect Future Results" for additional information and factors to be considered
concerning forward-looking statements.
2
PART I
ITEM 1. BUSINESS
The Company
Smithway Motor Xpress Corp. ("Smithway" or the "Company") is a truckload
carrier that provides nationwide transportation of diversified freight,
concentrating primarily on the flatbed segment of the truckload market. The
Company uses its "Smithway Network" of 23 computer-connected field offices,
commission agencies, and company-owned terminals to offer comprehensive
truckload transportation services to shippers located predominantly between the
Rocky Mountains in the West and the Appalachian Mountains in the East, and in
eight Canadian provinces.
Prior to 1984, the Company specialized in transporting building materials
on flatbed trailers. William G. Smith became President of Smithway in 1984, and
led the Company's effort to diversify its customer and freight base, formed the
Smithway Network of locations, and implemented systems to support the Company's
growth.
Smithway acquired the operations of nine trucking companies between June
1995 and March 2001. Through acquisitions and internal growth the Company
expanded from $77 million in revenue in 1995 to $199 million in 2000. However,
the Company experienced its first net loss since going public in 2000, and since
that time revenues have declined and net losses have increased.
Smithway Motor Xpress Corp. was incorporated in Nevada in January 1995 to
serve as a holding company and conduct the Company's initial public offering,
which occurred in June 1996. References to the "Company" or "Smithway" herein
refer to the consolidated operations of Smithway Motor Xpress Corp., a Nevada
corporation, and its wholly owned subsidiaries, Smithway Motor Xpress, Inc., an
Iowa corporation, East West Motor Express, Inc., a South Dakota corporation,
SMSD Acquisition Corp., a South Dakota corporation, and New Horizons Leasing,
Inc., an Iowa corporation.
The Company's headquarters are located at 2031 Quail Avenue, Fort Dodge,
Iowa 50501, and the Company's website address is www.smxc.com.
Operations
Smithway integrates its sales and dispatch functions throughout its
computer-connected "Smithway Network." The Smithway Network consists of the
Company's headquarters in Fort Dodge, Iowa and 22 terminals, field offices, and
independent agencies. The headquarters and 19 terminals and field offices are
managed by Smithway employees, while the three agencies are managed by
independent commission agents. The customer sales representatives and agents at
each location have front-line responsibility for booking freight in their
regions. Fleet managers at the Fort Dodge, Iowa headquarters coordinate all load
movements via computer link to optimize load selection and promote proper fleet
balance among regions. Sales and dispatch functions for traffic are generally
performed at terminals within the sales region.
Agents are the primary contact for shippers within their region and have
regular contact with drivers and independent contractors. The Company's agents
are paid a commission on revenue they generate. Agent contracts typically are
cancelable on 14 days' notice. In addition to sales and customer service
benefits, management believes agents offer the advantage of minimizing capital
investment and fixed costs, because agents are responsible for all of their own
expenses. The Company's number of agents has decreased over the past three
years.
Customers and Marketing
Smithway's sales force includes eleven sales representatives, personnel at
20 terminals and field offices, and three independent commission agents.
National sales representatives focus on national customers and van freight,
while sales personnel at terminals, field offices, and agencies are responsible
for regional customer contact. The Company's sales force emphasizes rapid
response time to customer requests for equipment, undamaged and on-time pickup
and delivery, one of the nation's largest fleets of flatbed equipment, safe and
professional drivers, logistics management, dedicated fleet capability, and its
strategically located Smithway Network. Management
3
believes that few other carriers operating principally in the Midwest flatbed
market offer similar size and service. Consequently, the Company seeks primarily
service-sensitive freight rather than competing for all freight on the basis of
price.
In 2002, the Company's top 50, 25, 10, and 5 customers accounted for
approximately 52%, 41%, 28%, and 20% of revenue, respectively. No single
customer accounted for 10% or more of the Company's revenue during 2002.
Technology
Management believes that advances in technology can enhance the Company's
operating efficiency and customer service. During February 2002, the Company
purchased new operating system and freight selection software that was expected
to improve the efficiency of its operations. The Company installed the software
in the summer of 2002, and experienced difficulties in the integration process
and obtaining the necessary information to analyze its operations. Many of
theses difficulties have been overcome, but the Company is still trying to
optimize the software to receive the benefits of full functionality. This
software was designed specifically for the trucking industry to allow the
Company's managers to coordinate available equipment with the transportation
needs of customers, monitor truck productivity and fuel consumption, and
schedule regular equipment maintenance. It also is designed to allow immediate
access to current information regarding driver and equipment status and
location, special load and equipment instructions, routing, and dispatching.
Smithway operates communication units in all of its company-owned tractors
and has offered rental of these units as an option to its independent
contractors. Management believes on-board communication capability can reduce
unnecessary stops and out-of-route miles because drivers are not forced to find
a telephone to contact the Company or receive instructions. In addition, drivers
can immediately report breakdowns or other emergency conditions. The system also
enables the Company to advise customers of the location of freight in transit
through its hourly position reports of each tractor's location.
Smithway also offers its customers electronic data interchange, which
allows customers to communicate directly with the Company via computer link or
the Internet and obtain location updates of in-transit freight, expected
delivery times, and account payment instructions.
Drivers, Independent Contractors, and Other Personnel
Smithway seeks drivers and independent contractors who safely manage their
equipment and treat freight transportation as a business. The Company
historically has operated a fleet comprised of substantial numbers of both
company-owned and independent contractor tractors. Management believes a mixed
fleet offers competitive advantages because the Company is able to recruit from
both personnel pools. The Company intends to retain a mixed fleet in the future
to insure that its recruiting efforts toward either group are not damaged by
becoming categorized as predominantly either a company-owned or independent
contractor fleet, although several factors may cause fluctuations in the fleet
mix from time-to-time.
Beginning in 2001 and continuing through 2002, the combination of high fuel
prices, a slowing economy, and tightened credit standards placed extreme
pressure on independent contractors. Many were forced to exit their business. At
year-end, Smithway's number of independent contractors had decreased by
approximately 9% from year-end 2001.
Smithway has implemented several policies to promote driver and independent
contractor recruiting and retention. These include maintaining an open-door
policy with easy access to senior executives, appointing an advisory board
comprised of top drivers and independent contractors to consult with management,
and assigning each driver and independent contractor to a particular dispatcher
to insure personal contact. In addition, the Company operates over relatively
short-to-medium distances (664-mile average length of haul in 2002) to return
drivers home as frequently as possible.
Smithway is not a party to a collective bargaining agreement and its
employees are not represented by a union. At December 31, 2002, the Company had
722 Company drivers, 270 non-driver employees, and 523 independent contractors.
Management believes that the Company has good relationships with its employees
and independent contractors.
4
Safety and Insurance
Smithway's active safety and loss prevention program has resulted in the
Department of Transportation's highest safety and fitness rating (satisfactory)
and numerous safety awards. The Company's safety and loss prevention program
includes pre-screening, initial orientation, six weeks on-the-road training for
drivers without substantial experience, and safety bonuses.
The Company currently maintains insurance covering losses in excess of a
$250,000 self-insured retention for its casualty insurance, which includes cargo
loss, personal injury, property damage, and physical damage claims. The Company
has a $250,000 self-insured retention for workers' compensation claims in states
where a self-insured retention is allowed. Its primary casualty insurance policy
has a limit of $2.0 million per occurrence, and the Company carries excess
liability coverage up to $40.0 million, which management believes is adequate to
cover exposure to claims exceeding its retention limit. Prior to July 2002, the
Company maintained a $50,000 self-insured retention for its casualty insurance
and a $100,000 self-insured retention for its workers' compensation insurance.
All policies are up for renewal in July 2003. The insurance markets have
experienced significant change over the past two years. If we are unable to
renew these policies on acceptable terms, we may significantly increase the
Company's self-insured retention levels or modify the Company's excess coverage.
Revenue Equipment
Smithway's equipment strategy for its owned tractors (as opposed to
independent contractors' tractors) is to operate tractors for a period that
balances capital expenditure requirements, disposition values, driver
acceptability, repair and maintenance expense, and fuel efficiency. As a result
of advances in the manufacturing of tractors and major components and the
depressed value of used equipment, in 2000 the Company extended its average
trade cycle mileage from 550,000 to 600,000 miles. The Company expects minimal
capital expenditures for tractors and trailers in 2003, due to capital
constraints. This is expected to increase the number of high-mileage trucks,
which could increase maintenance expenses and lower resale values. Generally,
mileage in excess of 500,000 miles exceeds warranty limits. Management has seen
an increase in maintenance expense in recent periods, further increases in
repair and maintenance expense are possible as the Company extends its trade
cycle. There also is much uncertainty surrounding the performance of tractors
built after October 2002 with new engines that meet higher emissions standards
mandated by the EPA. Changes in the market for used tractors, and difficult
market conditions faced by tractor manufacturers may result in price increases
and increased operating expenses if the Company is able to purchase new
tractors.
Smithway orders conventional (engine forward) tractors with standard engine
and drivetrain components, and trailers with standard brakes and tires to
minimize its inventory of spare parts. All equipment is subject to the Company's
regular maintenance program, and also is inspected and maintained each time it
passes through a Smithway maintenance facility. Smithway's company-owned tractor
fleet had an average age of 34.2 months at December 31, 2002. The average age
decreased in 2002 as the Company reduced its fleet size through the sale of
older units.
Competition
The truckload segment of the trucking industry is highly competitive and
fragmented, and no carrier or group of carriers dominates the flatbed or van
market. Smithway competes primarily with other regional, short-to-medium haul
carriers and private truck fleets used by shippers to transport their own
products in proprietary equipment. Competition is based primarily upon service
and price. The Company competes to a limited extent with rail and rail-truck
intermodal service, but attempts to limit this competition by seeking
service-sensitive freight and focusing on short-to-medium lengths of haul.
Although management believes the approximately 860 company drivers and
independent contractors dedicated to its flatbed operation at December 31, 2002,
rank its flatbed division among the ten largest such fleets in that industry
segment, there are other trucking companies, including diversified carriers with
large flatbed fleets, that possess substantially greater financial resources and
operate more equipment than Smithway.
5
Fuel Availability and Cost
The Company actively manages its fuel costs. Company drivers purchase
virtually all of the Company's fuel through service centers with which Smithway
has volume purchasing arrangements. In addition, management periodically enters
into options, futures contracts, and price swap agreements on heating oil, which
is derived from the same petroleum products as diesel fuel, in an effort to
partially hedge increases in fuel prices. The Company did not have any options,
futures contracts, or price swap agreements in place at any time during 2002.
Most of the Company's contracts with customers contain fuel surcharge provisions
and the Company also attempts to recover increases in fuel prices through higher
rates. However, increases in fuel prices generally are not fully offset through
these measures.
Shortages of fuel, increases in fuel prices, or rationing of petroleum
products could have a materially adverse effect on the operations and
profitability of the Company. Throughout 2000 the Company experienced
significant increases in the cost of diesel fuel. There was a short period of
decreased fuel prices starting at the end of 2001 and continuing through the
first quarter of 2002. Since the second quarter of 2002 fuel has continued to
increase, including into 2003. It is uncertain whether fuel prices will continue
to increase or will decrease, or the extent the Company can recoup a portion of
these costs through fuel surcharges.
Regulation
The Company is a common and contract carrier of general commodities.
Historically, the Interstate Commerce Commission ("ICC") and various state
agencies regulated motor carriers' operating rights, accounting systems, mergers
and acquisitions, periodic financial reporting, and other matters. In 1995,
federal legislation preempted state regulation of prices, routes, and services
of motor carriers and eliminated the ICC. Several ICC functions were transferred
to the Department of Transportation ("DOT"). Management does not believe that
regulation by the DOT or by the states in their remaining areas of authority has
had a material effect on the Company's operations. The Company's employees and
independent contractor drivers also must comply with the safety and fitness
regulations promulgated by the DOT, including those relating to drug and alcohol
testing and hours of service. The DOT has rated the Company "satisfactory" which
is the highest safety and fitness rating.
Over the past three years, the DOT has considered proposals to amend the
hours-in-service requirements applicable to truck drivers. The DOT sent a final
rule, which has not been published, to the Office of Management and Budget
("OMB") in January 2003, for OMB review and approval. Any change which reduces
the potential or practical amount of time that drivers can spend driving could
adversely affect the Company. Management is unable to predict the nature of any
changes that may be adopted. The DOT also is considering requirements that
trucks be equipped with certain equipment that the DOT believes would result in
safer operations. The cost of the equipment, if required, could adversely affect
the Company's profitability if shippers are unwilling to pay higher rates to
fund the purchase of such equipment.
