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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Quarterly Period Ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ____________ to _________________
Commission file number 000-20793
SMITHWAY MOTOR XPRESS CORP.
(Exact name of registrant as specified in its charter)
Nevada 42-1433844
- ------------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2031 Quail Avenue
Fort Dodge, Iowa 50501
- ------------------------------------- ------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 515/576-7418
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES [ ] NO [X]
As of July 31, 2003, the registrant had 3,846,821 shares of Class A Common Stock
and 1,000,000 shares of Class B Common Stock outstanding.
PART I
FINANCIAL INFORMATION
PAGE
NUMBER
Item 1 Financial Statements 3-10
Condensed Consolidated Balance Sheets as of December 31, 2002 and
June 30, 2003 (unaudited)........................................ 3-4
Condensed Consolidated Statements of Operations for the three and six
months ended June 30, 2002 and 2003 (unaudited)................... 5
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2002 and 2003 (unaudited)................... 6-7
Notes to Condensed Consolidated Financial Statements (unaudited)......... 8-10
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 11-19
Item 3 Quantitative and Qualitative Disclosures About Market Risk............... 19
Item 4 Controls and Procedures.................................................. 19
PART II
OTHER INFORMATION
Item 1 Legal Proceedings........................................................ 20
Item 2 Changes in Securities and Use of Proceeds................................ 20
Item 3 Defaults Upon Senior Securities.......................................... 20
Item 4 Submission of Matters to a Vote of Security Holders...................... 20
Item 5 Other Information........................................................ 20
Item 6 Exhibits and Reports on Form 8-K......................................... 20
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
(unaudited)
------------------------------------------
December 31, June 30,
2002 2003
--------------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 105 $ 349
Receivables:
Trade............................................... 13,496 15,635
Other............................................... 629 1,210
Inventories............................................ 868 995
Deposits, primarily with insurers...................... 753 849
Prepaid expenses....................................... 1,492 1,442
Deferred income taxes.................................. 2,263 2,457
--------------------- -------------------
Total current assets......................... 19,606 22,937
--------------------- -------------------
Property and equipment:
Land................................................... 1,548 1,548
Buildings and improvements............................. 8,210 8,210
Tractors............................................... 71,221 70,953
Trailers............................................... 42,517 40,651
Other equipment........................................ 8,105 5,714
--------------------- -------------------
131,601 127,076
Less accumulated depreciation......................... 64,031 66,053
Net property and equipment................... 67,570 61,023
--------------------- -------------------
Goodwill................................................. 1,745 1,745
Other assets............................................. 488 436
--------------------- -------------------
$ 89,409 $ 86,141
===================== ===================
See accompanying notes to condensed consolidated financial statements.
3
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
(unaudited)
---------------------------------------------
December 31, June 30,
2002 2003
---------------------- ----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt..................................... $ 11,595 $ 11,660
Accounts payable......................................................... 4,556 6,108
Accrued loss reserves.................................................... 3,882 4,295
Accrued compensation..................................................... 2,152 2,690
Checks in excess of cash balances........................................ 1,086 891
Other accrued expenses................................................... 463 575
---------------------- ----------------------
Total current liabilities...................................... 23,734 26,219
Long-term debt, less current maturities.................................... 30,533 26,827
Deferred income taxes...................................................... 10,257 9,299
Line of credit............................................................. 1,692 2,619
---------------------- ----------------------
Total liabilities............................................. 66,216 64,964
---------------------- ----------------------
Stockholders' equity:
Preferred stock.......................................................... - -
Common stock:
Class A............................................................... 40 40
Class B............................................................... 10 10
Additional paid-in capital............................................... 11,393 11,393
Retained earnings........................................................ 12,164 10,148
Reacquired shares, at cost............................................... (414) (414)
---------------------- ----------------------
Total stockholders' equity..................................... 23,193 21,177
Commitments
---------------------- ----------------------
$ 89,409 $ 86,141
====================== ======================
See accompanying notes to condensed consolidated financial statements.
