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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-15057
P.A.M. TRANSPORTATION SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 71-0633135
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
297 WEST HENRI DE TONTI BLVD, TONTITOWN, ARKANSAS 72770
(Address of principal executive offices) (Zip Code)
(479) 361-9111
Registrant's telephone number, including area code
Securities registered pursuant to section 12(b) of the Act:
NONE
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of class)
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 (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment 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 [X] No [ ]
The aggregate market value of the common stock of the registrant held by
non-affiliates of the registrant computed by reference to the average of the
closing bid and asked prices of the common stock as of the last business day of
the registrant's most recently completed second quarter was $122,863,693.
Solely for the purposes of this response, executive officers, directors and
beneficial owners of more than five percent of the registrant's common stock are
considered the affiliates of the registrant at that date.
The number of shares outstanding of the issuer's common stock, as of March 7,
2005: 11,307,207 shares of $.01 par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its Annual Meeting
of Stockholders to be held in 2005 are incorporated by reference in answer to
Part III of this report, with the exception of information regarding executive
officers required under Item 10 of Part III, which information is included in
Part I, Item 1.
FORWARD-LOOKING STATEMENTS
This Report contains forward-looking statements, including statements about our
operating and growth strategies, our expected financial position and operating
results, industry trends, our capital expenditure and financing plans and
similar matters. Such forward-looking statements are found throughout this
Report, including under Item 1, Business, Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations, and Item 7A,
Quantitative and Qualitative Disclosures About Market Risk. In those and other
portions of this Report, the words "believe," "may," "will," "estimate,"
"continue," "anticipate," "intend," "expect," "project" and similar expressions,
as they relate to us, our management, and our industry are intended to identify
forward-looking statements. We have based these forward-looking statements
largely on our current expectations and projections about future events and
financial trends affecting our business. Actual results may differ materially.
Some of the risks, uncertainties and assumptions about P.A.M. that may cause
actual results to differ from these forward-looking statements are described
under the headings "Management's Discussion and Analysis of Financial Condition
and Results of Operations," (including under its subheading "-Risk Factors"),
and "Quantitative and Qualitative Disclosures About Market Risk."
All forward-looking statements attributable to us, or to persons acting on our
behalf, are expressly qualified in their entirety by this cautionary statement.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks and uncertainties, the forward-looking events and
circumstances discussed in this Report might not transpire.
P.A.M. TRANSPORTATION SERVICES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
TABLE OF CONTENTS
PART I
------
Page
----
Item 1 Business....................................................... 1
Item 2 Properties..................................................... 8
Item 3 Legal Proceedings.............................................. 9
Item 4 Submission of Matters to a Vote of Security Holders............ 9
PART II
-------
Item 5 Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.............. 10
Item 6 Selected Financial Data........................................ 11
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 12
Item 7A Quantitative and Qualitative Disclosures About Market Risk..... 26
Item 8 Financial Statements and Supplementary Data.................... 27
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................ 53
Item 9A Controls and Procedures........................................ 53
Item 9B Other Information.............................................. 54
PART III
--------
Item 10 Directors and Executive Officers of the Registrant............ 55
Item 11 Executive Compensation........................................ 55
Item 12 Security Ownership of Certain Beneficial Owners And
Management and Related Stockholder Matters.................... 56
Item 13 Certain Relationships and Related Transactions................ 56
Item 14 Principal Accountant Fees and Services........................ 56
PART IV
-------
Item 15 Exhibits, Financial Statement Schedules and Reports
On Form 8-K................................................... 57
SIGNATURES.................................................... 58
EXHIBIT INDEX................................................. 59
PART I
ITEM 1. BUSINESS.
Unless the context otherwise requires, all references in this Annual Report on
Form 10-K to "P.A.M.," the "Company," "we," "our," or "us" mean P.A.M.
Transportation Services, Inc. and its subsidiaries.
We are a truckload dry van carrier transporting general commodities throughout
the continental United States, as well as in the Canadian provinces of Ontario
and Quebec. We also provide transportation services in Mexico under agreements
with Mexican carriers. Our freight consists primarily of automotive parts,
consumer goods, such as general retail store merchandise, and manufactured
goods, such as heating and air conditioning units.
P.A.M. Transportation Services, Inc. is a holding company organized under the
laws of the State of Delaware in June 1986 which conducts operations through the
following wholly owned subsidiaries: P.A.M. Transport, Inc., T.T.X., Inc.,
P.A.M. Dedicated Services, Inc., P.A.M. Logistics Services, Inc., Choctaw
Express, Inc., Choctaw Brokerage, Inc., Transcend Logistics, Inc., Allen Freight
Services, Inc., Decker Transport Co., Inc., East Coast Transport and Logistics,
LLC, S & L Logistics, Inc., P.A.M. International, Inc., P.A.M. Canada, Inc. and
McNeill Express, Inc. Our operating authorities are held by P.A.M. Transport,
P.A.M. Dedicated Services, Inc., Choctaw Express, Inc., Choctaw Brokerage, Inc.,
Allen Freight Services, Inc., T.T.X., Inc., Decker Transport Co., Inc., East
Coast Transport and Logistics, LLC, and McNeill Express, Inc.
We are headquartered and maintain our primary terminal and maintenance
facilities and our corporate and administrative offices in Tontitown, Arkansas,
which is located in northwest Arkansas, a major center for the trucking industry
and where the support services (including warranty repair services) for most
major tractor and trailer equipment manufacturers are readily available.
In order to conform to industry practice, the Company began to classify fuel
surcharges charged to customers as revenue rather than as a reduction of
operating supplies expense as had been presented in reports prior to the period
ended June 30, 2004. This reclassification has no effect on net operating
income, net income or earnings per share. The Company has made corresponding
reclassifications to comparative periods shown.
SEGMENT FINANCIAL INFORMATION
The Company's operations are all in the motor carrier segment and are aggregated
into a single operating segment in accordance with the aggregation criteria
presented in SFAS 131.
OPERATIONS
Our operations can generally be classified into truckload services or brokerage
and logistics services. Truckload services include those transportation
services in which we utilize company owned tractors or owner-operator owned
tractors for the pickup and delivery of freight. The brokerage and logistics
services consists of services such as transportation scheduling, routing, mode
selection, transloading and other value added services related to the
transportation of freight which may or may not involve the usage of company
owned or owner-operator owned equipment. Both our truckload operations and our
brokerage and logistics operations have similar economic characteristics and are
impacted by virtually the same economic factors as discussed elsewhere in this
Report. Truckload services operating revenues, before fuel surcharges
represented 86.4%, 86.7%, and 96.0% of total operating revenues for the years
ended December 31, 2004, 2003, and 2002, respectively. The remaining operating
revenues, before fuel surcharge for the same periods were generated by brokerage
and logistics services, representing 13.6%, 13.3%, and 4.0%, respectively.
Approximately 99% of the Company's revenues are generated by operations
conducted in the United States and all of the Company's assets are located or
based in the United States.
-1-
BUSINESS AND GROWTH STRATEGY
Our strategy focuses on the following elements:
Maintaining Dedicated Fleets in High Density Lanes. We strive to maximize
utilization and increase revenue per tractor while minimizing our time and empty
miles between loads. In this regard, we seek to provide dedicated equipment to
our customers where possible and to concentrate our equipment in defined regions
and disciplined traffic lanes. Dedicated fleets in high density lanes enable us
to:
- - maintain more consistent equipment capacity;
- - provide a high level of service to our customers, including time-sensitive
delivery schedules;
- - attract and retain drivers; and
- - maintain a sound safety record as drivers travel familiar routes.
Providing Superior and Flexible Customer Service. Our wide range of services
includes dedicated fleet services, logistics services, just-in-time delivery,
two-man driving teams, cross-docking and consolidation programs, specialized
trailers, and Internet-based customer access to delivery status. These
services, combined with a decentralized regional operating strategy, allow us to
quickly and reliably respond to the diverse needs of our customers, and provide
an advantage in securing new business. We also maintain ISO 9002 certification
to ensure that we operate in accordance with approved quality assurance
standards.
Many of our customers depend on us to make delivery on a "just-in-time" basis,
meaning that parts or raw materials are scheduled for delivery as they are
needed on the manufacturer's production line. The need for this service is a
product of modern manufacturing and assembly methods that are designed to
drastically decrease inventory levels and handling costs. Such requirements
place a premium on the freight carrier's delivery performance and reliability.
Employing Stringent Cost Controls. We focus intently on controlling our costs
while not sacrificing customer service. We maintain this balance by
scrutinizing all expenditures, minimizing non-driver personnel, operating a
late-model fleet of tractors and trailers to minimize maintenance costs and
enhance fuel efficiency, and adopting new technology only when proven and cost
justified.
Making Strategic Acquisitions. We continually evaluate strategic acquisition
opportunities, focusing on those that complement our existing business or that
could profitably expand our business or services. Our operational integration
strategy is to centralize administrative functions of acquired businesses at our
headquarters, while maintaining the localized operations of acquired businesses.
We believe that allowing acquired businesses to continue to operate under their
pre-acquisition names and in their original regions allows such businesses to
maintain driver loyalty and customer relationships.
INDUSTRY
The U.S. market for truck-based transportation services is estimated to be
approximately $610 billion in annual revenue. We believe that truckload
services, such as those we provide, include approximately $65 billion of
for-hire revenues and $80 billion of private fleet revenue. The truckload
industry is highly fragmented and is impacted by several economic and business
factors, many of which are beyond the control of individual carriers.
-2-
The state of the economy, coupled with equipment capacity levels, can impact
freight rates. Volatility of various operating expenses, such as fuel and
insurance, make the predictability of profit levels unclear. Availability,
attraction, retention and compensation for drivers affect operating costs, as
well as equipment utilization. In addition, the capital requirements for
equipment, coupled with potential uncertainty of used equipment values, impact
the ability of many carriers to expand their operations. The current operating
environment is characterized by the following:
- - Price increases by insurance companies, rising fuel costs, erosion of
equipment values in the used truck market, and intense competition for
drivers.
