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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ x ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from April 1, 1997 to December 31, 1997
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Commission file number 0-24806
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U.S. XPRESS ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
NEVADA 62-1378182
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
2931 SOUTH MARKET STREET
Chattanooga, Tennessee 37410
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (423) 697-7377
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: CLASS A COMMON STOCK, $0.01 PAR VALUE
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [____]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $141,707,964.50 as of March 13, 1998 (based upon the $19.625 per
share average of the closing bid and asked price on that date as reported by
NASDAQ). In making this calculation the Registrant has assumed, without
admitting for any purpose, that all executive officers, directors, and holders
of more than 10% of a class of outstanding common stock, and no other persons,
are affiliates.
As of March 13, 1998, the Registrant had 12,006,440 shares of Class A Common
Stock and 3,040,262 shares of Class B Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: The information set forth under Part III,
Items 11, 12, and 13 of this Report is incorporated by reference from the
Registrant's definitive proxy statement dated March 30, 1998 for the 1998 annual
meeting of stockholders.
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PART I
ITEM 1. BUSINESS
This report contains forward-looking statements relating to future events or the
future financial performance of the Company. Such forward-looking statements
are within the meaning of that term in Section 27A of the Securities Act and
Section 21E of the Exchange Act. Such statements may include, but not be
limited to, projections of revenues, income or loss, capital expenditures,
acquisitions, plans for growth and future operations, financing needs or plans
or intentions relating to acquisitions by the Company, as well as assumptions
relating to the foregoing. Forward-looking statements are inherently subject to
risks and uncertainties, some of which cannot be predicted or quantified.
Future events and actual results could differ materially from those set forth
in, contemplated by or underlying the forward-looking statements.
Effective December 31, 1997 the Company changed its fiscal year for
financial reporting purposes from a March 31 year-end to a December 31 year-end.
Throughout this report, the term 1997 transition period relates to the nine-
month period ended December 31, 1997. The terms fiscal 1997 and fiscal 1996
refer to the fiscal years ended March 31, 1997 and March 31, 1996, respectively.
Other references to years are to calendar years, unless specifically noted
otherwise.
GENERAL
U.S. Xpress Enterprises, Inc. (the "Company") provides transportation and
logistics services in the United States, Canada and Mexico. The Company is one
of the ten largest truckload carriers in the United States. The Company is a
leader in the adoption of proven new technologies as a means of reducing costs
and providing better service to its customers.
The Company has two operating subsidiaries, U.S. Xpress, Inc. ("U.S.
Xpress") and CSI/Crown, Inc. ("CSI/Crown"). U.S. Xpress, the Company's largest
subsidiary, accounted for 83% of the Company's 1997 transition period revenues.
U.S. Xpress provides three principal services: i) time-definite and expedited
services with medium and long lengths of haul of 800 to 3,000 miles; ii) time-
definite and expedited regional services with lengths of haul of 100 to 1,200
miles in the Western, Southeastern, Midwestern and Eastern regions of the United
States; and iii) expedited truckload transportation brokerage services that
primarily serve the air freight industry.
CSI/Crown's target market is the floorcovering industry. CSI/Crown
consolidates floorcovering products into truckload quantities, arranges
truckload transportation to company-owned distribution centers and third-party
agent facilities throughout the United States and Canada for local delivery to
floorcovering distributors, retailers and contractors. In addition, CSI/Crown
provides warehousing facilities and floorcovering cutting services, and sells
floorcovering installation supplies, most of which are sold bearing the
company's private-label "Installer's Choice" brand.
The Company's mission is to provide high levels of service to customers
utilizing proven technologies and skilled people. The Company's operating and
growth strategy is focused on taking advantage of opportunities and evolving
trends in the transportation industry. These strategies include:
1) Position the Company as a premier high-service provider. The Company's
services have attracted customers across many industries, particularly those
that operate just-in-time manufacturing and distribution systems. Over the last
three years, the Company's revenues have grown at a 24% compound annual rate. A
large portion of the Company's growth has been attributable to providing
services that are differentiated from other truckload carriers. The Company was
one of the first in the industry to establish time-definite pickups and
deliveries as a standard for service quality. Time-definite service is a
critical element in efficient supply chain and distribution systems management.