4
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(unaudited)
Three months ended Six months ended
June 30, June 30,
-----------------------------------------------------------------
2002 2003 2002 2003
-----------------------------------------------------------------
Operating revenue:
Freight................................. $45,041 $42,196 $86,100 $82,075
Other................................... 198 45 359 52
-----------------------------------------------------------------
Operating revenue................. 45,239 42,241 86,459 82,127
-----------------------------------------------------------------
Operating expenses:
Purchased transportation................ 16,551 14,344 31,842 28,699
Compensation and employee benefits...... 13,740 12,653 27,144 25,027
Fuel, supplies, and maintenance......... 7,023 7,094 13,507 14,931
Insurance and claims.................... 1,639 1,476 3,452 2,498
Taxes and licenses...................... 920 839 1,756 1,680
General and administrative.............. 1,928 1,856 3,737 3,214
Communications and utilities............ 432 381 939 793
Depreciation and amortization........... 4,269 3,781 8,045 7,491
-----------------------------------------------------------------
Total operating expenses.......... 46,502 42,424 90,422 84,333
-----------------------------------------------------------------
Loss from operations................ (1,263) (183) (3,963) (2,206)
Financial (expense) income
Interest expense........................ (524) (496) (1,085) (946)
Interest income......................... 10 2 17 4
-----------------------------------------------------------------
Loss before income taxes............ (1,777) (677) (5,031) (3,148)
Income tax benefit........................... (616) (219) (1,833) (1,132)
-----------------------------------------------------------------
Net loss........................... $(1,161) $ (458) $(3,198) $(2,016)
=================================================================
Basic and diluted loss per share............. $ (0.24) $ (0.09) $ (0.66) $ (0.42)
=================================================================
Basic and diluted weighted average shares
outstanding.................................. 4,846,021 4,846,821 4,845,277 4,846,821
=================================================================
See accompanying notes to condensed consolidated financial statements.
5
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)
Six months ended
June 30,
------------------------------
2002 2003
-------------- --------------
Cash flows from operating activities:
Net loss......................................................... $ (3,198) $ (2,016)
-------------- --------------
Adjustments to reconcile net loss to cash used by operating
activities:
Depreciation and amortization................................ 8,045 7,491
Deferred income tax benefit.................................. (1,843) (1,152)
Change in:
Receivables............................................. (1,843) (2,720)
Inventories............................................. (35) (127)
Deposits, primarily with insurers....................... 31 (96)
Prepaid expenses........................................ (493) 50
Accounts payable and other accrued liabilities.......... 2,533 2,615
-------------- --------------
Total adjustments................................... 6,395 6,061
-------------- --------------
Net cash provided by operating activities......... 3,197 4,045
-------------- --------------
Cash flows from investing activities:
Purchase of property and equipment............................... (837) (271)
Proceeds from sale of property and equipment..................... 2,735 2,231
Other............................................................ 46 52
-------------- --------------
Net cash provided by investing activities............. 1,944 2,012
-------------- --------------
Cash flows from financing activities:
Net borrowings on line of credit................................. 3,295 927
Principal payments on long-term debt............................. (8,055) (6,545)
Change in checks issued in excess of cash balances............... - (195)
Treasury stock reissued.......................................... 6 -
-------------- --------------
Net cash used in financing activities.................. (4,754) (5,813)
-------------- --------------
Net increase in cash and cash equivalents.............. 387 244
Cash and cash equivalents at beginning of period................... 722 105
-------------- --------------
Cash and cash equivalents at end of period......................... $ 1,109 $ 349
============== ==============
See accompanying notes to condensed consolidated financial statements.
6
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows, continued
(Dollars in thousands)
(unaudited)
Six months ended
June 30,
------------------------------
2002 2003
-------------- --------------
Supplemental disclosure of cash flow information:
Cash paid (received) during period for:
Interest................................................. $ 1,114 $ 894
Income taxes............................................. (1,041) 15
============== ==============
Supplemental schedules of noncash investing and financing
activities:
Notes payable issued for tractors and trailers.................. $ 2,282 $ 2,904
============== ==============
See accompanying notes to condensed consolidated financial statements.
7
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The condensed consolidated financial statements include the accounts of
Smithway Motor Xpress Corp., a Nevada holding company, and its four wholly
owned subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
The condensed consolidated financial statements have been prepared, without
audit, in accordance with accounting principles generally accepted in the
United States of America, pursuant to the published rules and regulations
of the Securities and Exchange Commission. In the opinion of management,
the accompanying condensed consolidated financial statements include all
adjustments which are necessary for a fair presentation of the results for
the interim periods presented, such adjustments being of a normal recurring
nature. Certain information and footnote disclosures have been condensed or
omitted pursuant to such rules and regulations. The December 31, 2002,
Condensed Consolidated Balance Sheet was derived from the audited balance
sheet of the Company for the year then ended. It is suggested that these
condensed consolidated financial statements and notes thereto be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K for the year ended December 31, 2002.
Results of operations in interim periods are not necessarily indicative of
results to be expected for a full year.
Note 2. Liquidity
The Company incurred significant losses in 2001 and 2002, and has continued
to incur losses in the first two quarters of 2003. In addition, working
capital is a negative $4,128 and $3,282 at December 31, 2002 and June 30,
2003, respectively. The Company was in violation of its bank covenants at
December 31, 2002, March 31, 2003, and June 30, 2003, respectively, 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, management believes that the
Company has adequate borrowing availability on its line of credit. 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 of
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, some
of which were developed with the assistance of a consulting firm engaged by
the board of directors, that are intended to improve the Company's
operating results and achieve compliance with the financial covenants.