- - In the last few years, many less profitable or undercapitalized carriers
have been forced to consolidate or to exit the industry.
COMPETITION
The trucking industry is highly competitive and includes thousands of carriers,
none of which dominates the market in which the Company operates. The Company's
market share is less than 1% and we compete primarily with other irregular route
medium- to long-haul truckload carriers, with private carriage conducted by our
existing and potential customers, and, to a lesser extent, with the railroads.
Increased competition has resulted from deregulation of the trucking industry.
We compete on the basis of quality of service and delivery performance, as well
as price. Many of the other irregular route long-haul truckload carriers have
substantially greater financial resources, own more equipment or carry a larger
total volume of freight.
MARKETING AND SIGNIFICANT CUSTOMERS
Our marketing emphasis is directed to that portion of the truckload market which
is generally service-sensitive, as opposed to being solely price competitive.
We seek to become a "core carrier" for our customers in order to maintain high
utilization and capitalize on recurring revenue opportunities. Our marketing
efforts are diversified and designed to gain access to dedicated fleet services
(including those in Mexico and Canada), domestic regional freight traffic, and
cross-docking and consolidation programs.
Our marketing efforts are conducted by a sales staff of seven employees who are
located in our major markets and supervised from our headquarters. These
individuals work to improve profitability by maintaining an even flow of freight
traffic (taking into account the balance between originations and destinations
in a given geographical area) and high utilization, and minimizing movement of
empty equipment.
Our five largest customers, for which we provide carrier services covering a
number of geographic locations, accounted for approximately 62%, 64% and 74% of
our total revenues in 2004, 2003 and 2002, respectively. General Motors
Corporation accounted for approximately 44%, 46% and 56% of our revenues in
2004, 2003 and 2002, respectively.
We also provide transportation services to other manufacturers who are suppliers
for automobile manufacturers. Approximately 56%, 58% and 68% of our revenues
were derived from transportation services provided to the automobile industry
during 2004, 2003 and 2002, respectively. This portion of our business,
however, is spread over 25 assembly plants and over 50 supplier/vendors located
throughout North America, which we believe reduces the risk of a material loss
of business.
-3-
REVENUE EQUIPMENT
At December 31, 2004, we operated a fleet of 1,857 tractors and 4,257 trailers.
We operate late-model, well-maintained premium tractors to help attract and
retain drivers, promote safe operations, minimize maintenance and repair costs,
and improve customer service by minimizing service interruptions caused by
breakdowns. We evaluate our equipment decisions based on factors such as
initial cost, useful life, warranty terms, expected maintenance costs, fuel
economy, driver comfort, customer needs, manufacturer support, and resale value.
Our current policy is to replace most of our tractors at 500,000 miles, which
normally occurs 30 to 48 months after purchase. The following table provides
information regarding our tractor and trailer turnover and the age of our fleet
over the past three years:
2004 2003 2002
---- ---- ----
Tractors
- --------
Additions............................... 502 781 430
Deletions............................... 558 649 309
End of year total....................... 1,857 1,913 1,781
Average age at end of year (in years)... 1.7 1.9 2.1
Trailers
- --------
Additions............................... 803 991 127
Deletions............................... 721 789 86
End of year total....................... 4,257 4,175 3,973
Average age at end of year (in years)... 4.7 5.2 5.7
We historically have contracted with owner-operators to provide and operate a
small portion of our tractor fleet. Owner-operators provide their own tractors
and are responsible for all associated expenses, including financing costs,
fuel, maintenance, insurance, and taxes. We believe that a combined fleet
complements our recruiting efforts and offers greater flexibility in responding
to fluctuations in shipper demand. At December 31, 2004 the Company's tractor
fleet included 85 owner-operator tractors.
Effective October 1, 2002, all newly manufactured truck engines must comply with
new engine emission standards mandated by the Environmental Protection Agency
("EPA"). All truck engines manufactured prior to October 1, 2002 are not
subject to these new standards. As of December 31, 2004, approximately 60% of
the Company-owned truck fleet consisted of trucks with the post-October 2002
engines. The Company has experienced a reduction in fuel efficiency to date,
and increased depreciation expense due to the higher cost of the new engines. A
new set of more stringent emissions standards mandated by the EPA will become
effective for newly manufactured trucks beginning in January 2007. The Company
expects that the engines produced under the 2007 standards will be less
fuel-efficient and have a higher cost than the current engines.
TECHNOLOGY
We have installed Qualcomm Omnitracs display units in all of our tractors. The
Omnitracs system is a satellite-based global positioning and communications
system that allows fleet managers to communicate directly with drivers. Drivers
can provide location status and updates directly to our computer which
increases productivity and convenience. The Omnitracs system provides us with
accurate estimated time of arrival information, which optimizes load selection
and service levels to our customers. In order to optimize our
tractor-to-trailer ratio, we have also installed Qualcomm TrailerTracs tracking
units in all of our trailers. The TrailerTracs system is a tethered trailer
tracking product that enables us to more efficiently track the location of all
trailers in our inventory as they connect to and disconnect from
Qualcomm-equipped tractors.
-4-
Our computer system manages the information provided by the Qualcomm devices to
provide us real-time information regarding the location, status and load
assignment of all of our equipment, which permits us to better meet delivery
schedules, respond to customer inquiries and match equipment with the next
available load. Our system also provides electronically to our customers
real-time information regarding the status of freight shipments and anticipated
arrival times. This system provides our customers flexibility and convenience
by extending supply chain visibility through electronic data interchange, the
Internet and e-mail.
MAINTENANCE
We have a strictly enforced comprehensive preventive maintenance program for our
tractors and trailers. Inspections and various levels of preventive maintenance
are performed at set mileage intervals on both tractors and trailers. A
maintenance and safety inspection is performed on all vehicles each time they
return to a terminal.
Our tractors carry full warranty coverage for at least three years or 350,000
miles. Extended warranties are negotiated with the tractor manufacturer and
manufacturers of major components, such as engine, transmission and differential
manufacturers, for up to four years or 500,000 miles. Trailers carry full
warranties by the manufacturer and major component manufacturers for up to five
years.
EMPLOYEES
At December 31, 2004, we employed 2,736 persons, of whom 2,237 were drivers, 143
were maintenance personnel, 203 were employed in operations, 20 were employed in
marketing, 60 were employed in safety and personnel, and 73 were employed in
general administration and accounting. None of our employees are represented by
a collective bargaining unit and we believe that our employee relations are
good.
DRIVERS
At December 31, 2004, we utilized 2,237 company drivers in our operations. We
also had 85 owner-operators under contract compensated on a per mile basis. Our
drivers are compensated on the basis of miles driven, loading and unloading,
extra stops and layovers in transit. Drivers can earn bonuses by recruiting
other qualified drivers who become employed by us and both cash and non-cash
prizes are awarded for consecutive periods of safe, accident-free driving. All
of our drivers are recruited, screened, drug tested and trained and are subject
to the control and supervision of our operations and safety departments. Our
driver training program stresses the importance of safety and reliable, on-time
delivery. Drivers are required to report to their driver managers daily and at
the earliest possible moment when any condition en route occurs that might delay
their scheduled delivery time.
In addition to strict application screening and drug testing, before being
permitted to operate a vehicle our drivers must undergo classroom instruction on
our policies and procedures, safety techniques as taught by the Smith System of
Defensive Driving, the proper operation of equipment, and must pass both written
and road tests. Instruction in defensive driving and safety techniques
continues after hiring, with seminars at several of our terminals. At December
31, 2004, we employed 60 persons on a full-time basis in our driver recruiting,
training and safety instruction programs.
Intense competition in the trucking industry for qualified drivers over the last
several years, along with difficulties and added expense in recruiting and
retaining qualified drivers, has had a negative impact on the industry. Our
operations have also been impacted and from time to time we have experienced
under-utilization and increased expenses due to a shortage of qualified drivers.
We place a high priority on the recruitment and retention of an adequate supply
of qualified drivers.
-5-
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are as follows:
YEARS OF SERVICE
NAME AGE POSITION WITH COMPANY WITH P.A.M.
- ---------------- --- ------------------------ -------------
Robert W. Weaver 55 President and Chief 22
Executive Officer
W. Clif Lawson 51 Executive Vice President
and Chief Operating Officer 20
Larry J. Goddard 46 Vice President - Finance,
Chief Financial Officer,
Secretary and Treasurer 17
Each of our executive officers has held his present position with the Company
for at least the last five years. We have entered into employment agreements
with our executive officers with terms remaining from three to fifteen months.
INTERNET WEB SITE
The Company maintains a web site where additional information concerning its
business can be found. The address of that web site is www.pamt.com. The
Company makes available free of charge on its Internet web site its Annual
Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") as
soon as reasonably practicable after it electronically files or furnishes such
materials to the Securities and Exchange Commission.
SEASONALITY
Our revenues do not exhibit a significant seasonal pattern due primarily to our
varied customer mix. Operating expenses can be somewhat higher in the winter
months primarily due to decreased fuel efficiency and increased maintenance
costs associated with inclement weather. In addition, the automobile plants for
which we transport a large amount of freight typically utilize scheduled
shutdowns of two weeks in July and one week in December and the volume of
freight we ship is reduced during such scheduled plant shutdowns.
REGULATION
We are a common and contract motor carrier regulated by various federal and
state agencies. We are subject to safety requirements prescribed by the U.S.
Department of Transportation ("DOT"). Such matters as weight and dimension of
equipment are also subject to federal and state regulations. All of our drivers
are required to obtain national driver's licenses pursuant to the regulations
promulgated by the DOT. Also, DOT regulations impose mandatory drug and alcohol
testing of drivers. We believe that we are in compliance in all material
respects with applicable regulatory requirements relating to our trucking
business and operate with a "satisfactory" rating (the highest of three grading
categories) from the DOT.