The Company's operations are subject to various federal, state, and local
environmental laws and regulations, implemented principally by the EPA and
similar state regulatory agencies, governing the management of hazardous wastes,
the discharge of pollutants into the air and surface and underground waters, and
the disposal of certain substances. The Company transports certain commodities
that may be deemed hazardous substances. The Company's Fort Dodge, Iowa
headquarters and Black Hawk, South Dakota and Des Moines, Iowa terminals have
above-ground fuel storage tanks and fueling facilities. The Company's Cohasset,
Minnesota terminal has underground fuel storage tanks. If the Company should be
involved in a spill or other accident involving hazardous substances, if any
such substances were found on the Company's properties, or if the Company were
found to be in violation of applicable laws and regulations, the Company could
be responsible for clean-up costs, property damage, and fines or other
penalties, any one of which could have a materially adverse effect on the
Company. Management believes that its operations are in material compliance with
current laws and regulations and does not know of any existing condition that
would cause compliance with applicable environmental regulations to have a
material effect on the Company's capital expenditures, earnings, or competitive
position. If the Company should fail to comply with applicable regulations, the
Company could be subject to substantial fines or penalties and to civil or
criminal liability.
6
Non-Audit Services Performed by Independent Accountants
Pursuant to Section 10A(i)(2) of the Securities Exchange Act of 1934, as
added by Section 202 of the Sarbanes-Oxley Act of 2002, the Company is
responsible for disclosing to investors the non-audit services approved by the
Company's Audit Committee to be performed by KPMG LLP, our independent auditors.
Non-audit services are defined as services other than those provided in
connection with an audit or a review of the Company's financial statements.
Following the adoption of the Sarbanes-Oxley Act of 2002, the Company's Audit
Committee preapproved non-audit services, consisting of tax compliance services,
which subsequently were performed by KPMG LLP. Additional non-audit services
will be preapproved in the future.
ITEM 2. PROPERTIES
Smithway's headquarters consists of 38,340 square feet of office space
and 51,000 square feet of equipment maintenance and wash facilities, located on
31 acres near Fort Dodge, Iowa. The Smithway Network consists of locations in or
near the following cities with the facilities noted:
Driver
Company Locations Maintenance Recruitment Dispatch Sales Ownership
----------------- ----------- ----------- -------- ----- ---------
Birmingham, Alabama................. X X X Leased
Black Hawk, South Dakota............ X X X X Owned
Chicago, Illinois................... X X Owned
Cohasset, Minnesota................. X X X Owned
Dallas, Texas....................... X X X Leased+
Denver, Colorado.................... X X Leased+
Des Moines, Iowa ................... X X X Owned
Enid, Oklahoma ..................... X Leased+
Fort Dodge, Iowa.................... X X X X Owned
Houston, Texas...................... X X Leased
Joplin, Missouri.................... X X X Owned
Kansas City, Missouri............... X X Leased
McPherson, Kansas................... X X X Owned
Oklahoma City, Oklahoma............. X X X X Owned
Oshkosh, Wisconsin.................. X X Leased+
Phoenix, Arizona.................... X X Leased
Stockton, California................ X X X Leased
St. Louis, Missouri................. X X Leased+
St. Paul, Minnesota................. X X Leased+
Youngstown, Ohio.................... X X X Leased+
Agent Locations
---------------
Chambersburg, Pennsylvania.......... X X
Detroit, Michigan .................. X X
Toledo, Ohio ....................... X X
+ Month-to-month leases.
ITEM 3. LEGAL PROCEEDINGS
The Company from time-to-time is a party to litigation and administrative
proceedings arising in the ordinary course of its business. These proceedings
primarily involve claims for personal injury and property damage incurred in the
transportation of freight. The Company is not aware of any claims or threatened
claims that might have a materially adverse effect upon its operations or
financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 31, 2002, no
matters were submitted to a vote of security holders.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Price Range of Common Stock. The Company's Class A Common Stock is traded
on the Nasdaq National Market under the symbol "SMXC." The following table sets
forth for the calendar periods indicated the range of high and low sales prices
for the Company's Class A Common Stock as reported by Nasdaq from January 1,
2001, to December 31, 2002.
Period High Low
- --------------------------- -------------- ----------------
Calendar Year 2002
1st Quarter $ 2.72 $ 1.76
2nd Quarter $ 2.29 $ 1.55
3rd Quarter $ 1.86 $ 1.03
4th Quarter $ 1.45 $ 0.71
Period High Low
- --------------------------- -------------- ----------------
Calendar Year 2001
1st Quarter $ 3.25 $ 1.63
2nd Quarter $ 3.13 $ 2.06
3rd Quarter $ 2.98 $ 1.85
4th Quarter $ 2.65 $ 1.20
As of February 28, 2003, the Company had 326 stockholders of record of its
Class A Common Stock. However, the Company believes that many additional holders
of Class A Common Stock are unidentified because a substantial number of the
Company's shares are held of record by brokers or dealers for their customers in
street names.
Dividend Policy. The Company has never declared and paid a cash dividend on
its Class A Common Stock. It is the current intention of the Company's Board of
Directors to continue to retain any earnings to finance the growth of the
Company's business rather than to pay dividends. Future payments of cash
dividends will depend upon the financial condition, results of operations, and
capital commitments of the Company, restrictions under then-existing agreements,
and other factors deemed relevant by the Board of Directors.
8
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
Years Ended December 31,
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Statement of Operations Data: (In thousands, except per share and operating data)
Operating revenue............................... $ 161,375 $ 196,945 $ 198,990 $ 190,826 $ 169,468
Operating expenses:
Purchased transportation...................... 66,495 79,735 77,755 70,129 62,364
Compensation and employee benefits............ 38,191 49,255 51,718 54,394 51,834
Fuel, supplies, and maintenance............... 19,738 23,754 30,995 32,894 27,722
Insurance and claims.......................... 2,745 4,212 3,426 5,325 7,324
Taxes and licenses............................ 3,048 4,045 3,943 3,817 3,444
General and administrative.................... 6,237 7,491 8,319 8,294 7,153
Communications and utilities.................. 1,838 2,190 2,052 2,123 1,783
Depreciation and amortization................. 11,015 15,800 19,325 18,778 19,725(1)
------------------------------------------------------------------
Total operating expenses................... 149,307 186,482 197,533 195,754 181,349
------------------------------------------------------------------
Earnings (loss) from operations............ 12,068 10,463 1,457 (4,928) (11,881)
Interest expense (net).......................... 2,965 3,715 4,029 3,004 1,915
------------------------------------------------------------------
Earnings (loss) before income taxes............. 9,103 6,748 (2,572) (7,932) (13,796)
Income taxes (benefit).......................... 3,774 2,822 (581) (2,721) (5,118)
------------------------------------------------------------------
Net earnings (loss)............................. 5,329 3,926 (1,991) (5,211) (8,678)(2)
==================================================================
Basic and diluted earnings (loss) per common
share........................................... $ 1.06 $ 0.78 $ (0.40) $ (1.07) $ (1.79)
==================================================================
Operating Data: (3)
Operating ratio (4)............................. 92.5% 94.7% 99.3% 102.6% 107.0%
Average revenue per tractor per week(5)......... $ 2,330 $ 2,299 $ 2,261 $ 2,189 $ 2,162
Average revenue per loaded mile(5).............. $ 1.33 $ 1.33 $ 1.32 $ 1.34 $ 1.37
Average length of haul in miles................. 659 678 712 697 664
Company tractors at end of period............... 815 844 887 939 773
Independent contractor tractors at end of period 711 689 614 575 521
Weighted average tractors during period......... 1,236 1,532 1,515 1,530 1,410
Trailers at end of period....................... 2,720 2,783 2,679 2,781 2,480
Weighted averages shares outstanding:
Basic......................................... 5,012 5,031 5,009 4,852 4,846
Diluted....................................... 5,037 5,032 5,009 4,852 4,846
Balance Sheet Data (at end of period):
Working capital................................. $ 6,811 $ 5,159 $ 3,300 $ (55) $ (4,128)
Net property and equipment...................... 87,137 94,305 86,748 79,045 67,570
Total assets.................................... 115,494 125,014 115,828 106,436 89,409
Long-term debt, including current maturities.... 61,703 59,515 52,334 49,742 43,820
Total stockholders' equity...................... 35,405 39,508 37,233 31,866 23,193
- -----------------------------------
(1) Includes an impairment charge for goodwill of $3,300 pre-tax.
(2) Includes an impairment charge for goodwill of $2,057 net of tax.
(3) Excludes brokerage activities except as to operating ratio.
(4) Operating expenses as a percentage of operating revenue.
(5) Net of fuel surcharges.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Except for the historical information contained herein, the discussion in
this annual report on Form 10-K contains forward-looking statements that involve
risk, assumptions, and uncertainties that are difficult to predict. Words such
as "believe," "may," "could," "expects," "likely," variations of these words,
and similar expressions, are intended to identify such forward-looking
statements. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below in the section entitled
"Factors That May Affect Future Results," as well as those discussed in this
item and elsewhere in this annual report on Form 10-K.
General
Beginning in 2000 and continuing through the present, truckload carriers
have operated in a very difficult business environment. A combination of high
fuel prices, rising insurance premiums, a depressed used truck market, a
declining number of independent contractors, and slowing freight demand
associated with an economic downturn affected the profitability of many trucking
companies, including Smithway. In addition to these general industry factors,
the impact of the economic downturn on Smithway's customer base has been
particularly severe, resulting in a more pronounced weakening in the Company's
freight demand than that experienced by truckload carriers generally. Since the
fourth quarter of 2000, approximately thirty of the Company's significant
customers have declared bankruptcy, and several others have experienced economic
difficulties.
Over the past three years the size of the Company's business has decreased,
and the Company has experienced a net loss in each year. From 2000 to 2002,
operating revenue decreased 14.8%, to $169 million in 2002 from $199 million in
2000. For the year 2002, Smithway experienced a net loss of $8.7 million or
$1.79 per basic and diluted share. The operating losses have had an adverse
effect on the Company's liquidity and the Company was in default at December 31,
2002, under its primary financing arrangement. Although a waiver was received
and financial covenants were subsequently amended to reflect financial
performance that management believes is reasonably achievable, there can be no
assurance the Company will maintain compliance with all covenants in its
borrowing obligations, or if unable to maintain compliance that it will be able
to obtain a waiver or amendment thereof, or that it will have sufficient cash
flow to meet its liquidity requirements. See "Liquidity and Capital Resources -
Uses and Sources of Cash" and "Factors That May Affect Future Results--Operating
Losses and Liquidity Concerns" for a more detailed discussion.
The loss in 2002 included a fourth-quarter $3.3 million pre-tax write-off
of goodwill associated with one of the Company's reporting units, and a $1.8
million pre-tax increase in auto liability and workers' compensation loss
reserves. The increase in liability reserves relates primarily to a change in
estimating the ultimate costs of claims that occurred in prior years. Despite
the increase in auto liability reserves, in 2002 the Company had its best safety
year, in terms of accidents per million miles, since going public in 1996.
Smithway's revenue was primarily impacted by reduced revenue per tractor
per week and brokerage revenue versus the prior year, caused by a slowing
economy and lower productivity from the Company's flatbed fleet. In addition,
higher fuel prices and insurance premiums and tighter credit standards by
lending institutions caused the number of independent contractors providing
tractors to Smithway to drop by approximately 9% during 2002. With fewer
independent contractors and lower production, Smithway's revenue base suffered.
On the expense side, Smithway's profitability was affected primarily by
higher insurance premiums, higher than historical fuel prices, increased parts
and maintenance expense associated with an aging fleet, and the previously
mentioned adjustments relating to reserves and goodwill.