These steps include: consolidating terminals; improving the utilization per
tractor through a full-time production manager; 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 reducing the
Company's excess insurance coverage limit effective July 1, 2003 to $2.0
million. Although management believes that seasonal improvements in
shipping demand during the third quarter and the actions being evaluated
should generate the required improvements, there is no assurance that 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 June 30, 2004. 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 comply with 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.
8
Note 3. Net earnings per common share
Basic earnings per share have been computed by dividing net earnings by the
weighted average outstanding Class A and Class B common shares during each
of the quarters. Diluted earnings per share have been calculated by also
including in the computation the effect of employee stock options,
nonvested stock, and similar equity instruments granted to employees as
potential common shares. Because the Company suffered a net loss for the
three months and six months ended June 30, 2002, and 2003, the effects of
potential common shares were not included in the calculation as their
effects would be anti-dilutive. Stock options outstanding at June 30, 2002,
and 2003, totaled 594,525 and 303,150, respectively.
Note 4. Stock Option Plans
The Company has three stock-based employee compensation plans:
(1) 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 granted under this plan is six years from the grant
date. Options fully 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 in the
aggregate not covered by this plan.
(2) 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.
(3) 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.
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 the statement of operations, as
all options granted to employees under these plans had an exercise price
equal to the market value of the common stock on the date of the grant.
9
The following table illustrates the effect on net loss and loss per share
if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, "Accounting for Stock-Based Compensation," to
stock-based employee compensation. The Company used the Black-Scholes
option pricing model to determine the fair value of stock options for the
three and six months ended June 30, 2002, and 2003. The following
assumptions were used in determining the fair value of these options:
weighted average risk-free interest rate, 4.55% in 2002 and 2.54% in 2003;
weighted average expected life, 5 years in 2002 and 2003; and weighted
average expected volatility, 61% in 2002, , and 66% in 2003. There were no
expected dividends. For purposes of pro forma disclosures, the estimated
fair value of options is amortized to expense over the options' vesting
periods.
Three months ended Six months ended
June 30, June 30,
---------------------------- -----------------------------
2002 2003 2002 2003
----------- ------------ ------------ ------------
Net loss, as reported $ (1,161) $ (458) $ (3,198) $ (2,016)
Deduct: Total stock-based
employee compensation expense
determined under fair value based
method for all awards, net of related
tax effects (2) (4) (3) (9)
----------- ------------ ------------ ------------
Pro forma net loss $ (1,163) $ (462) $ (3,201) $ (2,025)
=========== ============ ============ ============
Loss per share
Basic and Diluted - as reported $ (0.24) $ (0.09) $ (0.66) $ (0.42)
Basic and Diluted - pro forma $ (0.24) $ (0.09) $ (0.66) $ (0.42)
Note 5. Long-Term Debt
During July 2003, the Company amended its financing arrangement with
LaSalle Bank. This amendment included provisions which waive the covenant
violation for the quarter ended June 30, 2003 and also as of July 31, 2003.
The amendment also extends the expiration date of the agreement to July 1,
2004 and reduces the maximum loan limit from $32,500 to $27,500. The
Company believes the covenant compliance requirements for its financing
agreements are reasonably achievable, although there can be no assurance
that the required financial performance will be achieved.
During March and April 2003, the Company amended its financing arrangement
with LaSalle Bank. These amendments included provisions which waive a
covenant violation at March 31, 2003, adjust the covenant requirements
going forward, increase the interest rate from LaSalle's prime rate to
prime rate plus two percent, and accelerate the expiration date of the
agreement to April 1, 2004. In addition, the Company amended its equipment
financing arrangement to provide for a waiver of a covenant violation at
March 31, 2003, and the adjustment of the covenant requirement going
forward.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Except for the historical information contained herein, the discussion in
this quarterly report on Form 10-K contains forward-looking statements that
involve risk, assumptions, and uncertainties that are difficult to predict.