In addition, the Company is one of the few truckload carriers to provide
expedited service throughout the continental United States and in parts of
Canada and Mexico. This is particularly important to shippers that operate
multiple, geographically-separated facilities. The Company has consistently
utilized proven new technologies that provide value to customers, such as the
Xpress Connect Internet-based communication system that enables the Company's
customers to trace freight, tender orders for freight, exchange invoice
information, obtain imaged proofs of delivery and perform other functions
through the Internet.
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2) Expand core carrier relationships with shippers. Through its service
capabilities, the Company is positioned to act as a core carrier and/or
dedicated service provider to major shippers. The Company provides longhaul and
regional truckload services, expedited and time-definite service, dedicated
fleet capabilities and services to third-party logistics providers. In seeking
core carrier relationships, the Company emphasizes its commitment to
flexibility, responsiveness, analytical planning and information systems.
Many shippers are reducing the number of carriers they use. This is
resulting in opportunities in which large and successful carriers with a range
of capabilities, like the Company, have an advantage in competing for the
reduced number of core carrier positions.
The Company's top 50 customers, most of which have designated the Company
as a core carrier, include Federal Express, Carrier, Amana, Hewlett Packard,
DuPont, Compaq and Armstrong.
3) Position the Company as a driver-friendly employer. The labor market for
qualified professional truck drivers is extremely competitive, providing a
competitive advantage to driver-friendly employers like the Company. The
Company focuses significant resources and attention on the successful
recruiting, hiring, training and retention of qualified professional solo and
team drivers. In the 1997 transition period, the Company increased its fleet
size 26% through internal growth and the acquisition of truckload carrier JTI,
Inc. to 2,839 tractors at year-end, a 26.4% increase over March 31, 1997. The
Company was able to hire sufficient numbers of drivers to operate the larger
fleet.
Management believes that its success in hiring and retaining qualified solo
and team drivers is due to its high-quality equipment; high utilization of
equipment which translates into high miles and take-home pay for drivers;
driver-friendly freight that does not require drivers to load or unload;
flexible work schedules that enable some drivers to work schedules that
accomodate their personal obligations and lifestyles; and creative recruiting
strategies that recognize the changing demographics of the American work force
and seek to expand the diversity of the driver force. Management also believes
that it is critical that the Company remain in the upper tier of carriers for
total driver compensation in order to continue to attract and retain experienced
drivers.
An important aspect of driver retention is driver managers. Each Company
driver is assigned a driver manager who is responsible for all aspects of driver
satisfaction: miles, home time and helping drivers resolve work-related issues.
Driver managers' performance is evaluated based on equipment utilization, driver
turnover, driver miles and driver safety performance. The driver managers
communicate with drivers daily through the satellite communications system and
by telephone when personal communication is warranted. Typical matters in which
assistance is provided include payroll issues and scheduling a driver's load so
that he or she can return home. The Company recognizes that the first 90 days
of employment is a critical retention and safety period for new drivers. New
drivers are assigned to specific driver managers who are specially trained to
assist new drivers. Each driver manager is responsible for approximately 45
trucks.
Management believes the kind of freight the Company typically handles is a
significant factor in driver retention. Although drivers do occasionally load
and unload freight, the Company focuses much of its marketing efforts on
customers with freight which is "driver-friendly" in that it requires minimal or
no loading or unloading by drivers. The Company also is increasingly extending
this driver-friendly concept to customers that do not keep drivers waiting for
extensive periods of time while trailers are loaded and those whose employees,
usually loading dock personnel, treat the Company's drivers as professionals.
In 1997, the competition for professional drivers intensified, as several
competing carriers increased the rates at which drivers are paid for each mile
driven. Some carriers reported that they increased wages by more than ten
percent. The Company increased driver mileage pay in July 1997 by two to six
percent, based on drivers' seniority with the Company. The Company plans to
increase its fleet size in 1998 through internal growth and strategic
acquisitions. Truckload carrier Victory Express, Inc. was acquired in early
1998. Continuing success in recruiting, hiring, training and retaining
sufficient drivers to staff the increasingly larger fleet is critical to the
Company achieving its financial and growth objectives.