The Company operates a tractor-trailer fleet comprised of both
company-owned vehicles and vehicles obtained under leases from independent
contractors and third-party finance companies. Fluctuations among expense
categories may occur as a result of changes in the relative percentage of the
fleet obtained through equipment that is owned versus equipment that is leased
from independent contractors or financing sources. Costs associated with revenue
equipment acquired under operating leases or through agreements with independent
contractors are expensed as "purchased transportation." For these categories of
equipment the Company does not incur costs such as
10
interest and depreciation as it might with owned equipment. In addition,
independent contractor tractors, driver compensation, fuel, communications, and
certain other expenses are borne by the independent contractors and are not
incurred by the Company. Obtaining equipment from independent contractors and
under operating leases reduces capital expenditures and on-balance sheet
leverage and effectively shifts expenses from interest to "above the line"
operating expenses. The fleet profile and the Company's relative recruiting and
retention success with Company-employed drivers and independent contractors will
cause fluctuations from time-to-time in the percentage of the Company's fleet
that is owned versus obtained from independent contractors and under operating
leases.
Results of Operations
The following table sets forth the percentage relationship of certain items
to revenue for the periods indicated:
2000 2001 2002
---- ---- ----
Operating revenue................................... 100.0% 100.0% 100.0%
Operating expenses:
Purchased transportation................... 39.1 36.8 36.8
Compensation and employee benefits......... 26.0 28.5 30.6
Fuel, supplies, and maintenance............ 15.6 17.2 16.4
Insurance and claims....................... 1.7 2.8 4.3
Taxes and licenses......................... 2.0 2.0 2.0
General and administrative................. 4.2 4.3 4.2
Communication and utilities................ 1.0 1.1 1.1
Depreciation and amortization.............. 9.7 9.8 11.6
-------------------------------------------------
Total operating expenses................... 99.3 102.6 107.0
-------------------------------------------------
Earnings (loss) from operations..................... 0.7 (2.6) (7.0)
Interest expense, net............................... 2.0 1.6 1.1
-------------------------------------------------
Loss before income taxes............................ (1.3) (4.2) (8.1)
Income taxes (benefit).............................. (0.3) (1.4) (3.0)
-------------------------------------------------
Net loss............................................ (1.0)% (2.7)% (5.1)%
=================================================
Comparison of year ended December 31, 2002 to year ended December 31, 2001.
Operating revenue decreased $21.4 million (11.2%), to $169.5 million in
2002 from $190.8 million in 2001. Lower weighted-average tractors, decreased
fuel surcharge revenue, decreased brokerage revenue, and lower average revenue
per tractor per week were responsible for the decrease in operating revenue.
Weighted-average tractors decreased to 1,410 in 2002 from 1,530 in 2001 as the
Company disposed of a portion of its unseated company owned tractors in the last
half of 2002 and contracted with fewer independent contractor providers of
equipment. Management expects weighted-average tractors will remain at current
levels as few tractors are scheduled to be added in 2003. Fuel surcharge revenue
decreased $3.2 million to $3.1 million in 2002 from $6.3 million in 2001. During
2002 and 2001, approximately $1.8 million and $3.5 million, respectively, of the
fuel surcharge revenue collected helped to offset Company fuel costs. The
remainder was passed through to independent contractors. Additionally, soft
freight demand caused a $2.2 million decrease in brokerage revenue, to $7.3
million in 2002 from $9.5 million in 2001. Finally, average revenue per tractor
per week (excluding revenue from brokerage operations and fuel surcharges)
decreased to $2,162 in 2002 from $2,189 in 2001, primarily due to a higher
number of unseated company tractors during the first half of 2002 and lower
weekly production caused by soft freight demand. These factors were partially
offset by an increase in revenue per loaded mile, net of surcharges, to $1.37 in
2002 from $1.34 in 2001.
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 decreased $7.8 million (11.1%), to $62.4 million in 2002 from
$70.1 million in 2001, as the Company contracted with fewer independent
contractor providers of revenue equipment. Management believes the decline in
independent contractors as a percentage of the Company's fleet is attributable
to high fuel costs, high insurance costs, tighter credit standards, and slow
freight demand, which have diminished the pool of drivers interested in becoming
or remaining independent contractors. As a percentage of revenue, purchased
transportation
11
remained constant at 36.8% in both years, as the drop in total operating revenue
more than exceeded the drop in owner-operator revenue.
Compensation and employee benefits decreased $2.6 million (4.7%), to $51.8
million in 2002 from $54.4 million in 2001. As a percentage of revenue,
compensation and employee benefits increased to 30.6% in 2002 from 28.5% in
2001. The increase was primarily attributable to a $650 increase in reserves for
workers' compensation losses, including losses which have been incurred but not
yet reported to the Company. Additionally, wages paid to drivers for unloaded
miles increased during the year as weak freight demand caused an increase in
deadhead miles. Finally, health claims and premiums increased in 2002 compared
with 2001, and management expects this trend to continue in future periods.
Fuel, supplies, and maintenance decreased $5.2 million (15.7%), to $27.7
million in 2002 from $32.9 million in 2002. As a percentage of revenue, fuel,
supplies, and maintenance decreased to 16.4% of revenue in 2002 compared with
17.2% in 2001. This decrease was attributable primarily to lower fuel prices,
which decreased approximately 9% to an average of $1.25 per gallon in 2002 from
$1.38 per gallon in 2001. The price decrease was partially offset by higher
non-billable miles for which the Company incurs fuel expense but does not
receive fuel surcharges. Although average fuel prices were lower than 2001
levels, fuel prices have risen over the last three quarters of 2002, and have
continued to rise in 2003. Accordingly, fuel expense as a percentage of revenue
is expected to increase in the first quarter of 2003 and perhaps beyond
depending on fuel prices. Cost savings resulting from lower fuel prices were
partially offset by higher maintenance expense resulting from (i) an increase in
the percentage of the Company's fleet supplied by Company-owned equipment, and
(ii) a slightly older fleet, as a result of the Company's decision to further
extend its trade cycle for tractors. Although the average age of the Company's
tractor fleet decreased during 2002 due to the sale of older equipment that was
not replaced, the Company incurred increased maintenance expense on the aging
units that remained in service. The extension of the trade cycle is expected to
continue to impact maintenance expense in future periods.
Insurance and claims increased $2.0 million (37.5%), to $7.3 million in
2002 from $5.3 million in 2001. As a percentage of revenue, insurance and claims
increased to 4.3% of revenue in 2002 compared with 2.8% in 2001. The increase
was attributable to a $1.2 million increase in reserves for auto liability
losses. The increase in liability reserves relates primarily to a change in
estimating the ultimate costs of claims that occurred in prior years. Despite
the increase in reserves, in 2002 the Company had its best safety year, in terms
of accidents per million miles, since going public in 1996. The cost of
insurance and claims increased substantially on July 1, 2002, when the Company
increased its self-insured retention from $50,000 to $250,000 per occurrence
without a premium reduction that fully offset the increase in retention. The
higher self-insured retention increases the Company's risk associated with
frequency and severity of accidents and could increase the Company's expenses or
make them more volatile from period to period. The insurance policies are
scheduled for renewal on July 1, 2003. If the Company is unable to renew the
policies on their current terms, we may modify the Company's self-insured
retention, and/or excess coverage, or evaluate other alternatives.
Taxes and licenses decreased $373,000 (9.8%), to $3.4 million in 2002 from
$3.8 million in 2001, reflecting a decrease in the number of Company owned
tractors subject to annual license and permit costs. As a percentage of revenue,
taxes and licenses remained constant at 2.0% of revenue in 2002 and 2001.
General and administrative expenses decreased $1.1 million (13.8%), to $7.2
million in 2002 from $8.3 million in 2001. As a percentage of revenue, general
and administrative expenses remained relatively constant at 4.2% of revenue in
2002 compared with 4.3% of revenue in 2001.
Communications and utilities decreased $340 (16.0%), to $1.8 million in
2002 from $2.1 million in 2001. As a percentage of revenue, communications and
utilities remained constant at 1.1% of revenue in both years.
Depreciation and amortization increased $947,000 (5.0%), to $19.7 million
in 2002 from $18.8 million in 2001. During the annual goodwill impairment
analysis required by Statement of Financial Accounting Standard (SFAS) 142, the
Company determined that a portion of its goodwill had become impaired during the
year primarily as a result of continuing operating losses. As a result, the
Company wrote off $3.3 million of goodwill in the fourth quarter of 2002. In
2001, the Company committed to a plan to replace its proprietary computer
operating system with third party software. Accordingly, the Company wrote off
the $707,000 carrying value of its existing software during the fourth quarter
of 2001. In accordance with industry practices, the gain or loss on retirement,
sale, or write-down of equipment is included in depreciation and amortization.
In 2002 and 2001, depreciation and
12
amortization included net gains from the sale of equipment of $792,000 and
$187,000, respectively. In addition, 2002 included $3.3 million for goodwill
impairment and 2001 included $707,000 for the write-off of a proprietary
operating system. Increasing costs of new equipment continued to increase
depreciation per tractor. As a percentage of revenue, depreciation and
amortization increased to 11.6% of revenue in 2002 compared with 9.8% in 2001,
primarily as a result of these factors. Excluding the write-offs, depreciation
and amortization remained constant at 9.5% of revenue in 2001 and 2002.
Interest expense, net, decreased $1.1 million (36.2%), to $1.9 million in
2002 from $3.0 million in 2001. This decrease was attributable to lower interest
rates and lower average debt outstanding. As a percentage of revenue, interest
expense, net, decreased to 1.1% of revenue in 2002 compared with 1.6% in 2001.
As a result of the foregoing, the Company's pre-tax margin decreased to
(8.1%) in 2002 from (4.2%) in 2001.
The Company's income tax benefit was $5.1 million, or 37.1% of loss before
income taxes. The Company's income tax benefit in 2001 was $2.7 million, or
34.3% 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
the Company. The impact of the Company's paying per diem travel expenses varies
depending upon the ratio of drivers to independent contractors and the level of
the Company's pre-tax earnings.
As a result of the factors described above, net loss was $8.7 million in
2002 (5.1% of revenue), compared with net loss of $5.2 million in 2001 (2.7% of
revenue).
Comparison of year ended December 31, 2001 to year ended December 31, 2000.
Operating revenue decreased $8.2 million (4.1%), to $190.8 million in 2001
from $199.0 million in 2000. Lower average revenue per tractor per week,
decreased brokerage revenue, and decreased fuel surcharge revenue were
responsible for the decrease in operating revenue. Average revenue per tractor
per week (excluding revenue from brokerage operations and fuel surcharges)
decreased to $2,189 in 2001 from $2,261 in 2000, primarily due to a higher
number of unseated company tractors, lower weekly production caused by soft
freight demand, and lower weekly production of tractors acquired from Skipper
Transportation, Inc. In addition, soft freight demand caused a $2.9 million
decrease in brokerage revenue, to $9.5 million in 2001 from $12.3 million in
2000. Finally, fuel surcharge revenue decreased $1.0 million to $6.3 million in
2001 from $7.3 million in 2000. During 2001 and 2000, approximately $3.5 million
and $3.9 million, respectively, of the fuel surcharge revenue collected helped
to offset Company fuel costs. The remainder was passed through to independent
contractors. These factors were partially offset by an increase in revenue per
loaded mile, net of surcharges, to $1.34 in 2001 from $1.32 in 2000.
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 decreased $7.6 million (9.8%), to $70.1 million in 2001 from
$77.8 million in 2000, as the Company contracted with fewer independent
contractor providers of revenue equipment. As a percentage of revenue, purchased
transportation decreased to 36.8% in 2001 from 39.1% in 2000. This reflects a
decrease in the percentage of the Company's fleet supplied by independent
contractors. Management believes the decline in independent contractor
percentage is attributable to high fuel costs, high insurance costs, tighter
credit standards, and slow freight demand, which have diminished the pool of
drivers interested in becoming or remaining independent contractors.
Compensation and employee benefits increased $2.7 million (5.2%), to $54.4
million in 2001 from $51.7 million in 2000. As a percentage of revenue,
compensation and employee benefits increased to 28.5% in 2001 from 26.0% in
2000. The increases were primarily attributable to the increase in the
percentage of the Company's fleet represented by Company-owned equipment.
Additionally, wages paid to drivers for unloaded miles increased during the year
as weak freight demand caused an increase in deadhead miles. Finally, workers'
compensation claims and premiums increased in 2001 compared with 2000.