Words such as "anticipates," "believes," "estimates," "projects," "expects,"
variations of these words, and similar expressions, are intended to identify
such forward-looking statements. These statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Such
statements are based upon the current beliefs and expectations of the Company's
management and are subject to significant risks and uncertainties. Actual
results may differ from those set forth in forward-looking statements. The
following factors, among others, could cause actual results to differ materially
from those in forward-looking statements: failure to turn around continued
operating losses, which could result in further violation of bank covenants and
acceleration of indebtedness at several financial institutions; the ability to
obtain financing on acceptable terms, and obtain waivers and amendments to
current financing in the event of default; economic recessions or downturns in
customers' business cycles; excessive increases in capacity within truckload
markets; surplus inventories; decreased demand for transportation services
offered by the Company; increases or rapid fluctuations in inflation, interest
rates, fuel prices, and fuel hedging; the availability and costs of attracting
and retaining qualified drivers and owner-operators; increases in insurance
premiums and deductible amounts, or changes in excess coverage, relating to
accident, cargo, workers' compensation, health, and other claims; increased
exposure with respect to accident claims as a result of a reduction of the
Company's excess insurance coverage limit; the resale value of used equipment
and prices of new equipment; seasonal factors such as harsh weather conditions
that increase operating costs; regulatory requirements that increase costs and
decrease efficiency, including new emissions standards and hours-of-service
regulations; changes in management; and the ability to negotiate, consummate,
and integrate acquisitions. Readers should review and consider the various
disclosures made by the Company in its press releases, stockholder reports, and
public filings, as well as the factors explained in greater detail in the
Company's annual report on Form 10-K.
The Company's fiscal year ends on December 31 of each year. Thus, this
report discusses the second quarter and first six months of the Company's 2002
and 2003 fiscal years.
For the three months ended June 30, 2003, operating revenue decreased 6.6%
to $42.2 million from $45.2 million during the same quarter in 2002. Net loss
was $458,000, or ($0.09) per diluted share, compared with net loss of $1.2
million, or ($0.24) per diluted share, during the 2002 quarter. For the six
months ended June 30, 2003, operating revenue decreased 5.0% to $82.1 million
from $86.5 million during the same period in 2002. Net loss was $2.0 million, or
($0.42) per diluted share, compared with net loss of $3.2 million, or ($0.66)
per diluted share, during the 2002 period.
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 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
of acquired companies 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.
11
Results of Operations
The following table sets forth the percentage relationship of certain items
to revenue for the three and six months ended June 30, 2002 and 2003:
Three months ended Six months ended
June 30, June 30,
------------------------ -----------------------
2002 2003 2002 2003
----------- ----------- ---------- ----------
Operating revenue..................................... 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Purchased transportation.......................... 36.6 34.0 36.8 34.9
Compensation and employee benefits................ 30.4 30.0 31.4 30.5
Fuel, supplies, and maintenance................... 15.5 16.8 15.6 18.2
Insurance and claims.............................. 3.6 3.5 4.0 3.0
Taxes and licenses................................ 2.0 2.0 2.0 2.0
General and administrative........................ 4.3 4.4 4.3 3.9
Communication and utilities....................... 1.0 0.9 1.1 1.0
Depreciation and amortization..................... 9.4 9.0 9.3 9.1
----------- ----------- ---------- ----------
Total operating expenses.......................... 102.8 100.4 104.6 102.7
----------- ----------- ---------- ----------
Loss from operations.................................. (2.8) (0.4) (4.6) (2.7)
Interest expense, net................................. 1.2 1.2 1.3 1.2
----------- ----------- ---------- ----------
Loss before income taxes.............................. (3.9) (1.6) (5.8) (3.8)
Income tax benefit.................................... (1.4) (0.5) (2.1) (1.4)
----------- ----------- ---------- ----------
Net loss.............................................. (2.6)% (1.1)% (3.7)% (2.5)%
=========== =========== ========== ==========
Comparison of three months ended June 30, 2003, with three months ended June 30,
2002.
Operating revenue decreased $3.0 million (6.6%), to $42.2 million in the
2003 quarter from $45.2 million in the 2002 quarter. Lower weighted average
tractors, partially offset by increased average revenue per tractor per week and
increased fuel surcharge revenue, were responsible for the decrease in operating
revenue. Weighted average tractors decreased to 1,257 in the 2003 quarter from
1,466 in the 2002 quarter 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. In the near term, management
expects weighted average tractors will remain approximately at current levels as
few tractors are scheduled to be added in 2003. Average revenue per tractor per
week (excluding revenue from brokerage operations, fuel surcharges, and other
revenue) increased to $2,389 in the 2003 quarter from $2,221 in the 2002
quarter, primarily due to a lower number of unseated company tractors. Revenue
per loaded mile, net of surcharges, increased to $1.37 in the 2003 quarter from
$1.36 in the 2002 quarter. Finally, fuel surcharge revenue increased $759,000 to
$1.4 million in the 2003 quarter from $686,000 in the 2002 quarter. During the
2003 and 2002 quarters, approximately $979,000 and $376,000, respectively, of
the fuel surcharge revenue collected helped to offset Company fuel costs. The
remainder was passed through to independent contractors.