Our motor carrier operations are also subject to environmental laws and
regulations, including laws and regulations dealing with underground fuel
storage tanks, the transportation of hazardous materials and other environmental
matters, and our operations involve certain inherent environmental risks. We
maintain five bulk fuel storage and fuel islands. Our operations involve the
risks of fuel spillage or seepage, environmental damage, and hazardous waste
disposal, among others. We have instituted programs to monitor and control
environmental risks and assure compliance with applicable environmental laws.
-6-
As part of our safety and risk management program, we periodically perform
internal environmental reviews so that we can achieve environmental compliance
and avoid environmental risk. We transport a minimum amount of environmentally
hazardous substances and, to date, have experienced no significant claims for
hazardous materials shipments. If we should fail to comply with applicable
regulations, we could be subject to substantial fines or penalties and to civil
and criminal liability.
Company operations conducted in industrial areas, where truck terminals and
other industrial activities are conducted, and where groundwater or other forms
of environmental contamination have occurred, potentially expose us to claims
that we contributed to the environmental contamination.
We believe we are currently in material compliance with applicable laws and
regulations and that the cost of compliance has not materially affected results
of operations.
In addition to environmental regulations directly affecting our business, we are
also subject to the effects of new tractor engine design requirements
implemented by the EPA effective October 1, 2002. See "Revenue Equipment" above.
The Federal Motor Carrier Safety Administration ("FMCSA") issued a final rule on
April 24, 2003 that made several changes to the regulations that govern truck
drivers' hours of service ("HOS"). These new federal regulations became
effective on January 4, 2004. On July 16, 2004, the U.S. Circuit Court of
Appeals for the District of Columbia rejected these new hours of service rules
for truck drivers that had been in place since January 2004 because it said the
FMCSA had failed to address the impact of the rules on the health of drivers as
required by Congress. In addition, the judge's ruling noted other areas of
concern including the increase in driving hours from 10 hours to 11 hours, the
exception that allows drivers in trucks with sleeper berths to split their
required rest periods, the new rule allowing drivers to reset their 70-hour
clock to 0 hours after 34 consecutive hours off duty, and the decision by the
FMCSA not to require the use of electronic onboard recorders to monitor driver
compliance. On September 30, 2004, the extension of the Federal highway bill
signed into law by the President of the United States extended the current hours
of service rules for one year or until the FMCSA develops a new set of
regulations, whichever comes first. On January 24, 2005, the FMCSA re-proposed
its April 2003 HOS rules, adding references to how the rules would affect driver
health, but making no changes to the regulations. The FMCSA sought public
comments by March 10, 2005 on what changes to the rule, if any, are necessary
to respond to the concerns raised by the court, and to provide data or studies
that would support changes to, or continued use of, the 2003 rule. The
Company cannot predict what rule changes, if any, will result from the court's
ruling, nor the ultimate impact of any upcoming changes to the hours of service
rules. Any changes could have an adverse effect on the operations and
profitability of the Company.
-7-
ITEM 2. PROPERTIES.
Our executive offices and primary terminal facilities, which we own, are located
in Tontitown, Arkansas. These facilities are located on approximately 49.3 acres
and consist of 114,403 square feet of office space and maintenance and storage
facilities.
Our subsidiaries lease facilities in West Memphis, Arkansas; Jacksonville,
Florida; Breese and Effingham, Illinois; Riverdale and Paulsboro, New Jersey;
North Jackson, Ohio; Oklahoma City, Oklahoma; and Laredo, and El Paso, Texas.
Our terminal facilities in Columbia, Mississippi; Irving, Texas; North Little
Rock, Arkansas; and Willard, Ohio are owned. The leased facilities are leased
primarily on a month-to-month basis. The following provides a summary of the
ownership and types of activities conducted at each location:
Own/ Dispatch Maintenance Safety
Location Lease Office Facility Training
-------- ----- ------ -------- --------
Tontitown, Arkansas Own Yes Yes Yes
North Little Rock, Arkansas Own Yes Yes Yes
West Memphis, Arkansas Lease No Yes No
Jacksonville, Florida Lease Yes Yes Yes
Breese, Illinois Lease Yes No No
Effingham, Illinois Lease No Yes No
Columbia, Mississippi Own Yes Yes No
Riverdale, New Jersey Lease Yes Yes Yes
Paulsboro, New Jersey Lease Yes No No
North Jackson, Ohio Lease Yes Yes Yes
Willard, Ohio Own Yes Yes No
Oklahoma City, Oklahoma Lease Yes Yes Yes
El Paso, Texas Lease Yes Yes No
Irving, Texas Own Yes Yes Yes
Laredo, Texas Lease Yes Yes No
We also have access to trailer drop and relay stations in various other
locations across the country. We lease certain of these facilities on a
month-to-month basis from an affiliate of our largest shareholder.
We believe that all of the properties that we own or lease are suitable for
their purposes and adequate to meet our needs.
-8-
ITEM 3. LEGAL PROCEEDINGS.
During the fourth quarter of 2004, a suit which was originally filed on October
10, 2002 and entitled "The Official Committee of Unsecured Creditors of Bill's
Dollar Stores, Inc. v. Allen Freight Services Co.", was settled in the amount of
$25,000. The suit, which was filed in the United States Bankruptcy Court for
the District of Delaware, alleged preferential transfers of $660,055 were made
to the defendant, Allen Freight Services Co., within the 90 day period preceding
the bankruptcy petition date of Bill's Dollar Stores, Inc. The Company had
originally reserved the entire potential loss of $660,055, however as a result
of a settlement in the amount of $25,000 approximately $635,000 has been removed
as a liability on the Company's financial statements and the related expense
originally recorded as a bad debt expense has been reduced.
In addition to the specific legal action mentioned above, the nature of the our
business routinely results in litigation, primarily involving claims for
personal injuries and property damage incurred in the transportation of freight.
We believe that all such routine litigation is adequately covered by insurance
and that adverse results in one or more of those cases would not have a material
adverse effect on our financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of our security holders during the fourth
quarter ended December 31, 2004.
-9-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is traded on the NASDAQ National Market under the symbol PTSI.
The following table sets forth, for the quarters indicated, the range of the
high and low bid prices per share for our common stock as reported on the NASDAQ
National Market. Such quotations reflect inter-dealer prices, without retail
markups, markdowns or commissions and, therefore, may not necessarily represent
actual transactions.
Calendar Year Ended December 31, 2004
HIGH LOW
---- ---
First Quarter $22.31 $15.97
Second Quarter 19.30 16.43
Third Quarter 19.42 16.72
Fourth Quarter 21.01 17.51
Calendar Year Ended December 31, 2003
HIGH LOW
---- ---
First Quarter $28.17 $20.25
Second Quarter 26.55 21.00
Third Quarter 22.99 19.80
Fourth Quarter 22.31 18.10
As of March 8, 2005, there were approximately 202 holders of record of our
common stock. We have not declared or paid any cash dividends on our common
stock for the two most recent fiscal years. The policy of our board of
directors is to retain earnings for the expansion and development of our
business and the repayment of our debt service obligations. Future dividend
policy and the payment of dividends, if any, will be determined by the board of
directors in light of circumstances then existing, including our earnings,
financial condition and other factors deemed relevant by the board.
On October 24, 2003, the Company announced the approval by the Board of
Directors of a stock repurchase program in which the Company was authorized to
purchase 300,000 shares of its common stock at prevailing market prices over a
twelve month period. The stock repurchase program expired during the fourth
quarter of 2004 with no purchases by the Company during the authorized twelve
month period.
See Part III, Item 12, "Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters" of this Annual Report for a
presentation of compensation plans under which equity securities of the Company
are authorized for issuance.
-10-
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial and operating data should be read in
conjunction with the Consolidated Financial Statements and notes thereto
included elsewhere in this Report.
YEAR ENDED DECEMBER 31,
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(in thousands, except earnings per share amounts)
Statement of operations data:
Operating revenues:
Operating revenues, before fuel surcharge $309,475 $293,547 $264,012 $225,794 $205,245
Fuel surcharge 15,591 7,491 2,042 5,608 6,362
-------- -------- -------- -------- --------
Total operating revenues 325,066 301,038 266,054 231,402 211,607
-------- -------- -------- -------- --------
Operating expenses:
Salaries, wages and benefits 119,519 119,350 115,432 100,359 90,680
Operating supplies (1) 77,363 63,241 53,203 48,897 44,090
Rent and purchased transportation 38,938 35,287 9,780 10,526 12,542
Depreciation and amortization 30,016 26,601 24,715 20,300 18,806
Operating taxes and licenses 15,488 14,710 13,467 11,936 11,140
Insurance and claims 15,820 13,500 12,786 10,202 8,674
Communications and utilities 2,690 2,540 2,284 2,320 2,234
Other 5,131 4,755 4,620 4,707 3,756
(Gain) loss on sale or disposal of property 915 368 127 886 285
-------- -------- -------- -------- --------
Total operating expenses 305,880 280,352 236,414 210,133 192,207
-------- -------- -------- -------- --------
Operating income 19,186 20,686 29,640 21,269 19,400
Non-operating income 464 276 - - -
Interest expense (1,758) (1,667) (1,985) (4,477) (5,048)
-------- -------- -------- -------- -------
Income before income taxes 17,892 19,295 27,655 16,792 14,352
Income taxes 7,304 7,805 11,062 6,721 5,694
-------- -------- -------- -------- --------
Net income $ 10,588 $ 11,490 $ 16,593 $ 10,071 $ 8,658
======== ======== ======== ======== ========
Earnings per common share:
Basic $ .94 $ 1.02 $ 1.56 $ 1.18 $ 1.02
======== ======== ======== ======== ========
Diluted $ .94 $ 1.01 $ 1.55 $ 1.18 $ 1.02
======== ======== ======== ======== ========
Average common shares outstanding- Basic 11,298 11,291 10,669 8,522 8,455
======== ======== ======== ======== ========
Average common shares outstanding- Diluted (2) 11,324 11,326 10,715 8,550 8,518
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------
(1) In order to conform to industry practice, during 2004 the Company began to
classify fuel surcharges charged to customers as revenue rather than as a
reduction of operating supplies expense. This reclassification has no effect on
net operating income, net income or earnings per share. The Company has made
corresponding reclassifications to comparative periods shown.