4) Emphasize relationships with logistics providers. Many major manufacturers
and distributors are increasingly focusing on their core competencies and
outsourcing some or all of their logistics and transportation requirements to
logistics firms. Some shippers recognize significant cost savings and improved
performance by outsourcing transportation requirements and focusing their
resources on their core businesses. Logistics providers typically manage
transportation purchasing, coordination and freight allocation for their
customers. This trend is providing
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opportunities for the Company to establish working relationships with important
logistics suppliers, and thereby obtain significant new customer accounts.
Industry analysts have estimated that about 5% of freight in the U.S. is being
managed by logistics providers, and this share is expected to grow to 10% by the
year 2000. A small number of logistics providers have jumped to the forefront
of this young industry and have obtained significant business volumes from large
shippers.
The Company has established relationships with three of the leading
logistics suppliers -- J.B. Hunt Logistics, Menlo Logistics and Ryder Integrated
Logistics. These relationships have resulted in significant business
opportunities to serve large shippers whose logistics are managed by these
third-party logistics firms. For example, the Company now serves four large
shippers represented by J.B. Hunt Logistics. The Company's overall performance
in serving J.B. Hunt Logistics and its customers -- as measured by rates, on-
time performance and information technology capability -- resulted in the
Company's selection as J.B. Hunt Logistics' "Carrier of the Year" for 1997.
Management believes that as it continues to demonstrate its capabilities and
performs to the demanding requirements of logistics providers, it can earn
additional business opportunities quality logistics providers.
5) Continue to pursue attractive acquisition opportunities. The trucking
industry is consolidating. Many carriers are experiencing financial and
competitive pressures that are increasingly making it difficult for them to
successfully compete in the truckload industry. This is resulting in attractive
acquisition opportunities for well-capitalized carriers like the Company. The
Company has grown significantly through ten strategic acquisitions in the 1990s.
U.S. Xpress now includes the operations of six companies acquired in the 1990s -
- - Southwest Motor Freight, Hall Systems, National Freight Systems, Michael Lima
Transportation, JTI, Inc., and Victory Express, Inc. CSI/Crown includes the
operations of four companies acquired in the 1990s -- Crown Transport Systems,
Great Southern Xpress, CSI/Reeves and Rosedale Transport.
The acquisition of the Midwest and East Coast floorcovering and logistics
operations of Rosedale Transport, Inc. occurred in April 1997. The acquisition
of JTI, Inc., a Midwest regional truckload carrier, was made in May 1997.
Effective January 29, 1998, the Company acquired Victory Express, Inc., a
non-union truckload carrier based in Medway, Ohio, for $51 million in cash and
assumption of approximately $2 million in debt. Prior to the acquisition,
Victory had annual revenues of approximately $65 million. Victory Express serves
customers located primarily in the Midwest and on the Eastern seaboard. Other
areas of the country served by Victory Express include Georgia, Texas and
California. Victory Express employs approximately 790 persons, including
approximately 640 drivers and driver trainees.
Through this acquisition, management expects the Company to significantly
expand its regional capabilities in the Midwest and extend our regional service
capabilities to the East Coast. Victory Express' customer base is largely
centered in automotive, paper, retail and air freight markets. In addition,
U.S. Xpress continues to be presented with opportunities for additional business
from its customers in the Midwest. Management expects that Victory Express'
capacity will enable the Company to better capture these opportunities.
Management believes that market and financial forces will continue to
create attractive acquisition opportunities.
SERVICES
TIME DEFINITE SERVICE
The Company's principal service specialty is time-definite service, which is the
pickup and delivery of freight to prescribed schedules over distances ranging
from 200 to 3,000 miles. Time-definite transportation requires pickups and
deliveries to be performed to exact appointment times or within a specified
number of minutes. This service is a key point of differentiation from many
other trucking companies, which typically provide service only within time
"windows" ranging from a few hours to a few days. Time-definite service is
particularly important to the Company's customers that operate just-in-time
manufacturing, distribution and retail inventory systems and to customers in the
air freight industry.