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 $2.2 million (13.3%), to $14.3 million in the 2003
quarter from $16.6 million in the 2002 quarter, as the Company contracted with
fewer independent contractor providers of revenue equipment. As a percentage of
revenue, purchased transportation decreased to 34.0% of revenue in the 2003
quarter compared with 36.6% in the 2002 quarter. This reflects a decrease in the
percentage of the fleet supplied by independent contractors. 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. The percentage of total operating
revenue provided by independent contractors decreased to 36.5% in the 2003
quarter from 39.8% in the 2002 quarter.
Compensation and employee benefits decreased $1.1 million (7.9%), to $12.7
million in the 2003 quarter from $13.7 million in the 2002 quarter. As a
percentage of revenue, compensation and employee benefits decreased to 30.0% in
the 2003 quarter from 30.4% in the 2002 quarter. The decrease was primarily
attributable to a decrease in wages paid to non-driver employees resulting from
staff reductions and a decrease in workers' compensation
12
claims paid and reserved. These factors were partially offset by additional
wages paid to new drivers for sign-on bonuses implemented to enhance driver
recruiting.
Fuel, supplies, and maintenance increased $71,000 (1.0%), to $7.1 million
in the 2003 quarter from $7.0 million in the 2002 quarter. As a percentage of
revenue, fuel, supplies, and maintenance increased to 16.8% of revenue in the
2003 quarter compared with 15.5% in the 2002 quarter. This reflects a decrease
in the percentage of the fleet supplied by independent contractors. Although
fuel prices increased approximately 11% to an average of $1.37 per gallon in the
2003 quarter from $1.23 per gallon in the 2002 quarter, the increase in fuel
prices was partially offset by a $603,000 increase in fuel surcharge revenue
which is included in operating revenue.
Insurance and claims decreased $163,000 (9.9%), to $1.5 million in the 2003
quarter from $1.6 million in the 2002 quarter. As a percentage of revenue,
insurance and claims remained relatively constant at 3.5% of revenue in the 2003
quarter compared with 3.6% in the 2002 quarter. 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 were renewed on July
1, 2003 without modification to the self-retention level, but the Company's
excess insurance coverage limit was reduced to $2.0 million. Management expects
insurance and claims expense, as a percentage of revenue, will remain at current
levels in future periods unless the Company were to experience an increase in
the number or severity of accidents over the reduced excess policy coverage
limit, which could result in a substantial increase in this expense category as
a percentage of revenue.
Taxes and licenses decreased $81,000 (8.8%), to $839,000 in the 2003
quarter from $920,000 in the 2002 quarter reflecting a decrease in the weighted
average number of tractors in the fleet. As a percentage of revenue, taxes and
licenses remained constant at 2.0% of revenue in the 2003 and 2002 quarter.
General and administrative expenses decreased $72,000 (3.7%), to $1.9
million in the 2003 quarter from $1.9 million in the 2002 quarter. As a
percentage of revenue, general and administrative expenses remained relatively
constant at 4.4% of revenue in the 2003 quarter compared with 4.3% of revenue in
the 2002 quarter. During the quarter, decreases attributable to successful cost
cutting measures and the elimination of commissioned agents at two locations
were offset by a $307,000 increase in professional and consulting fees.
Communications and utilities decreased $51,000 (11.8%), to $381,000 in the
2003 quarter from $432,000 in the 2002 quarter reflecting a decrease in the
weighted average number of tractors in the fleet. As a percentage of revenue,
communications and utilities remained relatively constant at 0.9% of revenue in
the 2003 quarter compared with 1.0% of revenue in the 2002 quarter.
Depreciation and amortization decreased $488,000 (11.4%), to $3.8 million
in the 2003 quarter from $4.3 million in the 2002 quarter. The gain or loss on
retirement, sale, or write-down of equipment is included in depreciation and
amortization. In the 2003 and 2002 quarter, depreciation and amortization
included net gains from the sale of equipment of $69,000 and $54,000,
respectively. As a percentage of revenue, depreciation and amortization
decreased to 9.0% of revenue in the 2003 quarter compared with 9.4% of revenue
in the 2002 quarter because of higher revenue per seated tractor, which more
effectively spread this cost.
Interest expense, net, decreased $20,000 (3.9%), to $494,000 in the 2003
quarter from $514,000 in the 2002 quarter reflecting lower average debt
outstanding, partially offset by higher interest rates. As a percentage of
revenue, interest expense, net, remained constant at 1.2% of revenue in the 2003
and 2002 quarter.
As a result of the foregoing, the Company's pre-tax margin was (1.6%) in
the 2003 quarter versus (3.9%) in the 2002 quarter.