(2) Diluted income per share for 2004, 2003, 2002, 2001 and 2000 assumes the
exercise of stock options to purchase an aggregate of 62,224, 77,758, 87,984,
107,369 and 208,602 shares of common stock, respectively.
AT DECEMBER 31,
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Balance Sheet Data: (in thousands)
Total Assets $285,349 $264,849 $228,320 $182,516 $164,518
Long-term debt, excluding current portion 23,225 26,740 20,175 47,023 42,073
Stockholders' equity 168,543 156,875 144,452 72,597 62,210
-11-
YEAR ENDED DECEMBER 31,
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Operating Data:
Operating ratio (1) 93.8% 92.9% 88.7% 90.6% 90.5%
Average number of truckloads per week 7,278 7,105 6,463 5,399 5,169
Average miles per trip 664 701 755 769 713
Total miles traveled (in thousands) 235,894 242,890 238,256 204,303 183,476
Average miles per tractor 127,124 131,934 136,772 131,554 128,936
Average revenue, before fuel surcharge
per tractor per day $684 $653 $621 $591 $579
Average revenue, before fuel surcharge
per loaded mile $1.19 $1.13 $1.15 $1.17 $1.18
Empty mile factor 4.7% 4.5% 4.0% 5.5% 5.6%
At end of period:
Total company-owned/leased tractors 1,857(2) 1,913(3) 1,781(4) 1,660(5) 1,413(6)
Average age of all tractors (in years) 1.70 1.94 2.12 1.81 1.72
Total trailers 4,257 4,175 3,973 3,932 3,759
Average age of trailers (in years) 4.69 5.15 5.74 5.31 4.66
Number of employees 2,736 2,765 2,538 2,424 2,154
- -------------------------------------------------------------------------------
(1) Total operating expenses, net of fuel surcharge as a percentage of operating
revenues, before fuel surcharge.
(2) Includes 85 owner operator tractors.
(3) Includes 103 owner operator tractors.
(4) Includes 130 owner operator tractors.
(5) Includes 135 owner operator tractors.
(6) Includes 117 owner operator tractors.
The Company has not declared or paid any cash dividends during any of the
periods presented above.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
BUSINESS OVERVIEW
The Company's administrative headquarters are in Tontitown, Arkansas. From this
location we manage operations conducted through wholly owned subsidiaries based
in various locations around the United States and Canada. The operations of
these subsidiaries can generally be classified into either truckload services or
brokerage and logistics services. Truckload services include those
transportation services in which we utilize company owned tractors or
owner-operator owned tractors. Brokerage and logistics services consist of
services such as transportation scheduling, routing, mode selection,
transloading and other value added services related to the transportation of
freight which may or may not involve the usage of company owned or
owner-operator owned equipment. Both our truckload operations and our
brokerage/logistics operations have similar economic characteristics and are
impacted by virtually the same economic factors as discussed elsewhere in this
Report. All of the Company's operations are in the motor carrier segment.
For both operations, substantially all of our revenue is generated by
transporting freight for customers and is predominantly affected by the rates
per mile received from our customers, equipment utilization, and our percentage
of non-compensated miles. These aspects of our business are carefully managed
and efforts are continuously underway to achieve favorable results. Truckload
services revenues, excluding fuel surcharges, represented 86.4%, 86.7%, and
96.0% of total revenues, excluding fuel surcharges for the twelve months ended
December 31, 2004, 2003, and 2002, respectively.
The main factors that impact our profitability on the expense side are costs
incurred in transporting freight for our customers. Currently our most
challenging costs include fuel, driver recruitment, training, wage and benefit
costs, independent broker costs (which we record as purchased transportation),
insurance, and maintenance and capital equipment costs.
In discussing our results of operations we use revenue, before fuel surcharge,
(and fuel expense, net of surcharge), because management believes that
eliminating the impact of this sometimes volatile source of revenue allows a
more consistent basis for comparing our results of operations from period
-12-
to period. During 2004, 2003 and 2002, approximately $15.6 million, $7.5
million and $2.0 million of the Company's total revenue was generated from fuel
surcharges. We also discuss certain changes in our expenses as a percentage of
revenue, before fuel surcharge, rather than absolute dollar changes. We do this
because we believe the high variable cost nature of certain expenses makes a
comparison of changes in expenses as a percentage of revenue more meaningful
than absolute dollar changes.
RESULTS OF OPERATIONS - TRUCKLOAD SERVICES
The following table sets forth, for truckload services, the percentage
relationship of expense items to operating revenues, before fuel surcharges, for
the periods indicated. Operating supplies expense, which includes fuel costs,
are shown net of fuel surcharges.
YEARS ENDED DECEMBER 31,
2004 2003 2002
----- ----- -----
Operating revenues, before fuel surcharge 100.0% 100.0% 100.0%
----- ----- -----
Operating expenses:
Salaries, wages and benefits 43.8 46.2 45.2
Operating supplies, net of fuel surcharge 23.3 22.0 20.2
Rent and purchased transportation 0.6 0.3 0.2
Depreciation and amortization 11.2 10.4 9.7
Operating taxes and licenses 5.8 5.8 5.3
Insurance and claims 5.9 5.3 5.0
Communications and utilities 0.9 0.9 0.9
Other 1.7 1.6 1.8
Loss on sale or disposal of property 0.3 0.1 0.0
----- ----- -----
Total operating expenses 93.5 92.6 88.3
----- ----- -----
Operating income 6.5 7.4 11.7
Non-operating income 0.2 0.1 0.0
Interest expense (0.5) (0.5) (0.8)
----- ----- -----
Income before income taxes 6.2% 7.0% 10.9%
----- ----- -----
2004 COMPARED TO 2003
For the year ended December 31, 2004, truckload services revenue, before fuel
surcharges, increased 5.1% to $267.5 million as compared to $254.6 million for
the year ended December 31, 2003. Approximately $3.6 million of the $12.9
million increase was attributable to the McNeill Trucking, Inc. asset
acquisition which closed on April 3, 2003 and therefore had no comparable
revenue for the first three months of 2003. The remaining increase was due to
an increase in the average rate per total mile charged to customers from $1.08
during 2003 to $1.13 during 2004.
Salaries, wages and benefits decreased from 46.2% of revenues, before fuel
surcharges, in 2003 to 43.8% of revenues, before fuel surcharges, in 2004. The
decrease relates to the effect of a higher average rate per mile charged to
customers without a corresponding increase in salaries and wages. However,
effective October 1, 2004 a driver pay increase of approximately $.03 per mile
was implemented which began to partially offset the benefit of recent rate
increases charged to customers. Driver lease expense which is a component of
salaries, wages and benefits, also decreased during 2004 as the average number
of owner operators under contract decreased from 118 during 2003 to 93 during
2004. This decrease in driver lease expense was partially offset by an increase
in amounts paid to the corresponding company driver replacement, and in other
costs normally absorbed by the owner operator such as repairs and fuel. Also
contributing to the decrease in salaries, wages and benefits was the continued
benefit of the restructuring of workers compensation plans which resulted in a
decrease in amounts expensed for workers compensation coverage.
-13-
Operating supplies and expenses increased from 22.0% of revenues, before fuel
surcharges, in 2003 to 23.3% of revenues, before fuel surcharges, in 2004.
The increase was primarily due to higher fuel costs resulting from a 20.9%
increase in the average price per gallon paid by the Company during 2004 as
compared to 2003. During periods of rising fuel prices the Company is often
able to recoup at least a portion of the increase through fuel surcharges
passed along to its customers. Fuel costs, net of fuel surcharges, increased to
$40.7 million in 2004 from $35.6 million in 2003. The Company collected
approximately $15.6 million in fuel surcharges during 2004 and $7.3 million
during 2003. Fuel costs were also affected by the replacement of owner operators
with Company drivers as discussed above. Also contributing to the increase in
operating supplies and expenses were increased costs associated with our student
training program as the number of students increased during 2004 as compared to
2003.
Rent and purchased transportation increased from 0.3% of revenues, before fuel
surcharges, in 2003 to 0.6% of revenues, before fuel surcharges, in 2004. The
increase relates primarily to rental and mileage fees incurred on equipment used
past scheduled trade-in dates due to manufacturers' delays in providing
replacement equipment.
Depreciation and amortization increased from 10.4% of revenues, before fuel
surcharges, in 2003 to 11.2% of revenues, before fuel surcharges, in 2004.
The increase was primarily due to the combined effect of higher tractor
purchase prices and lower tractor guaranteed residual values offered by
manufacturers.
Insurance and claims expense increased from 5.3% of revenues, before fuel
surcharges, in 2003 to 5.9% of revenues, before fuel surcharges, in 2004. The
increase in expense relates to the purchase of additional auto liability
coverage which was not in place during 2003 and to an increase in the amount of
auto liability claims incurred by the Company.
Other expenses increased from 1.6% of revenues, before fuel surcharges, in
2003 to 1.7% of revenues, before fuel surcharges, in 2004. The increase relates
to an increase in amounts paid for both driver recruitment advertising and fees
paid to the Company's external auditors both of which were partially offset by
the settlement of a lawsuit which allowed the Company to recapture approximately
$635,000 of previously reported expense. The recapture contributed
approximately $.03 to both diluted and basic earnings per share.
The truckload services division operating ratio, which measures the ratio of
operating expenses, net of fuel surcharges, to operating revenues, before fuel
surcharges, increased to 93.5% for 2004 from 92.6% for 2003.
2003 COMPARED TO 2002
For the year ended December 31, 2003, truckload services revenue, before fuel
surcharges, increased to $254.6 million from $253.5 million for the year ended
December 31, 2002. During 2003 the Company completed the asset acquisition of
McNeill Trucking, Inc. which provided additional truckload services revenue of
approximately $10.2 as compared to 2002, however decreases in equipment
utilization during 2003 partially offset the additional revenue generated as a
result of the acquisition. This decrease in equipment utilization resulted in a
4.9% decrease in average truckload revenue, before fuel surcharges, generated
per tractor each work day from $596 in 2002 to $567 in 2003.