Fuel, supplies, and maintenance increased $1.9 million (6.1%), to $32.9
million in 2001 from $31.0 million in 2000. As a percentage of revenue, fuel,
supplies, and maintenance increased to 17.2% of revenue in 2001 compared with
15.6% in 2000. This was attributable primarily to (i) an increase in the
percentage of the Company's
13
fleet supplied by Company-owned equipment, (ii) a slightly older fleet of
Company-owned equipment as the Company has extended its trade cycle for
tractors, and (iii) higher non-billable miles for which the Company incurs fuel
expense, but does not recoup increased costs through fuel surcharges. These
factors were partially offset by a decrease in fuel prices, which decreased 4%
to an average of $1.38 per gallon in 2001 from $1.45 per gallon in 2000. Fuel
surcharge revenue attributable to loads hauled by Company trucks remained
relatively constant at $3.5 million in 2001 compared with $3.9 million in 2000.
Insurance and claims increased $1.9 million (55.4%), to $5.3 million in
2001 from $3.4 million in 2000. As a percentage of revenue, insurance and claims
increased to 2.8% of revenue in 2001 compared with 1.7% in 2000. The increase
was attributable to a substantial increase in insurance premiums on July 1,
2001, when the Company's insurance policies were renewed. Additionally,
liability claims paid and reserved increased.
Taxes and licenses decreased $126,000 (3.2%), to $3.8 million in 2001 from
$3.9 million in 2000, reflecting a decrease in the number of shipments requiring
special permits. The special permits are paid for by the shippers, which is
included in freight revenue. As a percentage of revenue, taxes and licenses
remained constant at 2.0% of revenue in 2001 and 2000.
General and administrative expenses remained essentially constant at $8.3
million in 2001 and 2000. During the fourth quarter of 2001, steel company
bankruptcies caused the Company to increase its allowance for doubtful accounts
by $332,000. Similarly, during the fourth quarter of 2000, three major customers
declared bankruptcy causing the Company to increase its allowance for doubtful
accounts by $775,000. General and administrative expenses, excluding
bankruptcies, increased $418,000 in 2001 as the Company incurred higher costs
associated with recruiting and training new drivers. As a percentage of revenue,
general and administrative expenses remained relatively constant at 4.3% of
revenue in 2001 compared with 4.2% of revenue in 2000. However, without the
increases in allowance for doubtful accounts during 2001 and 2000, general and
administrative expenses would have increased to 4.2% of revenue in 2001 compared
with 3.8% in 2000.
Communications and utilities remained essentially constant at $2.1 million
in 2001 and 2000. As a percentage of revenue, communications and utilities
remained relatively constant at 1.1% of revenue in 2001 compared with 1.0% of
revenue in 2000.
Depreciation and amortization decreased $547,000 (2.8%), to $18.8 million
in 2000 from $19.3 million in 2000. In 2001, the Company committed to a plan to
replace its proprietary computer operating system with third party software.
Accordingly, the Company wrote off the $707,000 carrying value of its existing
software during the fourth quarter. In 2000 and 2001, the market value of used
tractors declined in the United States. In response, management assessed the
valuation of its long-lived assets and identified tractors with carrying values
in excess of recoverable value. The carrying value of these tractors was reduced
by $1.0 million in 2000. In accordance with industry practices, the gain or loss
on retirement, sale, or write-down of equipment is included in depreciation and
amortization. In 2001 and 2000, the Company recognized net gains on equipment,
excluding one-time write-downs, of $187,000 and $119,000, respectively.
Additionally, increasing costs of new equipment continued to increase
depreciation per tractor. As a percentage of revenue, depreciation and
amortization remained essentially constant at 9.8% of revenue in 2001 and 9.7%
in 2000.
Interest expense, net, decreased $1.0 million (25.4%), to $3.0 million in
2001 from $4.0 million in 2000. This decrease was attributable to lower interest
rates and lower average debt outstanding. As a percentage of revenue, interest
expense, net, decreased to 1.6% of revenue in 2001 compared with 2.0% in 2000.
As a result of the foregoing, the Company's pre-tax margin decreased to
(4.2%) in 2001 from (1.3%) in 2000.
The Company's income tax benefit was $2.7 million, or 34.3% of loss before
income taxes. The Company's income tax benefit in 2000 was $581,000, or 22.6% 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 the Company.
The impact of the Company's paying per diem travel expenses varies depending
upon the ratio of drivers to independent contractors and the level of the
Company's pre-tax earnings.
14
As a result of the factors described above, net loss was $5.2 million in
2001 (2.7% of revenue), compared with net loss of $2.0 million in 2000 (1.0% of
revenue).
Liquidity and Capital Resources
Uses and Sources of Cash
The Company requires cash to fund working capital requirements and to
service its debt. The Company has 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. The Company
also has obtained a portion of its 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.
The Company's primary sources of liquidity have been funds provided by
operations and borrowings under credit arrangements with financial institutions
and equipment manufacturers. The Company is experiencing a period of negative
cash flow as continuing losses and declining revenue have resulted in lower cash
generated from operations and reduced borrowing capacity. As of the date of this
report, the Company has little borrowing availability on its line of credit.
Accordingly, the Company expects minimal capital expenditures during 2003. The
Company's ability to fund its cash requirements in future periods will depend on
its ability to comply with covenants contained in financing arrangements and
improve its operating results and cash flow. The Company's ability to achieve
the required improvements will depend on general shipping demand by the
Company's customers, fuel prices, the availability of drivers and independent
contractors, insurance and claims experience, and other factors. Management is
in the process of implementing several steps that are intended to improve the
Company's operating results and achieve compliance with the financial covenants.
These steps include: expanding the size of the Company's tractor fleet through
the addition of two identified dedicated fleet operations and recruiting
approximately 20 owner-operators over the remainder of the year; improving the
utilization per tractor through a full-time production manager and expected
increases in general freight levels; implementing a yield management program in
which the Company seeks additional favorable freight while ceasing to haul less
favorable freight; and identifying additional areas for cost containment,
including, personnel costs and liability insurance and claims. In addition to
these steps, management is working with a consulting firm to identify and
evaluate additional measures to achieve and enhance profitability over the
longer term. Although management believes that seasonal improvements in shipping
demand and the actions being evaluated should generate the required
improvements, there is no assurance that the improvements will occur as planned.
Although there can be no assurance, management believes that cash generated
by operations and available sources of financing for acquisitions of revenue
equipment, although such sources are limited, will be adequate to meet its
currently anticipated working capital requirements and other cash needs through
2003. To the extent that actual results or events differ from management's
financial projections or business plans, the Company's liquidity may be
adversely affected and the Company may be unable to meet its financial
covenants. Specifically, the Company's liquidity may be adversely affected by
one or more of the following factors: continuing weak 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; inability to maintain compliance with, or negotiate
amendments to, loan covenants; the ability to finance the tractors and trailers
delivered and scheduled for delivery; and the possibility of shortened payment
terms by the Company's suppliers and vendors worried about the Company's ability
to meet payment obligations. Except for financing for approximately 30 tractors
and 25 trailers, the Company expects to fund its cash requirements primarily
with cash generated from operations and revolving borrowings under its bank
financing.
Net cash provided by operating activities was $18.5 million, $14.3 million,
and $9.3 million for the years ended December 31, 2000, 2001, and 2002,
respectively. Historically, the Company's principal use of cash from operations
is to service debt and to internally finance acquisitions of revenue equipment.
Total receivables decreased $1.4 million, $2.8 million, and $2.4 million for the
years ended December 31, 2000, 2001, and 2002, respectively. The average age of
the Company's trade accounts receivable was approximately 37 days for 2000, 37
days for 2001, and 34 days for 2002.
Net cash (used in) provided by investing activities was ($2.6) million,
($4.0) million, and $3.3 million for the years ended December 31, 2000, 2001,
and 2002, respectively. Such amounts related primarily to purchases, sales, and
trades of revenue equipment and payments made for the acquisition of Skipper
Transportation, Inc. in 2001.
Net cash used in financing activities of $16.3 million, $9.9 million, and
$13.2 million for the years ended December 31, 2000, 2001, and 2002,
respectively, consisted primarily of net payments of principal under the
Company's long-term debt agreements.
15
The Company has a financing arrangement with LaSalle Bank, which expires on
April 1, 2004, and provides for automatic month-to-month renewals under certain
conditions. LaSalle may terminate the arrangement prior to April 1, 2004, in the
event of default, and may terminate at anytime during the renewal terms. Prior
to recent amendments, the arrangement expired on December 31, 2004. 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 $32.5 million or a specified
borrowing base.
At December 31, 2002, the term loan had a principal balance of $12.9
million, payable in 60 remaining equal monthly principal installments of
$215,000. The revolving line of credit allows for borrowings up to 85 percent of
eligible receivables. At December 31, 2002, total borrowings under the revolving
line were $1.7 million. The capital expenditure loan allows for borrowing 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
December 31, 2002, the amount owed under capital expenditure notes was $1.2
million. At December 31, 2002, the Company had outstanding letters of credit
totaling $7.4 million for self-insured amounts under its 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 the Company's
liquidity. At December 31, 2002, the Company's borrowing limit under the
financing arrangement was $24.4 million, leaving approximately $1.2 million in
remaining availability at such date. At the date hereof, the Company has
relatively little availability.
The Company is required to pay a facility fee on the LaSalle financing
arrangement of .25% of the maximum loan limit ($32.5 million). Borrowings under
the arrangement are secured by liens on revenue equipment, accounts receivable,
and certain other assets. In connection with an early March 2003 amendment, the
interest rate on outstanding borrowings under the arrangement was increased from
LaSalle's prime rate to the prime rate plus two percent.
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. The Company was
not in compliance with the tangible net worth or fixed charge covenants at
December 31, 2002, or the tangible net worth covenant at March 31, 2003, but
waivers were received. These covenants have since been amended to requirements
that management believes are reasonably achievable, 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. The Company was in compliance with the required minimum
tangible net worth requirement for December 31, 2002, but was not in compliance
on March 31, 2003. A waiver was obtained and this covenant has since been
amended. Management expects to remain in compliance going forward. If the
Company fails 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 an event, the
Company's liquidity would be materially and adversely impacted, and the
Company's ability to continue as a going concern would be called into question
if alternative financing could not be found.
Contractual Obligations and Commercial Commitments
The following tables set forth the contractual obligations and other
commercial commitments as of December 31, 2002:
Principal Payments Due by Year
(In Thousands)
Less than After
Contractual Obligations Total One year 2-3 years 4-5 years 5 years
------------------------------------------------------------------------------------------------------------------
Long-term debt $42,128 $11,595 $18,987 $11,470 $76
Operating leases 320 295 25 - -
--------------------------------------------------------------------
Total contractual cash obligations $42,448 $11,890 $19,013 $11,470 $76
====================================================================
The Company had no other commercial commitments at December 31, 2002.
16
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make decisions based upon estimates, assumptions, and factors it
considers 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 management's 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 is
contained in Note 1 of the consolidated financial statements attached hereto.
Other footnotes describe various elements of the financial statements and the
assumptions on which specific amounts were determined.
The Company's critical accounting policies include the following:
Revenue Recognition
The Company generally recognizes operating revenue when the freight to be
transported has been loaded. The Company operates primarily in the
short-to-medium length haul category of the trucking industry; therefore, the
Company's 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. The Company recognizes
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 or losses on trade-ins are included
in the basis of the new asset.
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 deductibles. Losses resulting from uninsured claims are recognized when
such losses are known and can be estimated. The Company estimates and accrues a
liability for its share of ultimate settlements using all available information.
The Company accrues for claims reported, as well as for claims incurred but not
reported, based upon the Company's 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 the Company has accrued at year-end.
Management's 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.
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. Management's 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. The Company has decided to maintain
its revenue equipment for the foreseeable future and not replace aging tractors.
If resale values remain at current levels or
17
decline, the Company may incur increased maintenance costs and a lower gain or
loss on sale resulting from retaining equipment even longer.
New Accounting Pronouncements
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
associated with Exit or Disposal Activities." SFAS 146 supercedes EITF No. 94-3.
The principal difference between SFAS 146 and EITF No. 94-3 relates to when an
entity can recognize a liability related to exit or disposal activities. SFAS
146 requires a liability be recognized for a cost associated with an exit or
disposal activity when the liability is incurred. EITF No. 94-3 allowed a
liability, related to an exit or disposal activity, to be recognized at the date
an entity commits to an exit plan. The provisions of SFAS 146 are effective on
January 1, 2003. Accordingly, we will apply this standard to all exit or
disposal activities initiated after January 1, 2003.