The Company's income tax benefit was $219,000, or 32.3% of loss before
income taxes. The Company's income tax benefit in the 2002 quarter was $616,000,
or 34.7% of loss before income taxes. In both quarters, 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.
13
As a result of the factors described above, net loss was $458,000 in the
2003 quarter (1.1% of revenue), compared with net loss of $1.2 million in the
2002 quarter (2.6% of revenue).
Comparison of six months ended June 30, 2003, with six months ended June 30,
2002.
Operating revenue decreased $4.3 million (5.0%), to $82.1 million in the
2003 period from $86.5 million in the 2002 period. Lower weighted average
tractors, partially offset by increased average revenue per tractor per week and
increased fuel surcharge revenue, were responsible for the decrease in operating
revenue. Weighted average tractors decreased to 1,271 in the 2003 period from
1,492 in the 2002 period 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. In the near term, management
expects weighted average tractors will remain approximately at current levels as
few tractors are scheduled to be added in 2003. Average revenue per tractor per
week (excluding revenue from brokerage operations, fuel surcharges, and other
income) increased to $2,285 in the 2003 period from $2,103 in the 2002 period,
primarily due to a lower number of unseated company tractors. Revenue per loaded
mile, net of surcharges, remained constant at $1.36 in both periods. Finally,
fuel surcharge revenue increased $2.3 million to $3.2 million in the 2003 period
from $906,000 in the 2002 period. During the 2003 and 2002 periods,
approximately $2.1 million and $488,000, respectively, of the fuel surcharge
revenue collected helped to offset Company fuel costs. The remainder was passed
through to independent contractors.
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 $3.1 million (9.9%), to $28.7 million in the 2003
period from $31.8 million in the 2002 period, as the Company contracted with
fewer independent contractor providers of revenue equipment. As a percentage of
revenue, purchased transportation decreased to 34.9% of revenue in the 2003
period compared with 36.8% in the 2002 period. This reflects a decrease in the
percentage of the fleet supplied by independent contractors. 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. The percentage of total operating
revenue provided by independent contractors decreased to 37.3% in the 2003
period from 40.5% in the 2002 period.
Compensation and employee benefits decreased $2.1 million (7.8%), to $25.0
million in the 2003 period from $27.1 million in the 2002 period. As a
percentage of revenue, compensation and employee benefits decreased to 30.5% in
the 2003 period from 31.4% in the 2002 period. The decrease was primarily
attributable to a decrease in wages paid to non-driver employees resulting from
staff reductions and a decrease in workers' compensation claims paid and
reserved. These factors were partially offset by additional wages paid to new
drivers for sign-on bonuses implemented to enhance driver recruiting and
increased health claims and premiums in the 2003 period.
Fuel, supplies, and maintenance increased $1.4 million (10.5%), to $14.9
million in the 2003 period from $13.5 million in the 2002 period. As a
percentage of revenue, fuel, supplies, and maintenance increased to 18.2% of
revenue in the 2003 period compared with 15.6% in the 2002 period. This reflects
a decrease in the percentage of the fleet supplied by independent contractors.
Although fuel prices increased approximately 24% to an average of $1.45 per
gallon in the 2003 period from $1.17 per gallon in the 2002 period, the increase
in fuel prices was partially offset by a $1.6 million increase in fuel surcharge
revenue which is included in operating revenue.
Insurance and claims decreased $1.0 million (27.6%), to $2.5 million in the
2003 period from $3.5 million in the 2002 period. As a percentage of revenue,
insurance and claims decreased to 3.0% of revenue in the 2003 period compared
with 4.0% in the 2002 period, primarily due to a net premium refund of $467,000
for the policy year ended June 30, 2002, upon accepting a $75,000 increase in
self-insured retention for such policy year. 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 were renewed on July
1, 2003 without modification to the self-retention level, but the Company's
excess insurance coverage limit was reduced to $2.0 million. Management expects
insurance and claims expense, as a percentage of revenue, will remain at current
levels in future periods unless the Company were to experience an increase in
the number or severity of accidents over the reduced excess policy coverage
limit, which could result in a substantial increase in this expense category as
a percentage of revenue.
14
Taxes and licenses decreased $76,000 (4.3%), to $1.7 million in the 2003
period from $1.8 million in the 2002 period. As a percentage of revenue, taxes
and licenses remained constant at 2.0% of revenue in the 2003 and 2002 period.
General and administrative expenses decreased $523,000 (14.0%), to $3.2
million in the 2003 period from $3.7 million in the 2002 period. As a percentage
of revenue, general and administrative expenses decreased to 3.9% of revenue in
the 2003 period compared with 4.3% of revenue in the 2002 period. During the
period, decreases attributable to successful cost cutting measures and the
elimination of commissioned agents at two locations were partially offset by a
$307,000 increase in professional and consulting fees in the second quarter.