Salaries, wages and benefits increased from 45.2% of revenues, before fuel
surcharges, in 2003 to 46.2% of revenues, before fuel surcharges, in 2004. The
increase was primarily due to higher costs associated with the Company's health
insurance and workers compensation benefit plans. The costs associated with
these benefit plans increased from $6.0 million during 2002 to $9.0 million
during 2003. Also during 2003, amounts accrued for incentive bonus plans were
decreased as compared to 2002 which helped to partially offset the increase in
health insurance and workers compensation expense.
-14-
Operating supplies and expenses increased from 20.2% of revenues, before fuel
surcharges, in 2002 to 22.0% of revenues, before fuel surcharges, in 2003.
The increase was primarily due to higher fuel costs resulting from a 12.6%
increase in the average price per gallon paid by the Company during 2003 as
compared to 2002. During periods of rising fuel prices the Company is often
able to recoup at least a portion of the increase through fuel surcharges
passed along to its customers. Fuel costs, net of fuel surcharges, increased to
$35.6 million in 2003 from $33.1 million in 2002. The Company collected
approximately $7.3 million in fuel surcharges during 2003 and $2.0 million
during 2002. Also contributing to the increase in operating supplies and
expenses were increased equipment maintenance costs associated with trade units
in order to meet equipment condition trade terms as specified by the equipment
manufacturer.
Depreciation and amortization increased from 9.7% of revenues, before fuel
surcharges, in 2002 to 10.4% of revenues, before fuel surcharges, in 2003.
The increase was primarily due to the combined effect of higher tractor
purchase prices and lower tractor guaranteed residual values offered by
manufacturers.
RESULTS OF OPERATIONS - LOGISTICS AND BROKERAGE SERVICES
The following table sets forth, for logistics and brokerage services, the
percentage relationship of expense items to operating revenues, before fuel
surcharges, for the periods indicated. Brokerage service operations occur
specifically in certain divisions; however, brokerage operations occur
throughout the Company in similar operations having substantially similar
economic characteristics. Rent and purchased transportation, which includes
costs paid to third party carriers, are shown net of fuel surcharges.
YEARS ENDED DECEMBER 31,
2004 2003 2002
----- ----- -----
Operating revenues, before fuel surcharge 100.0% 100.0% 100.0%
----- ----- -----
Operating expenses:
Salaries, wages and benefits 5.5 4.7 8.1
Operating supplies, net of fuel surcharge 0.0 0.0 0.0
Rent and purchased transportation 87.8 88.2 89.4
Depreciation and amortization 0.3 0.3 0.0
Operating taxes and licenses 0.0 0.0 0.0
Insurance and claims 0.1 0.1 0.5
Communications and utilities 0.4 0.4 0.9
Other 1.6 1.8 1.5
Loss on sale or disposal of property 0.0 0.0 0.0
----- ----- -----
Total operating expenses 95.7 95.5 100.4
----- ----- -----
Operating income 4.3 4.5 (0.4)
Non-operating income 0.0 0.0 0.0
Interest expense (0.6) (1.0) (0.0)
----- ----- -----
Income before income taxes 3.7% 3.5% (0.4)%
----- ----- -----
2004 COMPARED TO 2003
Logistics and brokerage services revenues, before fuel surcharges, increased
7.7% to $42.0 million for the year ended December 31, 2004 as compared to $39.0
million for the year ended December 31, 2003. Approximately $2.6 million of the
increase was attributable to the additional one month revenues, before fuel
surcharges, for 2004, generated by East Coast Transport, Inc. which was acquired
January 31, 2003.
-15-
Salaries, wages and benefits increased from 4.7% of revenues, before fuel
surcharges, in 2003 to 5.5% of revenues, before fuel surcharges, in 2004. The
increase relates to the hiring of an administrative staff at East Coast
Transport, LLC for functions which had previously been outsourced to a third
party and to an increase in corporate general and administrative salaries being
allocated to the division.
Rent and purchased transportation decreased from 88.2% of revenues, before fuel
surcharges, in 2003 to 87.8% of revenues, before fuel surcharges, in 2004. The
decrease reflects the change attributable to higher rates collected from
customers without a corresponding increase in cost.
Other expenses decreased from 1.8% of revenues, before fuel surcharges, in
2003 to 1.6% of revenues, before fuel surcharges, in 2004. The decrease relates
to a decrease in amounts paid for professional services due to the hiring of an
administrative staff at East Coast Transport, LLC for functions which had
previously been outsourced.
The logistics and brokerage services division operating ratio, which measures
the ratio of operating expenses, net of fuel surcharges, to operating
revenues, before fuel surcharges, increased to 95.7% for 2004 from 95.5% for
2003.
2003 COMPARED TO 2002
Logistics and brokerage services revenues, before fuel surcharges, increased to
$39.0 million for the year ended December 31, 2003 as compared to $10.5 million
for the year ended December 31, 2002. The increase was attributable to the
additional revenues, before fuel surcharges, generated by East Coast Transport,
Inc., which was acquired January 31, 2003 and therefore had no corresponding
2002 revenues.
Salaries, wages and benefits decreased from 8.1% of revenues, before fuel
surcharges, in 2002 to 4.7% of revenues in 2003. The decrease relates to the
effect of additional revenues generated by the East Coast Transport, Inc.
purchase on fixed costs as a percentage of revenue, before fuel surcharge.
Rent and purchased transportation decreased from 89.4% of revenues, before fuel
surcharges, in 2002 to 88.2% of revenues, before fuel surcharges, in 2003. The
decrease reflects increased fuel surcharges collected from customers which are
netted against outside purchased transportation costs. Also contributing to the
decrease was a lower average rate paid to outside transportation companies by
East Coast Transport, Inc. than had been paid by the Company prior to the
acquisition of East Coast Transport, Inc.
Communications and utilities expenses decreased from .9% of revenues, before
fuel surcharges, in 2002 to .4% of revenues, before fuel surcharges, in 2003.
The expenses represented by this category generally have fixed cost
characteristics. The significant increase in logistics and brokerage services
revenues resulting from the East Coast Transport, Inc. asset acquisition during
2003 reduced the percentage relationship of the fixed cost components to
revenues as greater economies of scale were achieved.
Other expenses increased from 1.5% of revenues, before fuel surcharges, in
2002 to 1.8% of revenues, before fuel surcharges, in 2003. The increase relates
to due diligence costs and non-compete payments associated with the East Coast
Transport, Inc. asset acquisition.
The logistics and brokerage services division operating ratio, which measures
the ratio of operating expenses, net of fuel surcharges, to operating
revenues, before fuel surcharges, decreased to 95.5% for 2003 from 100.4% for
2002.
-16-
RESULTS OF OPERATIONS - COMBINED SERVICES
2004 COMPARED TO 2003
Our effective tax rate increased from 40.4% during 2003 to 40.8% during 2004 due
to an increase in state income taxes. The decrease in income from operations
also resulted in a decrease in the provision for income taxes from $7.8 million
in 2003 to $7.3 million in 2004.
Net income decreased to $10.6 million, or 3.4% of revenues, in 2004 from $11.5
million, or 3.9% of revenues in 2003, representing a decrease in diluted net
income per share to $.94 in 2004 from $1.01 in 2003.
2003 COMPARED TO 2002
Our effective tax rate increased from 40.0% during 2002 to 40.4% during 2003 due
to an increase in partially non-deductible per-diem payments to drivers. The
decrease in income from operations also resulted in a decrease in the provision
for income taxes from $11.1 million in 2002 to $7.8 million in 2003.
Net income decreased to $11.5 million, or 3.9% of revenues, in 2003 from $16.6
million, or 6.3% of revenues in 2002, representing a decrease in diluted net
income per share to $1.01 in 2003 from $1.55 in 2002.
QUARTERLY RESULTS OF OPERATIONS
The following table presents selected consolidated financial information for
each of our last eight fiscal quarters through December 31, 2004. The
information has been derived from unaudited consolidated financial statements
that, in the opinion of management, reflect all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of the quarterly
information.
QUARTER ENDED
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
2004 2004 2004 2004 2003 2003 2003 2003
---- ---- ---- ---- ---- ---- ---- ----
(unaudited)
(in thousands, except earnings per share data)
Operating revenues (1) $80,120 $82,284 $79,080 $83,582 $72,442 $77,137 $75,515 $75,944
Total operating expenses (1) 76,322 75,734 73,491 80,333 67,488 70,077 70,198 72,589
Operating income 3,798 6,550 5,589 3,249 4,954 7,060 5,317 3,355
Net income 2,031 3,647 3,148 1,762 2,818 4,047 2,965 1,660
Earnings per common share:
Basic $ 0.18 $ 0.32 $ 0.28 $ 0.16 $ 0.25 $ 0.36 $ 0.26 $ 0.15
======= ======= ======= ======= ======= ======= ======= =======
Diluted $ 0.18 $ 0.32 $ 0.28 $ 0.16 $ 0.25 $ 0.36 $ 0.26 $ 0.14
======= ======= ======= ======= ======= ======= ======= =======
- --------------------------------------------------------------------------------
(1) In order to conform to industry practice, during 2004 the Company began to
classify fuel surcharges charged to customers as revenue rather than as a
reduction of operating supplies expense. This reclassification has no effect on
net operating income, net income or earnings per share. The Company has made
corresponding reclassifications to comparative periods shown.
LIQUIDITY AND CAPITAL RESOURCES
The growth of our business has required, and will continue to require, a
significant investment in new revenue equipment. Our primary sources of
liquidity have been funds provided by operations, proceeds from the sales of
revenue equipment, issuances of equity securities, and borrowings under our line
of credit.
During 2004, we generated $44.7 million in cash from operating activities
compared to $37.9 million and $48.9 million in 2003 and 2002, respectively.