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others." This
interpretation elaborates on disclosure requirements of obligations by a
guarantor under certain guarantees. This interpretation also requires a
guarantor to recognize, at the inception of a guarantee, a liability for the
fair value of an obligation undertaken in issuing a guarantee. We will apply the
provisions of Interpretation No. 45 for initial recognition and measurement
provisions to guarantees issued or modified after December 31, 2002, as
required. We did not have any guarantees, including indirect guarantees of
indebtedness of others, as of December 31, 2002, which would require disclosure
under Interpretation No. 45.
Related Party Transactions
During the years ended December 31, 2000, 2001, and 2002, there were no
material transactions with related parties.
Inflation and Fuel Costs
Most of the Company's operating expenses are inflation-sensitive, with
inflation generally producing increased costs of operation. During the past
three years, the most significant effects of inflation have been on revenue
equipment prices, the compensation paid to drivers, and fuel prices. Innovations
in equipment technology and comfort have resulted in higher tractor prices, and
there has been an industry-wide increase in wages paid to attract and retain
qualified drivers. The Company attempts to limit the effects of inflation
through increases in freight rates and certain cost control efforts. The failure
to obtain rate increases in the future could adversely affect profitability.
High fuel prices also decrease the Company's profitability. Most of the
Company's contracts with customers contain fuel surcharge provisions. Although
the Company attempts to pass through increases in fuel prices to customers in
the form of surcharges and higher rates, the fuel price increases are not fully
recovered.
Seasonality
In the trucking industry results of operations show a seasonal pattern
because customers generally reduce shipments during the winter season, and the
Company experiences some seasonality due to the open, flatbed nature of the
majority of its trailers. The Company at times has experienced delays in meeting
its shipment schedules as a result of severe weather conditions, particularly
during the winter months. In addition, the Company's operating expenses have
been higher in the winter months due to decreased fuel efficiency and increased
maintenance costs in colder weather.
Factors That May Affect Future Results
The Company may from time-to-time make written or oral forward-looking
statements. Written forward-looking statements may appear in documents filed
with the Securities and Exchange Commission, in press releases, and in reports
to stockholders. The Private Securities Litigation Reform Act of 1995 contains a
safe harbor for forward-looking statements. The Company relies on this safe
harbor in making such disclosures. In connection with this "safe harbor"
provision, the Company is hereby identifying important factors that could cause
actual results to differ materially from those contained in any forward-looking
statement made by or on behalf of the Company. Factors that might cause such a
difference include, but are not limited to, the following:
18
Operating Losses and Liquidity Concerns. The Company has reported operating
losses for the past three years. Failure to turn around the operating losses
could result in further violation of bank covenants, which could accelerate the
Company's debt at several financial institutions. In such an event, the
Company's liquidity would be materially and adversely impacted, and the
Company's ability to continue as a going concern would be called into question
if alternative financing could not be found. Continued operating losses also
could impair the Company's ability to replace capital assets on the desired
schedule, which could raise operating expenses. If operating losses continue,
suppliers and vendors worried about the Company's ability to meet payment
obligations could shorten payment terms or refuse to do business with the
Company, which would further heighten liquidity concerns. In addition, customers
could reduce or eliminate the amount of business they do with the Company. Any
of the foregoing could have a materially adverse effect on the Company's
operating results and liquidity.
General Economic and Business Factors. The Company's business is dependent
upon a number of factors that may have a materially adverse effect on its
results of operations, many of which are beyond the Company's control. These
factors include excess capacity in the trucking industry, significant increases
or rapid fluctuations in fuel prices, interest rates, fuel taxes, and insurance
and claims costs, to the extent not offset by increases in freight rates or fuel
surcharges. The Company's results of operations also are affected by
recessionary economic cycles and downturns in customers' business cycles,
particularly in market segments and industries in which the Company has a
concentration of customers. In addition, the Company's results of operations are
affected by seasonal factors. Customers tend to reduce shipments during the
winter months. Due to pending concerns in the Middle East and the strike in
Venezuela, fuel prices have risen over the last three quarters of 2002, and
continuing into 2003. Shortages of fuel, increases in fuel prices, or rationing
of petroleum products could have a materially adverse effect on the Company's
operating results.
Capital Requirements. The trucking industry is very capital intensive.
Historically, the Company has depended on cash from operations, operating
leases, and debt financing for funds to maintain its revenue equipment fleet.
The Company has slowed its growth and extended its trade cycle on tractors and
trailers, and expects only minimal capital expenditures in 2003. If the
Company's operating results do not improve, and the Company is unable in the
future to enter into acceptable financing arrangements, it might be required to
operate its revenue equipment for even longer periods or downsize its fleet,
which could have a materially adverse effect on the Company's operating results.
The failure of the Company to maintain compliance with all covenants in its
borrowing obligations, or obtain a waiver or amendment thereof, could have a
materially adverse effect on the Company's liquidity and operating results.
Revenue Equipment. The Company has decided to maintain its revenue
equipment for the foreseeable future and not replace aging tractors. If the
resale value of the Company's revenue equipment were to remain low or decline,
the Company could find it necessary to dispose of its equipment at a lower gain
or a loss, or retain some of its equipment even longer, with a resulting
increase in operating expenses, all of which could have a materially adverse
effect on the Company's operating results.
Recruitment, Retention, and Compensation of Qualified Drivers and
Independent Contractors. Competition for drivers and independent contractors is
intense in the trucking industry. There is, and historically has been, an
industry-wide shortage of qualified drivers and independent contractors. The
Company has suffered from an excessive number of Company-owned tractors without
drivers for the past several quarters. In addition, independent contractors have
decreased industry-wide for a variety of economic reasons. The Company's
shortage of drivers and independent contractors has constrained revenue
production. Failure to recruit additional drivers and independent contractors
could force the Company to increase compensation or limit fleet size, either of
which could have a materially adverse effect on operating results.
Competition. The trucking industry is highly competitive and fragmented.
The Company competes with other truckload carriers, private fleets operated by
existing and potential customers, and to some extent railroads and
rail-intermodal service. Competition is based primarily on service, efficiency,
and freight rates. Many competitors offer transportation service at lower rates
than the Company. The Company's results could suffer if it cannot obtain higher
rates.
Acquisitions. A significant portion of the Company's growth prior to 1999
occurred through acquisitions. In March 2001, the Company acquired the assets of
Skipper Transportation, Inc., a small flatbed carrier headquartered in
Birmingham, Alabama. This is the only acquisition the Company has made during
the past three years, and no further acquisitions are contemplated at this time.
19
Insurance. As the Company renews its insurance policies in July 2003, the
Company could be forced to implement significantly higher self-insured retention
amounts or modify its excess coverage to reduce its premium costs to a level the
Company can afford. An increase in the number or severity of accidents, a loss
in excess of the Company's coverage limits, stolen equipment, or other loss
events over those anticipated could have a materially adverse effect on the
Company's profitability.
Regulation. The trucking industry is subject to various governmental
regulations. The DOT sent a final rule, which has not been published, to the
Office of Management and Budget ("OMB") in January 2003, for OMB review and
approval. That rule, if approved, may limit the hours-in-service during which a
driver may operate a tractor. The DOT is also considering a proposal that would
require installing certain safety equipment on tractors. The EPA has promulgated
air emission standards that are expected to increase the cost of tractor engines
and reduce fuel mileage. Although the Company is unable to predict the nature of
any changes in regulations, the cost of any changes, if implemented, may
adversely affect the Company's profitability.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks from changes in (i) certain
interest rates on its debt and (ii) certain commodity prices.
Interest Rate Risk
In connection with an early March 2003 amendment, the Company's financing
arrangement with LaSalle Bank was amended to provide a variable interest rate
based on LaSalle's prime rate plus two percent, provided there has been no
default. Prior to the amendment the variable interest rate was LaSalle's prime
rate. In addition, approximately $24.9 million of the Company's other debt
carries variable interest rates. This variable interest exposes the Company to
the risk that interest rates may rise. Assuming borrowing levels at December 31,
2002, a one-point increase in the prime rate would increase interest expense by
approximately $389,000. The remainder of the Company's other debt carries fixed
interest rates and exposes the Company to the risk that interest rates may fall.
At December 31, 2002, approximately 93% of the Company's debt carries a variable
interest rate and the remainder is fixed.
Commodity Price Risk
The Company in the past has used derivative instruments, including heating
oil price swap agreements, to reduce a portion of its exposure to fuel price
fluctuations. During the year ended December 31, 2002, the Company had no such
agreements in place. The Company does not trade in these derivatives with the
objective of earning financial gains on price fluctuations, nor does it trade in
these instruments when there are no underlying transaction related exposures.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's audited financial statements, including its consolidated
balance sheets and consolidated statements of operations, cash flows,
stockholders' equity, and notes related thereto, are included at pages 28 to 43
of this report. The supplementary quarterly financial data follows:
(Unaudited)
Quarterly Financial Data
(Dollars in thousands, except earnings per share)
------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
2002 2002 2002 2002
-------------- --------------- ---------------- ---------------
Operating revenue................................ $ 41,200 $ 45,239 $ 43,272 $ 39,737
Loss from operations............................. (2,700) (1,263) (648) (7,270)
Loss before income taxes......................... (3,254) (1,777) (1,140) (7,625)
Income taxes (benefit)........................... (687) (616) (383) (2,902)
Net loss......................................... (2,037) (1,161) (757) (4,723)
Basic and diluted loss per share................. $ (0.42) $ (0.24) $ (0.16) $ (0.97)
First Quarter Second Quarter Third Quarter Fourth Quarter
2001 2001 2001 2001
-------------- --------------- ---------------- ---------------
Operating revenue................................ $ 47,379 $ 51,754 $ 48,571 $ 43,122
(Loss) earnings from operations.................. (1,127) 338 (1,114) (3,025)
Loss before income taxes......................... (1,975) (469) (1,845) (3,643)
Income taxes (benefit)........................... (687) (85) (633) (1,316)
Net loss......................................... (1,288) (384) (1,212) (2,327)
Basic and diluted loss per share................. $ (0.26) $ (0.08) $ (0.25) $ (0.48)
As a result of rounding, the total of the four quarters may not equal the Company's results for the full year.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
No reports on Form 8-K have been filed within the twenty-four months prior
to December 31, 2002, involving a change of accountants or disagreements on
accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information respecting executive officers and directors set forth under
the captions "Election of Directors; Information Concerning Directors and
Executive Officers" and "Section 16(a) Beneficial Ownership Reporting
Compliance" of the Registrant's Proxy Statement for the 2003 annual meeting of
stockholders, which will be filed with the Securities and Exchange Commission in
accordance with Rule 14a-6 promulgated under the Securities Exchange Act of
1934, as amended (the "Proxy Statement"), is incorporated by reference;
provided, that the "Audit Committee Report for 2002" and the Stock Price
Performance Graph contained in the Proxy Statement are not incorporated by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information respecting executive compensation set forth under the
caption "Executive Compensation" in the Proxy Statement is incorporated herein
by reference; provided, that the "Compensation Committee Report on Executive
Compensation" contained in the Proxy Statement is not incorporated by reference.
21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information respecting security ownership of certain beneficial owners
and management set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated herein
by reference.
Securities Authorized For Issuance Under Equity Compensation Plans. The
following table provides information as of December 31, 2002, regarding
compensation plans under which the Company's equity securities are authorized
for issuance:
Number of securities
remaining available for
future issuance under
Number of securities to Weighted-average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
warrants, and rights warrants, and rights column (a))
Plan Category (a) (b) (c)
- -------------------------- ----------------------- ---------------------- ------------------------
Equity compensation plans
approved by security holders 372,525 $4.72 552,475
Equity compensation plans
not approved by security
holders 12,000 $2.60 0
------------------------ ------------------------ ------------------------
Total 384,525 $4.66 552,475
On July 27, 2000, the Company made a one-time grant to each of its three
non-employee directors of an option to purchase 4,000 shares of the Company's
Class A Common Stock. The exercise price was set at 85% of the closing price on
the date of the grant ($2.60), and the options vested immediately. The options
expire on July 27, 2006. These grants were not subject to stockholder approval.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information respecting certain relationships and transactions of
management set forth under the captions "Compensation Committee Interlocks,
Insider Participation, and Related Party Transactions" in the Proxy Statement is
incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in its periodic reports
filed with the Securities and Exchange Commission is recorded, processed,
summarized, and reported within the time periods specified in the rules and
forms of the Commission and that such information is accumulated and
communicated to the Company's management. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rules 13a-14 and
15d-14 of the Securities Exchange Act of 1934, as amended). Based upon that
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date the Company carried out its evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
22
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
The Company's audited financial statements are set forth at the following
pages of this report:
Independent Auditors' Report.......................................................... Page 28 herein
Consolidated Balance Sheets........................................................... Page 29 through 30 herein
Consolidated Statements of Operations................................................. Page 31 herein
Consolidated Statements of Stockholders' Equity...................................... Page 32 herein
Consolidated Statements of Cash Flows................................................. Page 33 through 34 herein
Notes to Consolidated Financial Statements............................................ Page 35 through 43 herein
2. Financial Statement Schedules.
Financial statement schedules are not required because all required
information is included in the financial statements or is immaterial.