Communications and utilities decreased $146,000 (15.5%), to $793,000 in the
2003 period from $939,000 in the 2002 period reflecting a decrease in the
weighted average number of tractors in the fleet. As a percentage of revenue,
communications and utilities remained relatively constant at 1.0% of revenue in
the 2003 period compared with 1.1% of revenue in the 2002 period.
Depreciation and amortization decreased $554,000 (6.9%), to $7.5 million in
the 2003 period from $8.0 million in the 2002 period. The gain or loss on
retirement, sale, or write-down of equipment is included in depreciation and
amortization. In the 2003 and 2002 period, depreciation and amortization
included net gains from the sale of equipment of $279,000 and $703,000,
respectively. As a percentage of revenue, depreciation and amortization remained
relatively constant at 9.1% of revenue in the 2003 period compared with 9.3% of
revenue in the 2002 period because of higher revenue per seated tractor, which
more effectively spread this cost.
Interest expense, net, decreased $126,000 (11.8%), to $942,000 in the 2003
period from $1.1 million in the 2002 period reflecting lower average debt
outstanding, partially offset by higher interest rates. As a percentage of
revenue, interest expense, net, decreased to 1.2% of revenue in the 2003 period
compared with 1.3% in the 2002 period.
As a result of the foregoing, the Company's pre-tax margin was (3.8%) in
the 2003 period versus (5.8%) in the 2002 period.
The Company's income tax benefit was $1.1 million, or 36.0% of loss before
income taxes. The Company's income tax benefit in the 2002 period was $1.8
million, or 36.4% of loss before income taxes. In both periods, 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 $2.0 million in
the 2003 period (2.5% of revenue), compared with net loss of $3.2 million in the
2002 period (3.7% of revenue).
15
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's ability to fund its cash requirements
in future periods will depend on its ability to comply with covenants contained
in financing arrangements, and will require improvement in its operating results
and cash flow. The Company's ability to achieve the required improvements will
depend on general shipping demand of 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, some of which were developed with the assistance of a consulting
firm engaged by the board of directors, that are intended to improve the
Company's operating results and achieve compliance with the financial covenants.
These steps include: consolidating terminals; improving the utilization per
tractor through a full-time production manager; 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 reducing the Company's excess
insurance coverage limit effective July 1, 2003 to $2.0 million. Although
management believes that seasonal improvements in shipping demand during the
third quarter 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
June 30, 2004. 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. 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; increased exposure with respect to
accident claims as a result of a reduction of the Company's excess insurance
coverage limit; inability to maintain compliance with, or negotiate amendments
to, loan covenants; and the possibility of shortened payment terms by the
Company's suppliers and vendors worried about the Company's ability to meet
payment obligations. 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 $4.0 million for the six
months ended June 30, 2003, compared with $3.2 million for the 2002 period. The
increase in net cash provided by operating activities was primarily due to
improved operating results. Historically, the Company's principal use of cash
from operations is to service debt and to internally finance acquisitions of
revenue equipment. Total receivables increased $2.7 million for the six months
ended June 30, 2003. The average age of the Company's trade accounts receivable
was approximately 33.1 days in the 2002 period and 34.1 days in the 2003 period.
Net cash provided by investing activities was $2.0 million for the six
months ended June 30, 2003 compared with $1.9 million for the 2002 period. Such
amounts related primarily to sales of revenue equipment and other fixed assets.
Net cash used in financing activities was $5.8 million for the six months
ended June 30, 2003 compared with $4.8 million for the 2002 period. Net cash
used in financing primarily consisted of net payments of principal under the
Company's long-term debt agreements.
The Company has a financing arrangement with LaSalle Bank, which expires on
July 1, 2004, and provides for automatic month-to-month renewals under certain
conditions. LaSalle may terminate the arrangement prior to
16
July 1, 2004, in the event of default, and may terminate at anytime during the
renewal terms. 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 $27.5
million or a specified borrowing base.
At June 30, 2003, the term loan had a principal balance of $11.3 million,
payable in 54 remaining equal monthly principal installments of $210,000. The
revolving line of credit allows for borrowings up to 85 percent of eligible
receivables. At June 30, 2003, total borrowings under the revolving line were
$2.6 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 June 30,
2003, the amount owed under capital expenditure notes was $1.1 million. At June
30, 2003, 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 June 30, 2003, the Company's
borrowing limit under the financing arrangement was $24.2 million, leaving
approximately $1.8 million in remaining availability at such date.