Investing activities used $24.7 million in cash during 2004 compared to $68.4
million and $30.4 million in 2003 and 2002, respectively. The cash used in all
three years related primarily to the purchase of revenue equipment (tractors and
trailers) used in our operations. Financing activities used $3.4 million in
cash during 2004 compared to cash generated by financing activities of $2.8
million in 2003 and $11.4 million in 2002. See Cash Flows Statement.
-17-
Our primary use of funds is for the purchase of revenue equipment. We typically
use our existing lines of credit on an interim basis, in addition to cash flows
from operations, to finance capital expenditures and repay long-term debt.
During 2004 and 2003, we utilized cash on hand and our lines of credit to
finance revenue equipment purchases for an aggregate of $52.7 million and $69.6
million, respectively.
Occasionally we finance the acquisition of revenue equipment through installment
notes with fixed interest rates and terms ranging from 36 to 48 months, however
as of December 31, 2004 and 2003, we had no outstanding indebtedness under such
installment notes.
In order to maintain our tractor and trailer fleet count it is often necessary
to purchase replacement units and place them in service before trade units are
removed from service. The timing difference created during this process often
requires the Company to pay for new units without any reduction in price for
trade units. In this situation, the Company later receives payment for the
trade units as they are delivered to the equipment vendor and have passed vendor
inspection. During the twelve months ended December 31, 2004 and 2003, the
Company received approximately $24.3 million and $19.5, respectively, for units
delivered for trade.
We maintain a $20.0 million revolving line of credit and a $30.0 million
revolving line of credit (Line A and Line B, respectively) with separate
financial institutions. Amounts outstanding under Line A bear interest at LIBOR
(determined as of the first day of each month) plus 1.40%, are secured by our
accounts receivable and mature on May 31, 2006. At December 31, 2004
outstanding advances on line A were approximately $1.4 million, consisting
entirely of letters of credit, with availability to borrow $18.6 million.
Amounts outstanding under Line B bear interest at LIBOR (determined on the last
day of the previous month) plus 1.15%, are secured by revenue equipment and
mature on June 30, 2006. At December 31, 2004, $27.3 million, including $7.3
million in letters of credit were outstanding under Line B with availability to
borrow $2.7 million. In an effort to reduce interest rate risk associated with
these floating rate facilities, we have entered into interest rate swap
agreements in an aggregate notional amount of $20.0 million. For additional
information regarding the interest rate swap agreements, see Item 7A of this
Report.
During March and April 2002, the Company received net proceeds of approximately
$54.5 million from a public offering of 2,621,250 shares of its common stock.
The Company repaid approximately $43.0 million of long-term debt obligations
with the proceeds and used the remaining proceeds to fund its capital
expenditures and to finance general working capital needs.
Cash and cash equivalents at December 31, 2004 increased approximately $16.6
million as compared to December 31, 2003. Approximately $9.7 million of the
increase is related to the difference in amounts reclassified to accounts
payable as bank drafts outstanding in excess of bank balance. See accounts
payable discussion below and Cash Flow Statement for more information.
Prepaid expenses and deposits at December 31, 2004 increased approximately $8.0
million as compared to December 31, 2003. The increase relates to an increase
in amounts prepaid for tractor and trailer license fees as well as prepayments
of auto liability insurance premiums. During December 2004 the Company prepaid
tractor and trailer license fees for the calendar year ending December 31, 2005
in the amount of approximately $3.0 million. In past years the Company did not
pay these fees until January of the new coverage year. The Company also prepaid
approximately $5.0 million in additional auto liability insurance premiums as
compared to premiums prepaid during 2003.
Marketable equity securities available for sale at December 31, 2004 increased
approximately $3.3 million as compared to December 31, 2003. During the year
ended December 31, 2004, the Company purchased approximately $2.4 million of
equity securities with excess cash. These securities, combined with equity
securities purchased in prior periods, have an original cost of approximately
-18-
$6.3 million and a combined fair market value of $8.8 million. The Company has
developed a strategy to invest in securities from which it expects to receive
dividends that qualify for favorable tax treatment, as well as, appreciate in
value. The Company anticipates that increases in the market value of the
investments combined with dividend payments will exceed interest rates paid on
borrowings for the same period. During 2004 the Company had unrealized pre-tax
gains of approximately $877,000 and received dividends of approximately
$300,000. The holding term of these securities depends largely on the general
economic environment, the equity markets, borrowing rates and the Company's cash
requirements.
Accounts payable at December 31, 2004 increased approximately $6.4 million as
compared to December 31, 2003. The increase is primarily related to an increase
in the amount of bank drafts outstanding in excess of bank balance as compared
to bank drafts outstanding at December 31, 2003. As of December 31, 2004 bank
drafts of approximately $16.5 million were reclassified to accounts payable as
compared to approximately $6.8 million reclassified as of December 31, 2003.
The net increase also reflects the decrease of approximately $2.1 million in
amounts accrued for the payment of purchased transportation costs provided by
outside transportation companies and a decrease of approximately $1.6 million in
amounts accrued for third party equipment repair costs.
For 2005, we expect to purchase approximately 375 new tractors and approximately
350 trailers while continuing to sell or trade older equipment, which we expect
to result in net capital expenditures of approximately $25.8 million.
Management believes we will be able to finance our near term needs for working
capital over the next twelve months, as well as acquisitions of revenue
equipment during such period, with cash balances, cash flows from operations,
and borrowings believed to be available from financing sources. We will
continue to have significant capital requirements over the long-term, which may
require us to incur debt or seek additional equity capital. The availability of
additional capital will depend upon prevailing market conditions, the market
price of our common stock and several other factors over which we have limited
control, as well as our financial condition and results of operations.
Nevertheless, based on our recent operating results, current cash position,
anticipated future cash flows, and sources of financing that we expect will be
available to us, we do not expect that we will experience any significant
liquidity constraints in the foreseeable future.
On January 31, 2003, the Company closed the purchase of substantially all of the
assets of East Coast Transport and Logistics, Inc., a freight brokerage
operation based in New Jersey. In connection with this acquisition, the Company
issued to the seller an installment note in the amount of approximately $5.0
million at an interest rate of 6% and paid cash of approximately $1.9 million
utilizing existing cash.
On April 3, 2003, the Company closed the purchase of substantially all of the
assets of McNeill Trucking, Inc., a truckload carrier based in North Little
Rock, Arkansas. In connection with this acquisition, the Company paid cash of
approximately $8.8 million and assumed liabilities of approximately $70,000.
-19-
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table sets forth the Company's contractual obligations and
commercial commitments, as defined in Regulation S-K 303 (a)(5)(ii) issued by
the Securities and Exchange Commission, as of December 31, 2004:
Payments due by period
----------------------
(in thousands)
Less than 1 to 3 4 to 5 More than
Total 1 year Years Years 5 Years
------- ------- ------- ------- -------
Long-term debt $25,305 $ 2,080 $21,457 $ 1,623 $ 145
Operating leases (1) 1,320 466 573 281 -
Purchase obligations (2) 38,826 38,826 - - -
------- ------- ------- ------- -------
Total $65,451 $41,372 $22,030 $ 1,904 $ 145
======= ======= ======= ======= =======
(1) Represents building, facilities, and drop yard operating leases.
(2) Represents tractor and trailer purchase obligations which are
cancelable by us contingent upon advance notice.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements as defined in Regulation S-K
303(a)(4)(ii) issued by the Securities and Exchange Commission.
INSURANCE
With respect to physical damage for tractors, cargo loss and auto liability, the
Company maintains insurance coverage to protect it from certain business risks.
These policies are with various carriers and have per occurrence deductibles of
$2,500, $10,000 and $2,500 respectively. Since 2002, the Company has elected to
self insure for physical damage to trailers. During 2003, and continuing
through 2004, the Company changed its workers' compensation coverage in
Arkansas, Oklahoma, Mississippi and Florida from a fully insured policy with a
$350,000 per occurrence deductible to become self insured with a $500,000 per
occurrence excess policy. The Company continues to be self insured for workers'
compensation in the State of Ohio with a $500,000 self insured retention with
excess insurance. The Company has elected to opt out of workers' compensation
coverage in Texas and is providing coverage through the P.A.M. Texas Injury
Plan. The Company has reserved for estimated losses to pay such claims as well
as claims incurred but not yet reported. The Company has not experienced any
adverse trends involving differences in claims experienced versus claims
estimates for workers' compensation claims. Letters of credit aggregating
$4,279,000 are held by a bank as security for workers' compensation claims. The
Company self insures for employee health claims with a stop loss of $150,000 per
covered employee per year and estimates its liability for claims incurred but
not reported.
-20-
RISK FACTORS
Set forth below and elsewhere in this Report and in other documents we file with
the SEC are risks and uncertainties that could cause our actual results to
differ materially from the results contemplated by the forward-looking
statements contained in this Report.
Our business is subject to general economic and business factors that are
largely out of our control, any of which could have a material adverse effect on
our operating results.
These factors include significant increases or rapid fluctuations in fuel
prices, excess capacity in the trucking industry, surpluses in the market for
used equipment, interest rates, fuel taxes, license and registration fees,
insurance premiums, self-insurance levels, and difficulty in attracting and
retaining qualified drivers and independent contractors.
We are also affected by recessionary economic cycles and downturns in customers'
business cycles, particularly in market segments and industries, such as the
automotive industry, where we have a significant concentration of customers.
Economic conditions may adversely affect our customers and their ability to pay
for our services.
We operate in a highly competitive and fragmented industry, and our business may
suffer if we are unable to adequately address downward pricing pressures and
other factors that may adversely affect our ability to compete with other
carriers.