3. Exhibits
See list under Item 14(c) below, with management compensatory plans and
arrangements being listed under 10.1, 10.2, 10.3, 10.5, 10.7, 10.8, 10.9, and
10.10.
(b) Reports on Form 8-K
None
23
(c) Exhibits
Exhibit
Number Description
3.1 * Articles of Incorporation.
3.2 * Bylaws.
4.1 * Articles of Incorporation.
4.2 * Bylaws.
10.1 * Outside Director Stock Plan dated March 1, 1995.
10.2 * Incentive Stock Plan adopted March 1, 1995.
10.3 * 401(k) Plan adopted August 14, 1992, as amended.
10.4 * Form of Agency Agreement between Smithway Motor Xpress, Inc. and its independent
commission agents.
10.5 * Memorandum of officer incentive compensation policy.
10.6 * Form of Independent Contractor Agreement between Smithway Motor Xpress, Inc. and its
independent contractor providers of tractors.
10.7 ** 1997 Profit Incentive Plan, adopted May 8, 1997.
10.8 *** Amendment No. 2 to Smithway Motor Xpress Corp. Incentive Stock Plan, adopted May 7, 1999.
10.9 **** Form of Outside Director Stock Option Agreement dated July 27, 2000, between Smithway
Motor Xpress Corp. and each of its non-employee directors.
10.10 ***** New Employee Incentive Stock Plan, adopted August 6, 2001.
10.11 ***** Amended and Restated Loan and Security Agreement dated December 28, 2001, between LaSalle
Bank National Association, Smithway Motor Xpress, Inc., as Borrower, and East West Motor
Xpress, Inc., as Borrower.
21 + List of Subsidiaries.
23 # Consent of KPMG LLP, independent auditors.
- ---------------------
* 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 Quarterly Report on Form 10-Q for the period ended March 31, 2000. Commission File
No. 000-20793, dated May 5, 2000.
*** Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1999. Commission File
No. 000-20793, dated August 13, 1999.
**** Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2000. Commission
File No. 000-20793, dated November 3, 2000.
*****Incorporated by reference from the Company's Annual report on Form 10-K for the fiscal year ended December 31, 2001.
Commission File No. 000-20793, dated March 28, 2002.
+ Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. Commission
File No. 000-20793, dated March 29, 2000.
# Filed herewith.
24
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: April 15, 2003 By: /s/ William G. Smith
---------------------------------------
William G. Smith
Chairman of the Board, President,
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Position Date
/s/ William G. Smith Chairman of the Board, President, and Chief Executive
- -------------------------- Officer; Director (principal executive officer) April 15, 2003
William G. Smith
/s/ G. Larry Owens Executive Vice President, Chief Administrative Officer,
- -------------------------- and Chief Financial Officer; Director April 15, 2003
G. Larry Owens
/s/ Douglas C. Sandvig Senior Vice President, Controller, and Chief Accounting
- -------------------------- Officer (principal financial and accounting officer) April 15, 2003
Douglas C. Sandvig
/s/ Herbert D. Ihle Director April 15, 2003
- --------------------------
Herbert D. Ihle
/s/ Robert E. Rich Director April 15, 2003
- --------------------------
Robert E. Rich
/s/ Terry G. Christenberry Director April 15, 2003
- --------------------------
Terry G. Christenberry
25
CERTIFICATIONS
I, William G. Smith, certify that:
1. I have reviewed this annual report on Form 10-K of Smithway Motor Xpress
Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 15, 2003 /s/ William G. Smith
--------------------------------
William G. Smith
Chief Executive Officer
26
I, G. Larry Owens, certify that:
1. I have reviewed this annual report on Form 10-K of Smithway Motor Xpress
Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 15, 2003 /s/ G. Larry Owens
--------------------------------
G. Larry Owens
Chief Financial Officer
27
Independent Auditors' Report
To the Stockholders and Board of Directors of Smithway Motor Xpress Corp.:
We have audited the accompanying consolidated balance sheets of Smithway Motor
Xpress Corp. and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 2002. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Smithway Motor
Xpress Corp. and subsidiaries as of December 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standard No. 142,
Goodwill and Other Intangible Assets, on January 1, 2002.
/s/ KPMG LLP
Des Moines, Iowa
February 14, 2003, except for note 1 - liquidity and note 4,
which are as of April 15, 2003
28
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
December 31,
------------------------------------------
2001 2002
--------------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 722 $ 105
Receivables:
Trade (note 4)...................................... 13,649 13,496
Other............................................... 1,020 622
Recoverable income taxes............................ 1,820 7
Inventories............................................ 1,561 868
Deposits, primarily with insurers (note 10)............ 539 753
Prepaid expenses....................................... 926 1,492
Deferred income taxes (note 5)......................... 1,726 2,263
--------------------- -------------------
Total current assets......................... 21,963 19,606
--------------------- -------------------
Property and equipment (note 4):
Land................................................... 1,548 1,548
Buildings and improvements............................. 8,175 8,210
Tractors............................................... 79,472 71,221
Trailers............................................... 44,784 42,517
Other equipment........................................ 7,318 8,105
--------------------- -------------------
141,297 131,601
Less accumulated depreciation......................... 62,252 64,031
--------------------- -------------------
Net property and equipment................... 79,045 67,570
--------------------- -------------------
Goodwill (note 2)........................................ 5,016 1,745
Other assets............................................. 412 488
--------------------- -------------------
$ 106,436 $ 89,409
===================== ===================
See accompanying notes to consolidated financial statements.
29
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
December 31,
---------------------------------------------
2001 2002
---------------------- ---------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (note 4)............................ $ 12,052 $ 11,595
Accounts payable......................................................... 4,589 4,556
Accrued loss reserves (note 10).......................................... 2,327 3,882
Accrued compensation..................................................... 2,258 2,152
Checks in excess of cash balances........................................ - 1,086
Other accrued expenses................................................... 792 463
---------------------- ----------------------
Total current liabilities...................................... 22,018 23,734
Long-term debt, less current maturities (note 4)........................... 37,105 30,533
Deferred income taxes (note 5)............................................. 14,862 10,257
Line of credit (note 4).................................................... 585 1,692
---------------------- ----------------------
Total liabilities............................................. 74,570 66,216
---------------------- ----------------------
Stockholders' equity (notes 6 and 7):
Preferred stock (.01 par value; authorized 5 million shares; issued none) - -
Common stock:
Class A (.01 par value; authorized 20 million shares;
issued 2001 and 2002 - 4,035,989 shares)..................... 40 40
Class B (.01 par value; authorized 5 million shares;
issued 1 million shares)..................................... 10 10
Additional paid-in capital............................................... 11,394 11,393
Retained earnings........................................................ 20,842 12,164
Reacquired shares, at cost (2001 - 192,009 shares; 2002 - 189,168 shares) (420) (414)
---------------------- ----------------------
Total stockholders' equity..................................... 31,866 23,193
Commitments (note 10)
---------------------- ----------------------
$ 106,436 $ 89,409
====================== ======================
See accompanying notes to consolidated financial statements.
30
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
Years ended December 31,
----------------------------------------------------------
2000 2001 2002
------------------ ------------------- -------------------
Operating revenue:
Freight..............................................$ 198,247 $ 190,165 $ 168,918
Other................................................ 743 661 550
------------------ ------------------- -------------------
Operating revenue.............................. 198,990 190,826 169,468
------------------ ------------------- -------------------
Operating expenses:
Purchased transportation............................. 77,755 70,129 62,364
Compensation and employee benefits................... 51,718 54,394 51,834
Fuel, supplies, and maintenance...................... 30,995 32,894 27,722
Insurance and claims................................. 3,426 5,325 7,324
Taxes and licenses................................... 3,943 3,817 3,444
General and administrative........................... 8,319 8,294 7,153
Communications and utilities......................... 2,052 2,123 1,783
Depreciation and amortization (note 2)............... 19,325 18,778 19,725
------------------ ------------------- -------------------
Total operating expenses....................... 197,533 195,754 181,349
------------------ ------------------- -------------------
Earnings (loss) from operations.................. 1,457 (4,928) (11,881)
Financial (expense) income
Interest expense..................................... (4,124) (3,052) (1,955)
Interest income...................................... 95 48 40
------------------ ------------------- -------------------
Loss before income taxes......................... (2,572) (7,932) (13,796)
Income tax benefit (note 5)............................... (581) (2,721) (5,118)
------------------ ------------------- -------------------
Net loss........................................$ (1,991) $ (5,211) $ (8,678)
================== =================== ===================
Basic and diluted loss per share (note 8).................$ (0.40) $ (1.07) $ (1.79)
================== =================== ===================
See accompanying notes to consolidated financial statements.
31
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2000, 2001, and 2002
(Dollars in thousands)
Additional Total
Common paid-in Retained Reacquired stockholders'
stock capital earnings shares equity
----------------------------------------------------------------------
Balance at December 31, 1999.................... $ 50 $ 11,414 $ 28,044 $ - $ 39,508
Net loss........................................ - - (1,991) - (1,991)
Treasury stock acquired (167,922 shares)........ - - - (456) (456)
Treasury stock reissued (48,297 shares)......... - (18) - 190 172
----------------------------------------------------------------------
Balance at December 31, 2000.................... 50 11,396 26,053 (266) 37,233
Net loss........................................ - - (5,211) - (5,211)
Treasury stock acquired (77,900 shares)......... - - - (166) (166)
Treasury stock reissued (5,516 shares).......... - (2) - 12 10
----------------------------------------------------------------------
Balance at December 31, 2001.................... 50 11,394 20,842 (420) 31,866
Net loss........................................ - - (8,678) - (8,678)
Treasury stock reissued (2,841 shares).......... - (1) - 6 5
---------------------------------------------------------------------
Balance at December 31, 2002.................... $ 50 $ 11,393 $ 12,164 $ (414) $ 23,193
=====================================================================
See accompanying notes to consolidated financial statements.
32
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years ended December 31,
------------------------------------------------
2000 2001 2002
--------------- -------------- ---------------
Cash flows from operating activities:
Net loss......................................................... $ (1,991) $ (5,211) $ (8,678)
--------------- -------------- ---------------
Adjustments to reconcile net loss to cash provided by operating
activities:
Depreciation and amortization................................ 19,325 18,778 19,725
Deferred income taxes (benefit).............................. (489) (129) (5,142)
Change in:
Receivables............................................. 1,389 2,783 2,364
Inventories............................................. 25 29 693
Deposits, primarily with insurers....................... 121 (379) (214)
Prepaid expenses........................................ (331) 95 (566)
Accounts payable and other accrued liabilities.......... 486 (1,653) 1,087
--------------- -------------- ---------------
Total adjustments................................... 20,526 19,524 17,947
--------------- -------------- ---------------
Net cash provided by operating activities......... 18,535 14,313 9,269
--------------- -------------- ---------------
Cash flows from investing activities:
Payments for acquisitions........................................ - (2,954) -
Purchase of property and equipment............................... (4,366) (2,537) (1,149)
Proceeds from sale of property and equipment..................... 1,905 1,541 4,519
Other............................................................ (97) (71) (76)
--------------- -------------- ---------------
Net cash (used in) provided by investing activities... (2,558) (4,021) 3,294
--------------- -------------- ---------------
Cash flows from financing activities:
Net borrowings on line of credit................................ - 585 1,107
Proceeds from long-term debt.................................... 8,500 24,759 -
Principal payments on long-term debt............................ (24,529) (35,107) (15,378)
Change in checks issued in excess of cash balances.............. - - 1,086
Treasury stock reissued......................................... 172 10 5
Other........................................................... (456) (166) -
--------------- -------------- ---------------
Net cash used in financing activities.................. (16,313) (9,919) (13,180)
--------------- -------------- ---------------
Net (decrease) increase in cash and cash equivalents... (336) 373 (617)
Cash and cash equivalents at beginning of year..................... 685 349 722
--------------- -------------- ---------------
Cash and cash equivalents at end of year........................... $ 349 $ 722 $ 105
=============== ============== ===============
See accompanying notes to consolidated financial statements.