EXPEDITED SERVICE
The Company's expedited service consists of the pick up and delivery of freight
on prescribed schedules at transit times competitive to deferred air freight
service. The Company is able to meet these transit times through the use of
team drivers or relays at much lower cost than deferred air freight. In the
1997 transition period, revenue from expedited services was $110.2 million, an
increase of 16% from the same period in 1996. Customers in the air freight
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industry accounted for 27% of expedited services revenue, with the remainder
provided by manufacturers, distributors, retailers, freight forwarders and
consolidators. Examples of this service are as follows:
TRANSIT
Times
Origin Destination Miles (in hours)
- --------------- ----------------- ----- ----------
Charlotte, NC Los Angeles, CA 2,381 53
Atlanta, GA San Francisco, CA 2,482 55
Seattle, WA Miami, FL 3,263 73
Dallas, TX Chicago, IL 923 20
Newark, NJ Columbus, OH 527 12
REGIONAL SERVICE
About 70% of the freight transported in the U.S. moves over distances of less
than 1,000 miles. In addition, the average length of haul of shipments is
shrinking as manufactuers and distributors increasingly bring the various
elements of their supply and distribution chains into closer geographical
proximity to each other. These trends lead shippers to use carriers, like the
Company, that can provide short-haul, medium-haul and long-haul services in key
regions of the U.S. The ability to provide regional service is an important
factor to the Company obtaining certain core carrier accounts.
In the 1997 transition period, revenue from regional services (freight
originating and delivering in defined regional areas) totalled $74.7 million, an
increase of 38% from the same period of 1996. Over 48% of regional revenues
were derived from the Southeast region. The Western region accounted for 40%
and the Midwestern region accounted for 12%. The January 1998 acquisition of
Victory Express will expand the Company's regional service capacity in the
Midwest.
DEDICATED SERVICES
Some shippers are eliminating or reducing the size of their private fleets,
providing increased opportunities for carriers, like the Company, to provide
dedicated services in which specific trucks and drivers are assigned to specific
customer accounts. Approximately 300 tractors at U.S. Xpress are dedicated to
specific customers or geographic lanes. In addition, through the acquisition of
Victory Express in early 1998, two significant dedicated accounts were obtained.
These two accounts together represent nearly 50% of Victory Express' revenues
prior to its acquisition by the Company. Through dedicated services, customers
obtain a higher degree of assurance of available capacity to meet their
requirements. U.S. Xpress benefits by receiving increased business volume from
key customers, by improving planning of equipment requirements and by enhancing
the safety of its drivers who travel the same lanes repeatedly. Drivers benefit
through enhanced predictability of their schedules, reduced downtime between
loads and more predictability of their off-duty time.
CSI/Crown expanded its dedicated service offerings in 1997 by assigning
certain equipment to specific customers and promoting the customers' brand on
the equipment. In this way, the customer obtains the benefits of assured
capacity and brand promotion, without incurring the management costs and
inherent inefficiencies of operating a private fleet. CSI/Crown benefits by
being assured consistent volume for its dedicated equipment and drivers.
LOGISTICS SERVICES
U.S. Xpress provides logistics services, principally expedited truckload
services, utilizing company equipment and a network of contract carriers. Most
of the customers for these services are airlines, air freight forwarders and
customs brokers involved in the air freight industry. Customers are identified
and acquired through the Company's own sales efforts and through a network of
sales agents. The contract carrier network also provides supplementary
capacity to U.S. Xpress customers when available opportunities do not fit U.S.
Xpress' targeted market segments or when U.S. Xpress equipment is not available.
FLOORCOVERING LOGISTICS
CSI/Crown is the leading nationwide provider of logistics services for the
floorcovering industry. CSI/Crown picks up floorcovering products from
manufacturers; consolidates shipments into truckloads bound for specific
destinations;
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contracts with U.S. Xpress and other truckload carriers to deliver the products
to CSI/Crown service centers or to contract agents and delivery services; and
delivers the products to floorcovering distributors and retailers in all 50
states, Canada and Mexico. In addition, CSI/Crown provides warehouse facilities
and cutting services and sells floorcovering installation supplies.
CSI/Crown contracts with several truckload carriers, including U.S. Xpress,
to deliver floorcovering products from North Georgia, where many floorcovering
manufacturers are located, to CSI/Crown and agent service centers in the U.S.
and Canada. Revenue from floorcovering logistics in the 1997 transition period
was $57.6 million, an increase of 12.7% from the same period in 1996. At
December 31, 1997, CSI/Crown operated 25 distribution centers and contracted
with others to provide distribution services at 33 other locations. Subsequent
to December 31, 1997, four company-operated distribution centers were
transferred to third party agents.