Numerous competitive factors could impair our ability to maintain our current
profitability. These factors include the following:
- - we compete with many other truckload carriers of varying sizes and, to a
lesser extent, with less-than-truckload carriers and railroads, some of
which have more equipment and greater capital resources than we do;
- - some of our competitors periodically reduce their freight rates to gain
business, especially during times of reduced growth rates in the economy,
which may limit our ability to maintain or increase freight rates, maintain
our margins or maintain significant growth in our business;
- - many customers reduce the number of carriers they use by selecting
so-called "core carriers" as approved service providers, and in some
instances we may not be selected;
- - many customers periodically accept bids from multiple carriers for their
shipping needs, and this process may depress freight rates or result in the
loss of some of our business to competitors;
- - the trend toward consolidation in the trucking industry may create other
large carriers with greater financial resources and other competitive
advantages relating to their size and with whom we may have difficulty
competing;
- - advances in technology require increased investments to remain competitive,
and our customers may not be willing to accept higher freight rates to
cover the cost of these investments;
- - competition from Internet-based and other logistics and freight brokerage
companies may adversely affect our customer relationships and freight
rates; and
-21-
- - economies of scale that may be passed on to smaller carriers by procurement
aggregation providers may improve their ability to compete with us.
We are highly dependent on our major customers, the loss of one or more of which
could have a material adverse effect on our business.
A significant portion of our revenue is generated from our major customers. For
2004, our top five customers, based on revenue, accounted for approximately 62%
of our revenue, and our largest customer, General Motors Corporation, accounted
for approximately 44% of our revenue. We also provide transportation services
to other manufacturers who are suppliers for automobile manufacturers. As a
result, concentration of our business within the automobile industry is greater
than the concentration in a single customer. Approximately 56% of our revenues
for 2004 were derived from transportation services provided to the automobile
industry.
Generally, we do not have long-term contractual relationships with our major
customers, and we cannot assure that our customer relationships will continue as
presently in effect. A reduction in or termination of our services by our major
customers could have a material adverse effect on our business and operating
results.
Ongoing insurance and claims expenses could significantly reduce our earnings.
Our future insurance and claims expenses might exceed historical levels, which
could reduce our earnings. The Company is self insured for health and workers
compensation insurance coverage up to certain limits. If medical costs continue
to increase, or if the severity or number of claims increase, and if we are
unable to offset the resulting increases in expenses with higher freight rates,
our earnings could be materially and adversely affected.
We may be unable to successfully integrate businesses we acquire into our
operations.
Integrating businesses we acquire may involve unanticipated delays, costs or
other operational or financial problems. Successful integration of the
businesses we acquire depends on a number of factors, including our ability to
transition acquired companies to our management information systems. In
integrating businesses we acquire, we may not achieve expected economies of
scale or profitability or realize sufficient revenues to justify our investment.
We also face the risk that an unexpected problem at one of the companies we
acquire will require substantial time and attention from senior management,
diverting management's attention from other aspects of our business. We cannot
be certain that our management and operational controls will be able to support
us as we grow.
Difficulty in attracting drivers could affect our profitability and ability to
grow.
Periodically, the transportation industry experiences difficulty in attracting
and retaining qualified drivers, including independent contractors, resulting in
intense competition for drivers. We have from time to time experienced
under-utilization and increased expenses due to a shortage of qualified drivers.
If we are unable to continue to attract drivers and contract with independent
contractors, we could be required to further adjust our driver compensation
package or let trucks sit idle, which could adversely affect our growth and
profitability.
-22-
If we are unable to retain our key employees, our business, financial condition
and results of operations could be harmed.
We are highly dependent upon the services of the following key employees: Robert
W. Weaver, our President and Chief Executive Officer; W. Clif Lawson, our
Executive Vice President and Chief Operating Officer; and Larry J. Goddard, our
Vice President and Chief Financial Officer. We do not maintain key-man life
insurance on any of these executives. The loss of any of their services could
have a material adverse effect on our operations and future profitability. We
must continue to develop and retain a core group of managers if we are to
realize our goal of expanding our operations and continuing our growth. We
cannot assure that we will be able to do so.
We have significant ongoing capital requirements that could affect our
profitability if we are unable to generate sufficient cash from operations.
The trucking industry is very capital intensive. If we are unable to generate
sufficient cash from operations in the future, we may have to limit our growth,
enter into financing arrangements, or operate our revenue equipment for longer
periods, any of which could have a material adverse affect on our profitability.
Our operations are subject to various environmental laws and regulations, the
violation of which could result in substantial fines or penalties.
We are subject to various environmental laws and regulations dealing with the
handling of hazardous materials, underground fuel storage tanks, and discharge
and retention of stormwater. We operate in industrial areas, where truck
terminals and other industrial activities are located, and where groundwater or
other forms of environmental contamination could occur. We also maintain bulk
fuel storage and fuel islands at five of our facilities. Our operations involve
the risks of fuel spillage or seepage, environmental damage, and hazardous waste
disposal, among others. If we are involved in a spill or other accident
involving hazardous substances, or if we are found to be in violation of
applicable laws or regulations, it could have a materially adverse effect on our
business and operating results. If we should fail to comply with applicable
environmental regulations, we could be subject to substantial fines or penalties
and to civil and criminal liability.
We operate in a highly regulated industry and increased costs of compliance
with, or liability for violation of, existing or future regulations could have a
material adverse effect on our business.
The U.S. Department of Transportation and various state agencies exercise broad
powers over our business, generally governing such activities as authorization
to engage in motor carrier operations, safety, and financial reporting. We may
also become subject to new or more restrictive regulations relating to fuel
emissions, drivers' hours in service, and ergonomics. Compliance with such
regulations could substantially impair equipment productivity and increase our
operating expenses.
The EPA recently adopted new emissions control regulations, which require
progressive reductions in exhaust emissions from diesel engines through 2007,
for engines manufactured in October 2002 and thereafter. In part to offset the
costs of compliance with the new EPA engine design requirements, some
manufacturers have significantly increased new equipment prices and eliminated
or sharply reduced the price of repurchase or trade-in commitments. If new
equipment prices were to increase, or if the price of repurchase commitments by
equipment manufacturers were to decrease, more than anticipated, we may be
required to increase our depreciation and financing costs and/or retain some of
our equipment longer, with a resulting increase in maintenance expenses. To the
extent we are unable to offset any such increases in expenses with rate
increases or cost savings, our results of operations could be adversely
affected. If our fuel or maintenance expenses were to increase as a result of
our use of the new, EPA-compliant engines, and we are unable to offset such
increases with fuel surcharges or higher freight rates, our results of
-23-
operations could be adversely affected. Further, our business and operations
could be adversely impacted if we experience problems with the reliability of
the new engines. We began operating tractors with engines meeting the EPA
guidelines during 2003. Although we have not experienced any significant
reliability issues with these engines to date, the expenses associated with the
tractors containing these engines have been slightly elevated, primarily as a
result lower fuel efficiency and slightly higher depreciation.
INFLATION
Inflation has an impact on most of our operating costs. Recently, the effect of
inflation has been minimal.
Competition for drivers has increased in recent years, leading to increased
labor costs. While increases in fuel and driver costs affect our operating
costs, we do not believe that the effects of such increases are greater for us
than for other trucking concerns.
ADOPTION OF ACCOUNTING POLICIES
See "Item 8. Financial Statements and Supplementary Data, Note 1 to the
Consolidated Financial Statements - Recent Accounting Pronouncements."
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are described in Note 1 to the
Consolidated Financial Statements. The policies described below represent those
that are broadly applicable to the Company's operations and involve additional
management judgment due to the sensitivity of the methods, assumptions and
estimates necessary in determining the related amounts.
Accounts Receivable. We continuously monitor collections and payments from our
customers, third parties and vendors and maintain a provision for estimated
credit losses based upon our historical experience and any specific collection
issues that we have identified. While such credit losses have historically been
within our expectations and the provisions established, we cannot guarantee that
we will continue to experience the same credit loss rates that we have in the
past.
Property and equipment. Management must use its judgment in the selection of
estimated useful lives and salvage values for purposes of depreciating tractors
and trailers which in some cases do not have guaranteed residual values.
Estimates of salvage value at the expected date of trade-in or sale are based on
the expected market values of equipment at the time of disposal which, in many
cases include guaranteed residual values by the manufacturers.
Self Insurance. The Company is self-insured for health and workers'
compensation benefits up to certain stop-loss limits. Such costs are accrued
based on known claims and an estimate of incurred, but not reported (IBNR)
claims. IBNR claims are estimated using historical lag information and other
data either provided by outside claims administrators or developed internally.
This estimation process is subjective, and to the extent that future actual
results differ from original estimates, adjustments to recorded accruals may be
necessary.
Revenue Recognition. Revenue is recognized in full upon completion of delivery
to the receiver's location. For freight in transit at the end of a reporting
period, the Company recognizes revenue prorata based on relative transit miles
completed as a portion of the estimated total transit miles with estimated
expenses recognized upon recognition of the related revenue.
-24-
Prepaid Tires. Tires purchased with revenue equipment are capitalized as a cost
of the related equipment. Replacement tires are included in prepaid expenses and
deposits and are amortized over a 24-month period. Costs related to tire
recapping are expensed when incurred.
Income Taxes. Significant management judgment is required to determine the
provision for income taxes and to determine whether deferred income taxes
will be realized in full or in part. Deferred income 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. When it is more likely that all or some portion
of specific deferred income tax assets will not be realized, a valuation
allowance must be established for the amount of deferred income tax assets
that are determined not to be realizable. A valuation allowance for
deferred income tax assets has not been deemed to be necessary due to the
Company's profitable operations. Accordingly, if the facts or financial
circumstances were to change, thereby impacting the likelihood of realizing
the deferred income tax assets, judgment would need to be applied to
determine the amount of valuation allowance required in any given period.
Business Segment and Concentrations of Credit Risk. The Company operates in
one business segment, motor carrier operations. The Company provides
transportation services to customers throughout the United States and portions
of Canada and Mexico. The Company performs ongoing credit evaluations and
generally does not require collateral from its customers. The Company maintains
reserves for potential credit losses. In view of the concentration of the
Company's revenues and accounts receivable among a limited number of customers
within the automobile industry, the financial health of this industry is a
factor in the Company's overall evaluation of accounts receivable. At December
31, 2004, one customer's accounts receivable balance represented 54.8% of the
Company's total accounts receivable.