33
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years ended December 31,
------------------------------------------------
2000 2001 2002
--------------- -------------- ---------------
Supplemental disclosure of cash flow information:
Cash paid (received) during year for:
Interest................................................. $ 4,181 $ 3,075 $ 2,003
Income taxes............................................. (1,096) (788) (1,790)
=============== ============== ===============
Supplemental schedules of noncash investing and financing
activities:
Notes payable issued for tractors and trailers.................. $ 8,848 $ 7,171 $ 8,349
Treasury stock reissued......................................... 172 10 5
=============== ============== ===============
Cash payments for acquisitions:
Revenue equipment............................................... $ - $ 2,088 $ -
Intangible assets............................................... - 526 -
Land, buildings, and other assets............................... - 340 -
--------------- -------------- ---------------
$ - $ 2,954 $ -
=============== ============== ===============
See accompanying notes to consolidated financial statements.
34
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Note 1: Summary of Significant Accounting Policies
Operations
Smithway Motor Xpress Corp. and subsidiaries (the Company) is a truckload
carrier that provides nationwide transportation of diversified freight,
concentrating primarily in flatbed operations. It generally operates over
short-to-medium traffic routes, serving shippers located predominantly in the
central United States. The Company also operates in the southern provinces of
Canada. Canadian revenues, based on miles driven, were approximately $670, $649,
and $477 for the years ended December 31, 2000, 2001, and 2002, respectively.
The consolidated financial statements include the accounts of Smithway Motor
Xpress Corp. and its three wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Liquidity
The Company incurred significant losses in 2001 and 2002, and has continued
to incur losses in the first quarter of 2003. In addition, working capital is a
negative $4,128 at December 31, 2002. The Company was in violation of its bank
covenants at December 31, 2002, and March 31, 2003, but received waivers. Since
the beginning of 2003, there have been several amendments to the financing
arrangement. These amendments have temporarily increased the borrowing base,
permanently increased the interest rate, and revised the financial covenants to
reflect financial performance that management believes is reasonably achievable,
although there can be no assurance that the required financial performance will
be achieved. The Company's 2002 cash flows from operations would not be
sufficient to cover the 2003 debt service requirements.
During 2002, the Company's primary sources of liquidity were funds provided
by operations and borrowings under credit arrangements with financial
institutions and equipment manufacturers. The Company is experiencing a period
of negative cash flow as continuing losses and declining revenue have resulted
in lower cash generated from operations and reduced borrowing capacity. As of
the date of this report, the Company has little borrowing availability on its
line of credit. Accordingly, the Company expects minimal capital expenditures
during 2003. The Company's ability to fund its cash requirements in future
periods will depend on its ability to comply with covenants contained in
financing arrangements and improve its operating results and cash flow. The
Company's ability to achieve the required improvements will depend on general
shipping demand by the Company's customers, fuel prices, the availability of
drivers and independent contractors, insurance and claims experience, and other
factors. Management is in the process of implementing several steps that are
intended to improve the Company's operating results and achieve compliance with
the financial covenants. These steps include: expanding the size of the
Company's tractor fleet through the addition of two identified dedicated fleet
operations and recruiting approximately 20 owner-operators over the remainder of
the year; improving the utilization per tractor through a full-time production
manager and expected increases in general freight levels; implementing a yield
management program in which the Company seeks additional favorable freight while
ceasing to haul less favorable freight; and identifying additional areas for
cost containment, including, personnel costs and liability insurance and claims.
In addition to these steps, management is working with a consulting firm to
identify and evaluate additional measures to achieve and enhance profitability
over the longer term. Although management believes that seasonal improvements in
shipping demand and the actions being evaluated should generate the required
improvements, there is no assurance the improvements will occur as planned.
Assuming the improvements do occur as planned, management believes there will be
sufficient cash flow to meet the Company's liquidity requirements at least
through December 31, 2003. To the extent that actual results or events differ
from management's financial projections or business plans, the Company's
liquidity may be adversely affected and the Company may be unable to meet its
financial covenants. In such event, the Company's liquidity would be materially
and adversely impacted, and the Company's ability to continue as a going concern
would be called into question if alternative financing could not be found.
Customers
The Company serves a diverse base of shippers. No single customer accounted
for more than 10 percent of the Company's total operating revenues during any of
the years ended December 31, 2000, 2001, and 2002. The Company's 10 largest
customers accounted for approximately 25 percent, 24 percent, and 28 percent of
the Company's total operating revenues during 2000, 2001, and 2002,
respectively. The Company's largest concentration of customers is in the steel
and building materials industries, which together accounted for approximately 41
percent, 42 percent, and 43 percent of the Company's total operating revenues in
2000, 2001, and 2002, respectively.
35
Drivers
The Company faces intense industry competition in attracting and retaining
qualified drivers and independent contractors. This competition from time to
time results in the Company temporarily idling some of its revenue equipment or
increasing the compensation the Company pays to its drivers and independent
contractors.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Cash and Cash Equivalents
The Company considers interest-bearing instruments with maturity of three
months or less at the date of purchase to be the equivalent of cash. The Company
did not hold any cash equivalents as of December 31, 2001 or 2002.
Receivables
Trade receivables are stated net of an allowance for doubtful accounts of
$1,265 and $1,520 at December 31, 2001 and 2002, respectively. The financial
status of customers is checked and monitored by the Company when granting
credit. The Company routinely has significant dollar transactions with certain
customers, however at December 31, 2001 and 2002, no individual customer
accounted for more than 10 percent of total trade receivables.
Inventories
Inventories consist of tractor and trailer supplies and parts. Inventories
are stated at lower of cost (first-in, first-out method) or market.
Prepaid Expenses
Prepaid expenses consist primarily of the cost of tarps, which are
amortized over 36 months and licenses which are amortized over 12 months.
Accounting for Leases
The Company is a lessee of revenue equipment under a limited number of
operating leases. Rent expense is charged to operations as it is incurred under
the terms of the respective leases. Under the leases for transportation
equipment, the Company is responsible for all repairs, maintenance, insurance,
and all other operating expenses. The Company is also a lessee of terminal
property under various short term operating leases.
Rent charged to expense on the above leases, expired leases, and short-term
rentals was $543 in 2000; $1,058 in 2001; and $1,030 in 2002.
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
36
in depreciation and amortization in the consolidated statements of operations.
Gains or losses on trade-ins are included in the basis of the new asset. During
2000, 2001, and 2002, depreciation and amortization included net gains from the
sale of equipment of $881, $187, and $792, respectively. In addition, 2000
included $1,033 for the write-down of tractors, 2001 included $707 for the
write-off of a proprietary operating system, and 2002 included $3,300 for
goodwill impairment.
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. 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 exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
Revenue Recognition
The Company generally recognizes operating revenue when the freight to be
transported has been loaded. The Company operates primarily in the
short-to-medium length haul category of the trucking industry; therefore, the
Company's 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. The Company recognizes
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.
Insurance and Claims
Losses resulting from personal liability, physical damage, workers'
compensation, and cargo loss and damage are covered by insurance subject to
certain deductibles. Losses resulting from uninsured claims are recognized when
such losses are known and can be estimated. The Company estimates and accrues a
liability for its share of ultimate settlements using all available information.
Expenses depend on actual loss experience and changes in estimates of settlement
amounts for open claims which have not been fully resolved.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect of a change in tax rates on deferred tax assets
and liabilities is recognized in income in the period that includes the
enactment date.
Stock Option Plans
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure" (SFAS 148). SFAS 148 amends the disclosure requirements of
Statement of Financial Accounting Standards 123, "Accounting for Stock-Based
Compensation" (SFAS 123). As of December 31, 2002, the Company has three
stock-based employee compensation plans, which are described more fully in Note
7. The Company accounts 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 net income, as all options granted under these
plans had an exercise price equal to the market value of the common stock on the
date of the grant.
37
Had the Company determined compensation based on the fair value at the
grant date for its outstanding stock options under SFAS 123 for 2000, 2001, and
2002 pro forma net loss would have been $2,117, $5,317 and $8,684, and pro forma
basic and diluted loss per share would have been $.42, $1.10 and $1.79 per
share, respectively. For purposes of pro forma disclosures, the estimated fair
value of options is amortized to expense over the options' vesting periods.
The Company used the Black-Scholes option pricing model to determine the
fair value of stock options for the years ended December 31, 2000, 2001, and
2002. The following assumptions were used in determining the fair value of these
options: weighted-average risk-free interest rate, 5.05% in 2000, 4.26% in 2001,
and 4.55% in 2002; weighted-average expected life, 5 years in 2000, 5 years in
2001, and 5 years in 2002; and weighted-average expected volatility, 55% in
2000, 60% in 2001, and 61% in 2002. There were no expected dividends.
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 years. 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 the Company suffered a net loss for the years ended December 31, 2001
and 2002, the effects of potential common shares were not included in the
calculation as their effects would be anti-dilutive. Stock options outstanding
at December 31, 2001 and 2002 totaled 623,000 and 384,525, respectively.
Note 2: Goodwill
In 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets."
SFAS 142 requires that goodwill no longer be amortized, but instead be tested
for impairment at least annually. The Company's impairment at January 1, 2002
was based on an independent appraisal and indicated no impairment. At December
31, 2002 the Company updated its impairment analysis as required under SFAS 142
using a combination of available market data for similar transportation
companies and an internal update of the appraisal. The analysis indicated the
goodwill in one of the Company's reporting units is impaired, triggered
primarily as a result of the continued losses during 2002. The Company recorded
an impairment charge of $3.3 million during the fourth quarter, which is
included in depreciation and amortization in the statement of operations and
cash flows.
The following table reflects the consolidated results, adjusted as though
the adoption of SFAS 142 occurred as of the beginning of the year ended December
31, 2000.
(Dollars in thousands, except per share amounts) Years Ended December 31,
-----------------------------------------
2000 2001 2002
------------ ------------ ------------
Net loss:
As reported $ (1,991) $ (5,211) $ (8,678)
Goodwill amortization, net of tax 483 466 -
Goodwill impairment charge, net of tax - - 2,057
------------ ------------ ------------
Adjusted net loss $ (1,508) $ (4,745) $ (6,621)
============ ============ ============
Loss per share - basic and diluted:
As reported $ (0.40) $ (1.07) $ (1.79)
Goodwill amortization, net of tax 0.10 0.09 -
Goodwill impairment charge, net of tax - - 0.42
----------- ------------ ------------
Adjusted basic and diluted net loss per share $ (0.30) $ (0.98) $ (1.37)
=========== ============ ============
38
A roll-forward of goodwill for the years ending December 31, is as follows:
Years ended December 31,
-------------------------------
2001 2002
-------------------------------
Balance at beginning of year $5,191 $5,016
Goodwill acquired 526 -
Goodwill amortization (701) -
Impairment charge - (3,271)
-------------------------------
Balance at end of year $5,016 $1,745
===============================
In March 2001, the Company acquired tractors, trailers, and certain other
assets owned or leased by Skipper Transportation, Inc. of Birmingham, Alabama.
In exchange for these assets, the Company assumed and repaid approximately
$1,483 in equipment financing secured by these assets and paid $944 to the
former owners of the acquired assets. In addition, the Company paid $526 for
goodwill. This acquisition was accounted for by the purchase method of
accounting. There were no acquisitions during 2002.
Note 3: Financial Instruments
SFAS 107, "Disclosures About Fair Value of Financial Instruments," defines
the fair value of a financial instrument as the amount at which the instrument
could be exchanged in a current transaction between willing parties. At December
31, 2002, the carrying amounts of cash and cash equivalents, trade receivables,
other receivables, line of credit, accounts payable, and accrued liabilities,
approximate fair value because of the short maturity of those instruments. The
fair value of the Company's long-term debt, including current maturities, was
$49,227 and $42,150 at December 31, 2001 and 2002, respectively, based upon
estimated market rates.
Note 4: Long-Term Debt
The Company has a financing arrangement with LaSalle Bank, which expires on
April 1, 2004, and provides for automatic month-to-month renewals under certain
conditions. LaSalle may terminate the arrangement prior to April 1, 2004, in the
event of default, and may terminate at anytime during the renewal terms. Prior
to a recent amendment, the arrangement expired on December 31, 2004.