MARKETING AND CUSTOMERS
Marketing personnel target customers for each of the Company's six major
services. The Company's services are marketed on the basis of the Company's
commitment to high levels of service, flexibility, responsiveness, analytical
planning and information technology management. The Company's marketing
department is primarily responsible for identifying new business prospects and
implementing marketing programs to obtain and retain customer accounts. The
marketing staff also is responsible for offering the Company's logistics
capabilities to existing and new customers and to third party logistics
providers.
Mr. Quinn, the Company's Co-Chairman, and Mr. Lusk, the Executive Vice
President of Marketing, are directly involved in marketing the Company's
services at the national account level and supporting local sales activities.
In addition, the Company employs 19 full-time marketing representatives, who are
geographically dispersed.
The Company's top 50 customers, most of which have designated the Company
as a core carrier, accounted for approximately 46% of revenues in 1997. During
1997, no single customer accounted for more than 6.5% of the Company's revenue.
TECHNOLOGY
The Company utilizes proven new technologies that yield both competitive service
advantages and the ability to more profitably serve its niche markets. The
Company has developed a computerized information system that is integrated with
the QUALCOMM Omnitracs satellite communication system ("the QUALCOMM system") to
enhance customer service and equipment utilization. The Company's Electronic
Data Interchange ("EDI") capabilities provide customers with an efficient means
of tracing freight and performing several administrative functions. In
November, 1996, the Company introduced its proprietary Internet-based OXpress
ConnectO system which enables customers to trace freight, tender loads and
exchange invoice information via the Internet. Management believes that this
system is a base from which it will provide enhanced customer service, and
ultimately provide direct connectivity between customers and drivers via the
Internet.
The Company is a leader in the innovation of computer information systems
that are integrated with the QUALCOMM system. Management believes that proven
technologies provide both competitive service advantages and the ability to more
profitably serve its niche markets.
OPERATING SYSTEMS
Management believes that the Company's information systems are one of its
principal competitive advantages. These systems integrate operations systems
and the principal back-office functions of payroll, billing, fuel and accounting
with the QUALCOMM system.
SATELLITE COMMUNICATIONS
The QUALCOMM system was first utilized by the Company in 1990. The QUALCOMM
system simplifies the location of equipment and permits timely and efficient
communication of critical operating data, such as shipment orders, loading
instructions, routing, fuel, taxes paid, mileage operated, payroll, safety,
traffic and maintenance information. For example, load planners assign loads by
entering the required information into the system. Drivers then access the
previously-planned load from the system and acquire all the necessary customer,
order and routing information through their onboard display unit, thus
eliminating waiting time and inefficient dependence on truck stop telephones.
Management estimates that carriers without satellite communications typically
lose one hour or more of productive time per driver per day waiting for
telephones. The QUALCOMM system permits transmission of load
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assignments directly to the onboard display unit and will signal a driver when
an assignment is available so that he or she may sleep in the tractor pending an
assignment. In addition, through the QUALCOMM system, drivers have direct access
to the Company's IBM AS/400 computer. This capability enables the driver to
access information from operations and payroll systems, such as requesting and
receiving cash advances on the road.
LOAD PLANNING/DISPATCH
The Company operates the QUALCOMM Decision Support System ("QDSS"), a dispatch
optimization software system. This software package provides the capability to
efficiently allocate equipment and drivers to available loads. QDSS maximizes
utilization of the Company's equipment and contributes to improved customer and
driver satisfaction. Load planners convert customer orders into daily pre-
planned freight dispatches. Driver managers then send instructions to drivers
via the QUALCOMM system. Drivers access the order when they are ready for the
next load assignment. Drivers can obtain shipment orders, pickup and delivery
instructions, customer location and routing information through the onboard
computer. Through QDSS, the Company seeks to identify potential problems of too
much or too little freight in a particular geographic region. The Company seeks
additional freight in the affected area or through its logistics group, seeks
alternative carriers to handle overflow loads.
ELECTRONIC DATA INTERCHANGE
The Company's automated administrative (e.g. billing, fuel tax, payroll) and
operating systems enable dial-up tracing and full EDI of administrative and
shipment status information between the Company and its customers. This system
provides significant operating advantages to U.S. Xpress and its customers,
including real-time information flow, reduction or elimination of paperwork,
error-free transcription and reductions in clerical personnel. EDI allows the
Company to exchange data with its customers in a variety of formats, depending
on individual customer's capabilities, which can significantly enhance quality
control, customer service and customer efficiency.