The Company is required to pay a facility fee on the LaSalle financing
arrangement of .25% of the maximum loan limit. In order to reduce costs, the
maximum loan limit was reduced from $32.5 million to $27.5 million as the
Company's actual borrowing capacity is not expected to exceed $27 million.
Borrowings under the arrangement are secured by liens on revenue equipment,
accounts receivable, and certain other assets. In connection with the 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
in compliance with the tangible net worth covenant at June 30, 2003. The Company
was not in compliance with the fixed charge coverage ratio requirement at June
30, 2003. A waiver of such noncompliance was obtained though July 31, 2003. 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 at June 30, 2003. Although there can be
no assurance, management expects to remain in compliance with the various
financial covenants under its financing arrangements 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 could 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 June 30, 2003:
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 $38,487 $11,659 $16,487 $10,340 $ -
Line of credit 2,619 - 2,619 - -
Operating leases 615 347 90 78 101
--------------------------------------------------------------------
Total contractual cash obligations $41,721 $12,006 $19,196 $10,418 $ 101
====================================================================
The Company had no other commercial commitments at June 30, 2003. Long-term debt
payment dates assume continued compliance with debt covenants.
17
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 included
in this Form 10-Q is contained in Note 1 of the consolidated financial
statements included in the Company's Form 10-K for the year ended December 31,
2002. Other footnotes in the Form 10-K describe various elements of the
financial statements included in this Form 10-Q and the assumptions on which
specific amounts were determined.
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
18
equipment for the foreseeable future and not replace aging tractors. If resale
values remain at current levels or decline, the Company may incur increased
maintenance costs and a lower gain or loss on sale resulting from retaining
equipment even longer.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks from changes in certain interest
rates on its debt. In connection with the 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 $24.2 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 June 30,
2003, a one-point increase in the prime rate would increase annual interest
expense by approximately $392,000. 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 June 30, 2003, approximately 95% of the Company's debt
carries a variable interest rate and the remainder is fixed.
ITEM 4. 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.
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Company has 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 Rule 13a-15(e) under the Exchange Act).
Based upon that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective as of the end of period covered by this report. There
were no changes in the Company's internal control over financial reporting that
occurred during the quarter ended June 30, 2003, that have materially affected,
or that are reasonably likely to materially affect, the Company's internal
control over financial reporting.
19
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No reportable events or material changes occurred during the quarter for
which this report is filed.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company's financing arrangement with LaSalle Bank 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 in compliance with the tangible net worth covenant at June 30, 2003.
The Company was not in compliance with the fixed charge coverage ratio
requirement at June 30, 2003. A waiver of such noncompliance was obtained though
July 31, 2003. Although there can be no assurance, management expects to remain
in compliance with the various financial covenants under its financing
arrangements 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
could be called into question if alternative financing could not be found.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
3.1 * Articles of Incorporation.
3.2 * Bylaws.
4.1 * Articles of Incorporation.
4.2 * Bylaws.
10.15 # Fifth Amendment to Amended and Restated Loan and Security Agreement dated April 15,
2003, between LaSalle Bank National Association, Smithway Motor Xpress, Inc., as
Borrower, and East West Motor Express, Inc., as Borrower.
31.1 # Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, by William G. Smith, the Company's Chief
Executive Officer
31.2 # Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, by G. Larry Owens, the Company's Chief
Financial Officer
32.1 # Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, by William G. Smith, the Company's Chief Executive
Officer
20
32.2 # Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, by G. Larry Owens, the Company's Chief Financial Officer
- ------------------------------------
* Incorporated by reference from the Company's Registration Statement on Form S-1, Registration No. 33-
90356, effective June 27, 1996.
# Filed herewith.
(b) Reports on Form 8-K.
During the quarter ended June 30, 2003, the Company filed with, or furnished to, the Securities and
Exchange Commission (the "Commission") the following Current Reports on Form 8-K:
Current Report on Form 8-K dated April 18, 2003 (filed with the Commission on April 21, 2003)
reporting the Company's issuance of a press release to announce financial and operating results for the
quarter and year ended December 31, 2002, the filing of the Company's Annual Report on Form 10-K,
amendments to the Company's financing arrangements, and expectations regarding results for the first
quarter of 2003; and
Current Report on Form 8-K dated April 25, 2003 (filed with the Commission on April 29, 2003) reporting
the Company's issuance of a press release to announce financial and operating results for the quarter
ended March 31, 2003.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SMITHWAY MOTOR XPRESS CORP.
Date: August 14, 2003 By: /s/ G. Larry Owens
-------------------------------------
G. Larry Owens
Executive Vice President, Chief Administrative
Officer, and Chief Financial Officer, in his
capacity as such and on behalf of the issuer
22