Business Combinations and Goodwill. Upon acquisition of an entity, the cost of
the acquired entity must be allocated to assets and liabilities acquired.
Identification of intangible assets, if any, that meet certain recognition
criteria is necessary. This identification and subsequent valuation requires
significant judgments. The carrying value of goodwill was tested for impairment
on December 31, 2004. The impairment testing requires an estimate of the value
of the Company as a whole, as the Company has determined it only has one
reporting unit as defined in Statement of Financial Accounting Standards No.
142.
-25-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Our primary market risk exposures include equity price risk, interest rate risk,
and commodity price risk (the price paid to obtain diesel fuel for our
tractors). The potential adverse impact of these risks and the general
strategies we employ to manage such risks are discussed below.
The following sensitivity analyses do not consider the effects that an adverse
change may have on the overall economy nor do they consider additional actions
we may take to mitigate our exposure to such changes. Actual results of changes
in prices or rates may differ materially from the hypothetical results described
below.
EQUITY PRICE RISK
We hold certain actively traded marketable equity securities which subjects the
Company to fluctuations in the fair market value of its investment portfolio
based on current market price. The recorded value of marketable equity
securities increased to $8.8 million at December 31, 2004 from $5.5 million at
December 31, 2003. The increase reflects additional purchases of approximately
$2.4 million during 2004 and an increase in the fair market value of
approximately $.9 million during 2004. A 10% decrease in the market price of
our marketable equity securities would cause a corresponding 10% decrease in the
carrying amounts of these securities, or approximately $880,000. For additional
information with respect to the marketable equity securities, see Note 3 to our
consolidated financial statements.
INTEREST RATE RISK
Our two lines of credit each bear interest at a floating rate equal to LIBOR
plus a fixed percentage. Accordingly, changes in LIBOR, which are effected by
changes in interest rates, will affect the interest rate on, and therefore our
costs under, the lines of credit. In an effort to manage the risks associated
with changing interest rates, we entered into interest rate swap agreements
effective February 28, 2001 and May 31, 2001, on notional amounts of $15,000,000
and $5,000,000, respectively. The "pay fixed rates" under the $15,000,000 and
$5,000,000 swap agreements are 5.08% and 4.83%, respectively. The "receive
floating rate" for both swap agreements is "1-month" LIBOR. These interest rate
swap agreements terminate on March 2, 2006 and June 2, 2006, respectively.
Assuming $20.0 million of variable rate debt was outstanding under Line "A" and
not covered by the hedge agreement for a full fiscal year, a hypothetical 100
basis point increase in LIBOR would result in approximately $200,000 of
additional interest expense, net of the effect of the swap agreements. For
additional information with respect to the interest rate swap agreements, see
Note 16 to our consolidated financial statements.
COMMODITY PRICE RISK
Prices and availability of all petroleum products are subject to political,
economic and market factors that are generally outside of our control.
Accordingly, the price and availability of diesel fuel, as well as other
petroleum products, can be unpredictable. Because our operations are dependent
upon diesel fuel, significant increases in diesel fuel costs could materially
and adversely affect our results of operations and financial condition. Based
upon our 2004 fuel consumption, a 10% increase in the average annual price per
gallon of diesel fuel would increase our annual fuel expenses by $5.6 million.
In August 2000 and July 2001, we entered into agreements to obtain price
protection and reduce a portion of our exposure to fuel price fluctuations.
Under these agreements, we were obligated to purchase minimum amounts of diesel
fuel per month, with a price protection component, for the six-month periods
ended March 31, 2001 and February 28, 2002. The agreements also provide that if
during the 48 months commencing April 2001, the price of heating oil on the New
York Mercantile Exchange ("NY MX HO") falls below $.58 per gallon, we are
-26-
obligated to pay, for a maximum of twelve different months selected by the
contract holder during such 48-month period, the difference between $.58 per
gallon and NY MX HO average price, multiplied by 900,000 gallons. Accordingly,
in any month in which the holder exercises such right, we would be obligated to
pay the holder $9,000 for each cent by which $.58 exceeds the average NY MX HO
price for that month. For example, the NY MX HO average price during February
2002 was approximately $.54, and if the holder were to exercise its payment
right, we would be obligated to pay the holder approximately $36,000. In
addition, if during any month in the twelve-month period commencing January
2005, the average NY MX HO is below $.58 per gallon, we will be obligated to pay
the contract holder the difference between $.58 and the average NY MX HO price
for such month, multiplied by 1,000,000 gallons. During December 2004, the
average NY MX HO price was $1.28. The estimated fair value of the agreements are
periodically adjusted and as of December 31, 2004 the estimated fair value of
$500,000 is included in accrued liabilities in the accompanying consolidated
financial statements. For the twelve-month period ended December 31, 2004 an
adjustment of $250,000 was made to reflect the decline in fair value of the
agreements which had the effect of reducing operating supplies expense and other
current liabilities each by $250,000 in the accompanying consolidated financial
statements. For the twelve-month period ended December 31, 2003 an adjustment
was not necessary and the carrying value in accrued liabilities was $750,000.
For additional information with respect to this agreement, see Note 16 to our
consolidated financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following statements are filed with this report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets- December 31, 2004 and 2003
Consolidated Statements of Income- Years ended
December 31, 2004, 2003 and 2002
Consolidated Statements of Shareholders' Equity- Years ended
December 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows- Years ended
December 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
-27-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
P.A.M. Transportation Services, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of P.A.M.
Transportation Services, Inc. (a Delaware corporation) and subsidiaries (the
"Company") as of December 31, 2004 and 2003, and the related consolidated
statements of income, stockholders' equity and other comprehensive income, and
cash flows for each of the three years in the period ended December 31, 2004.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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, such consolidated financial statements present fairly, in all
material respects, the financial position of P.A.M. Transportation Services,
Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted
in the United States of America.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on the
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 8, 2005 expressed an unqualified opinion on management's assessment
of the effectiveness of the Company's internal control over financial reporting
and an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Little Rock, Arkansas
March 8, 2005
-28-
P.A.M. TRANSPORTATION SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(in thousands, except share data)
- ---------------------------------------------------------------------------------------
2004 2003
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 19,659 $ 3,064
Accounts receivable-net:
Trade 47,926 46,120
Other 1,110 1,150
Inventories 913 844
Prepaid expenses and deposits 14,862 6,771
Marketable equity securities available-for-sale 8,792 5,492
Income taxes refundable 754 1,256
-------- --------
Total current assets 94,016 64,697
PROPERTY AND EQUIPMENT:
Land 2,674 2,674
Structures and improvements 9,299 9,258
Revenue equipment 238,750 249,713
Service vehicles 878 911
Office furniture and equipment 5,571 6,863
-------- --------
Total property and equipment 257,172 269,419
Accumulated depreciation (83,029) (86,689)
-------- --------
Net property and equipment 174,143 182,730
OTHER ASSETS:
Goodwill 15,413 15,413
Non-compete agreements 654 1,004
Other 1,123 1,005
-------- --------
Total other assets 17,190 17,422
-------- --------
TOTAL ASSETS $285,349 $264,849
======== ========
(Continued)
-29-
P.A.M. TRANSPORTATION SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(in thousands, except share data)
- ---------------------------------------------------------------------------------------
2004 2003
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 28,702 $ 22,295
Accrued expenses and other liabilities 9,828 11,167
Current maturities of long-term debt 2,080 2,039
Deferred income taxes-current 7,162 1,330
-------- --------
Total current liabilities 47,772 36,831
Long-term debt-less current portion 23,225 26,740
Deferred income taxes-less current portion 45,375 43,708
Other 434 695
-------- --------
Total liabilities 116,806 107,974
-------- --------
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value:
Authorized shares-10,000,000
Issued and outstanding
shares: 0 at December 31, 2004 and 2003
Common stock, $.01 par value:
Authorized shares-40,000,000
Issued and outstanding shares: 11,303,207 and 11,294,207
at December 31, 2004 and 2003, respectively 113 113
Additional paid-in capital 76,050 75,957
Accumulated other comprehensive income 1,151 164
Retained earnings 91,229 80,641
-------- --------
Total shareholders' equity 168,543 156,875
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $285,349 $264,849
======== ========
(Concluded)
See notes to consolidated financial statements.
-30-
P.A.M. TRANSPORTATION SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(in thousands, except per share data)
- ---------------------------------------------------------------------------------------
2004 2003 2002
OPERATING REVENUES:
Revenue, before fuel surcharge $309,475 $293,547 $264,012
Fuel surcharge 15,591 7,491 2,042
-------- -------- --------
Total operating revenues 325,066 301,038 266,054
-------- -------- --------
OPERATING EXPENSES AND COSTS:
Salaries, wages, and benefits 119,519 119,350 115,432
Operating supplies and expenses 77,363 63,241 53,203
Rents and purchased transportation 38,938 35,287 9,780
Depreciation and amortization 30,016 26,601 24,715
Operating taxes and licenses 15,488 14,710 13,467
Insurance and claims 15,820 13,500 12,786
Communications and utilities 2,690 2,540 2,284
Other 5,131 4,755 4,620
Loss on sale or disposal of equipment 915 368 127
-------- -------- --------
Total operating expenses and costs 305,880 280,352 236,414
-------- -------- --------
NET OPERATING INCOME 19,186 20,686 29,640
NON-OPERATING INCOME 464 276
INTEREST EXPENSE (1,758) (1,667) (1,985)
-------- -------- --------
NET INCOME BEFORE INCOME TAXES 17,892 19,295 27,655
FEDERAL AND STATE INCOME TAXES:
Current 479 630 1,718
Deferred 6,825 7,175 9,344
-------- -------- --------
Total federal and state income taxes 7,304 7,805 11,062
-------- -------- --------
NET INCOME $ 10,588 $ 11,490 $ 16,593
======== ======== ========
EARNINGS PER COMMON SHARE:<