The agreement provides for a term loan, a revolving line of credit, and a
capital expenditure loan. The term loan has a balance of $12,900 and is payable
in 60 equal monthly installments of $215 in principal. The revolving line of
credit allows for borrowings up to 85 percent of eligible receivables. The
capital expenditure loan allows for borrowing 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 $2,000 annually, and $4,000
over the term of the agreement. The capital expenditure loan has a balance of
$1,169 and is payable in equal monthly installments of $18 in principal. The
combination of all loans with LaSalle Bank cannot exceed $32,500 or a specified
borrowing base. At December 31, 2002, total borrowings under the revolving line
were $1,692.
The financing arrangement also includes financing for letters of credit. At
December 31, 2002, the Company had outstanding letters of credit totaling $7,449
for self-insured amounts under its insurance programs. (See note 10). These
letters of credit directly reduce the amount of potential borrowings available
under the financing arrangement discussed above. 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 the Company's
liquidity.
At December 31, 2002, the Company's borrowing limit under the financing
arrangement was $24.4 million, leaving approximately $1.2 million in remaining
availability at such date. At the date hereof, the Company has relatively little
availability.
39
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. The Company was
not in compliance with the tangible net worth or fixed charge covenants at
December 31, 2002, or the tangible net worth covenant at March 31, 2003, but
waivers were received. These covenants have since been amended to requirements
that management believes are reasonably achievable, although there can be no
assurance that the required financial performance will be achieved.
The weighted average interest rates on debt outstanding at December 31,
2001 and 2002 were approximately 4.75 and 3.80 percent, respectively. In
connection with an early March 2003 amendment, the interest rate on outstanding
borrowings under the arrangement was increased from LaSalle's prime rate to the
prime rate plus two percent. The Company is required to pay a facility fee on
the financing arrangement of .25% of the maximum loan limit ($32,500).
Borrowings under the agreement are secured by liens on revenue equipment,
accounts receivable, and certain other assets.
Long-term debt also includes equipment notes with balances of $30,656 and
$28,059 at December 31, 2001 and 2002, respectively. Interest rates on the
equipment notes range from 2.51 percent to 7.54 percent with maturities through
2007. The equipment notes are collateralized by the underlying equipment, and
contain a minimum tangible net worth requirement. The Company was in compliance
with the required minimum tangible net worth requirement for December 31, 2002,
but was not in compliance on March 31, 2003. A waiver was obtained and this
covenant has since been amended. Management expects to remain in compliance
going forward.
If the Company fails to maintain compliance with financial covenants in its
borrowing obligations, 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 an event, the Company's liquidity would be materially and
adversely impacted, and the Company's ability to continue as a going concern
would be called into question if alternative financing could not be obtained.
Future maturities on long-term debt at December 31, 2002 are as follows:
2003, $11,595; 2004, $11,323; 2005, $7,664; 2006, $6,012; 2007, $5,458;
thereafter, $76.
Note 5: Income Taxes
Income taxes consisted of the following components for the three years
ended December 31:
2000 2001 2002
---------------------------- ---------------------------------- -------------------------------
Federal State Total Federal State Total Federal State Total
---------------------------- ---------------------------------- -------------------------------
Current $ (74) $ (18) $ (92) $(2,541) $ (51) $(2,592) $ - $ 24 $ 24
Deferred (391) (98) (489) (112) (17) (129) (4,147) (995) (5,142)
---------------------------- ---------------------------------- -------------------------------
$(465) $(116) $(581) $(2,653) $ (68) $(2,721) $(4,147) $(971) $(5,118)
============================ ================================== ===============================
Total income tax benefit differs from the amount of income tax benefit
computed by applying the normal United States federal income tax rate of 34
percent to income before income tax benefit. The reasons for such differences
are as follows:
Years Ended December 31,
-------------------------------------------------
2000 2001 2002
-------------------------------------------------
Computed "expected" income tax benefit $ (677) $ (2,696) $ (4,691)
State income tax expense, net of federal taxes (77) (313) (641)
Permanent differences, primarily nondeductible
portion of driver per diem and travel expenses 278 288 214
Other (105) - -
-------------------------------------------------
$ (581) $ (2,721) $ (5,118)
=================================================
40
Temporary differences between the financial statement basis of assets and
liabilities and the related deferred tax assets and liabilities at December 31,
2001 and 2002, were as follows:
Deferred tax assets: 2001 2002
----------------- -----------------
Net operating loss carryforwards $ 5,041 $ 6,126
Alternative minimum tax (AMT) credit carryforwards 271 271
Accrued expenses 1,656 2,336
Goodwill - 1,265
Other 156 20
----------------- -----------------
Total gross deferred tax assets 7,124 10,018
----------------- -----------------
Deferred tax liabilities:
Property and equipment (20,260) (18,012)
----------------- -----------------
Net deferred tax liabilities $ (13,136) $ (7,994)
================= =================
At December 31, 2002, the Company has net operating loss carryforwards for
income tax purposes of approximately $15,482 which are available to offset
future taxable income. These net operating losses expire during the years 2019
through 2022. The AMT credit carryforwards are available indefinitely to reduce
future income tax liabilities to the extent they exceed AMT liabilities.
The Company has reviewed the need for a valuation allowance relating to the
deferred tax assets, and has determined that no allowance is needed. The Company
believes the future deductions will be realized principally through future
reversals of existing taxable temporary differences, and to a lesser extent,
future taxable income. In addition, the Company has the ability to use
tax-planning strategies to generate taxable income if necessary to realize the
deferred tax assets.
Note 6: Stockholders' Equity
On all matters with respect to which the Company's stockholders have a
right to vote, each share of Class A common stock is entitled to one vote, while
each share of Class B common stock is entitled to two votes. The Class B common
stock is convertible into shares of Class A common stock on a share-for-share
basis at the election of the stockholder and will be converted automatically
into shares of Class A common stock upon transfer to any party other than
William G. Smith, his wife, Marlys L. Smith, their children, their
grandchildren, trusts for any of their benefit, and entities wholly owned by
them.
Note 7: Stock Plans
The Company has 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 the Company
granted outside directors 12,000 stock options not covered by this plan.
The Company has 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.
The Company has 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.
41
A summary of stock option activity and weighted-average exercise prices
follows:
2000 2001 2002
--------------------------------------------------------------------------
Exercise Exercise Exercise
Shares price Shares price Shares price
--------------------------------------------------------------------------
Outstanding at beginning of year 152,000 $9.85 345,000 $5.50 623,000 $4.25
Granted 193,000 2.07 278,000 2.70 27,525 2.31
Exercised - - - - - -
Forfeited - - - - 266,000 3.47
--------------------------------------------------------------------------
Outstanding at end of year 345,000 $5.50 623,000 $4.25 384,525 $4.66
==========================================================================
Options exercisable at end of year 220,400 $6.71 296,400 $5.77 301,725 $5.20
Weighted-average fair value of
options granted during the year $1.66 $1.49 $1.28
A summary of stock options outstanding and exercisable as of December 31,
2002, follows:
Options outstanding Options exercisable
----------------------------------------------------------- ----------------------------------
Range of exercise Number Weighted average Weighted average Number Weighted average
prices outstanding remaining life (years) exercise price exercisable exercise price
- ------------------------------------------------------------------------------ ----------------------------------
$ 1.55 - $ 3.47 261,525 7.61 $ 2.17 185,125 $ 2.27
$ 7.23 - $ 9.50 88,000 2.54 $ 9.11 88,000 $ 9.11
$11.81 - $14.05 35,000 4.77 $12.00 28,600 $12.05
----------------------------------------------------------- ----------------------------------
384,525 6.19 $ 4.66 301,725 $ 5.20
=========================================================== ==================================
The Company has reserved 55,000 shares of Class A common stock for issuance
pursuant to an independent contractor driver bonus plan. The Company awarded
33,646, -0-, and -0- shares under the plan in 2000, 2001, and 2002,
respectively.
The Company also has a Class A common stock profit incentive plan under
which the Company will set aside for delivery to certain participants the number
of shares of Class A common stock having a market value on the distribution date
equal to a designated percentage (as determined by the board of directors) of
the Company's consolidated net earnings for the applicable fiscal year. In 2000
the Company issued 13,401 shares of Class A common stock to participants in the
plan. No shares were awarded in 2001 and 2002 under the plan.
Note 8: Loss per Share
A summary of the basic and diluted loss per share computations is presented
below:
Years ended December 31 2000 2001 2002
- -------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stockholders $ (1,991) $ (5,211) $ (8,678)
---------------------------------------------------
Basic weighted-average shares outstanding 5,008,759 4,852,067 4,845,652
Effect of dilutive stock options - - -
---------------------------------------------------
Diluted weighted-average shares outstanding 5,008,759 4,852,067 4,845,652
===================================================
Basic loss per share $ (0.40) $ (1.07) $ (1.79)
Diluted loss per share $ (0.40) $ (1.07) $ (1.79)
---------------------------------------------------
Note 9: Employees' Profit Sharing and Savings Plan
The Company has an Employees' Profit Sharing and Savings Plan, which is a
qualified plan under the provisions of Sections 401(a) and 501(a) of the
Internal Revenue Code. Eligible employees are allowed to contribute up to a
maximum of 15 percent of pre-tax compensation into the plan. Employers may make
savings, matching, and discretionary contributions, subject to certain
restrictions. During the years ended December 31, 2000, 2001, and
42
2002, Company contributions totaled $180, $-0-, and $-0-, respectively. The plan
owns 525,693 shares of the Company's Class A common stock at December 31, 2002.
Note 10: Commitments and Contingent Liabilities
Prior to July 1, 2002, the Company's insurance program for auto liability,
physical damage, and cargo losses involves a deductible of $50 per incident and
the Company's insurance program for workers' compensation involves a deductible
of $100 per incident. In response to increasing costs of insurance premiums, the
Company increased its deductible for both insurance programs to $250 per
incident beginning July 1, 2002. At December 31, 2001 and 2002, the Company had
$2,327 and $3,882, respectively, accrued for its estimated liability for
incurred losses related to these programs.
The insurance companies require the Company to provide letters of credit to
provide funds for payment of the deductible amounts. At December 31, 2001 and
2002, the Company had $5,513 and $7,449 letters of credit issued under the
financing arrangement described in note 4. In addition, funds totaling $413 and
$654 were held by the insurance companies as deposits at December 31, 2001 and
2002, respectively.
The Company's obligations under non-cancelable operating lease agreements
are as follows: 2003, $295; 2004, $20; 2005, $5; thereafter $-0-. There are no
equipment re-purchase commitments or lease residual guarantees in place on the
Company's fleet. In addition, the Company has no fuel purchase commitments as of
December 31, 2002.
The Company's health insurance program is provided as an employee benefit
for all eligible employees and contractors. The plan is self funded for losses
up to $125 per covered member. At December 31, 2001 and 2002, the Company had
approximately $871 and $943, respectively, accrued for its estimated liability
related to these claims.
The Company is involved in certain legal actions and proceedings arising
from the normal course of operations. Management believes that liability, if
any, arising from such legal actions and proceedings will not have a materially
adverse effect on the financial statements of the Company.
Note 11: Transactions with Related Parties
During the years ended December 31, 2000, 2001, and 2002 there were no
material transactions with related parties.
Note 12: Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for the Company for 2001 and 2002 is as
follows:
March 31 June 30 September 30 December 31
----------------------------------------------------------------------
2001
Operating revenue $47,379 $51,754 $48,571 $43,122
Earnings (loss) from operations (1,127) 338 (1,114) (3,025)
Net loss (1,288) (384) (1,212) (2,327)
Basic and diluted loss per share ($0.26) ($0.08) ($0.25) ($0.48)
2002
Operating revenue $41,220 $45,239 $43,272 $39,737
Loss from operations (2,700) (1,263) (648) (7,270) (1)
Net loss (2,037) (1,161) (757) (4,723) (1)
Basic and diluted loss per share ($0.42) ($0.24) ($0.16) ($0.97)
As a result of rounding, the total of the four quarters may not equal the
Company's results for the year.
(1) Fourth quarter 2002 includes a charge of $3,271 ($1,998 after tax) for
impairment of goodwill in one of the Company's reporting units as discussed in
note 2 and a charge of $1,800 ($1,100 after tax) for a revision of estimates
related to auto liability and workers' compensation loss reserves.
43