XPRESS CONNECT(TM)
The Company's Xpress Connect(TM) system is an Internet-based system, located at
www.USXpress.com, that makes it easy for shippers to track freight, tender
loads and communicate with the Company via Internet e-mail. The system, which
is a featured part of the Company's World Wide Web site, is designed to assist
shippers in better managing their transportation shipments by providing up-to-
date information on the location and status of active shipments, as well as
historical information on completed shipments. The Company believes that Xpress
Connect is the first World Wide Web application of its type that permits a
customer to track shipments without prior knowledge of shipment or order
numbers. Xpress Connect(TM) is customer-specific and password protected to
guarantee the security of proprietary information. The system is being
continually improved and upgraded, and in fiscal 1998, management expects to add
enhancements that provide: 1) customers the ability to obtain proofs of
delivery from the Company's document imaging system; 2) an on-line freight
rating system; and 3) automatic notifications to customers' pagers of expected
delays in transit.
Management believes that Xpress Connect(TM) provides a competitive
advantage in the truckload and floorcovering logistics industries, because
shippers have greater capabilities and ease of use at lower costs than are
provided through other carriers' EDI and Internet-based systems.
EATON VORAD
Eaton Vorad collision avoidance systems are specified equipment on Century Class
tractors used by U.S. Xpress. These radar-based systems are designed to detect
traffic ahead and to the side of trucks, and to provide drivers with
additional response time, resulting in a safer vehicle for drivers and the
motoring public. At December 31, 1997 the Company had more than 1,700 such
systems in operation.
TRANSIT TECHNOLOGIES
The Pre-Pass(TM) technology enables a tractor to stop at one weigh station and
receive clearance for travel on participating highways. After the truck
conducts an initial visit to a weigh station, information regarding the truck
and its contents are downloaded onto a transponder located on the tractor.
Thereafter, a sensor located along the highway reads the information contained
in the transponder and allows the truck and its contents to be electronically
cleared without the delays associated with multiple weigh station visits. The
Company participated in beta tests for these technologies
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and equipped a majority of its tractors with these systems in 1997. The Company
has begun to implement a similar technology to expedite movement through toll
plazas. These technologies enhance fuel economy, improve equipment utilization,
improve transit times and reduce accidents.
DOCUMENT IMAGING
The Company has installed an optical character recognition system that scans
documents such as bills of lading, driver logs and fuel receipts onto optical
disks or other storage media. This system has reduced clerical and management
time required to enter and retrieve information, while enhancing the
availability and increasing the utilization of data by customers.
YEAR 2000 COMPLIANCE
Some computer systems that use two digits to indicate a year will not be able to
process data properly for the year 2000. The Company has assessed the ability of
its computer software and operating systems to function in the year 2000 and
beyond. Systems in use by the Company in operations, accounting and purchasing
are year 2000 compliant.
Testing of all U.S. Xpress systems for year 2000 compliance is scheduled
for July 1998. Systems in use at CSI/Crown are presently 50% compliant with year
2000 requirements. Programming to make all CSI/Crown systems year 2000 compliant
is expected to be completed by December 1998. Testing of all CSI/Crown systems
is scheduled for March 1999.
A load optimization system purchased from Sabre Group is year 2000
compliant. A new version of the Q-Tracks satellite communication system that is
year 2000 compliant has been purchased from Qualcomm, Inc. This system is being
installed and is expected to be operational in June 1998. The Company does not
currently have any information concerning the year 2000 compliance status of its
other suppliers and customers. In the event that any of the Company's
significant suppliers or customers do not successfully and timely achieve year
2000 compliance, the Company's business or operations could be adversely
affected. The Company does not expect the costs of achieving year 2000
compliance to be material.
EQUIPMENT
The Company determines the specifications of equipment purchases based on such
factors as vehicle and component quality, warranty service, driver preferences,
new vehicle prices and the likely resale market. Because the fleet is
standardized and has warranty maintenance agreements with original equipment
suppliers, the Company has minimized parts inventories and maintenance costs.
The Company has negotiated attractive repurchase commitments from its primary
equipment vendors for disposal of used equipment in 1998. These agreements
reduce the Company's risks related to equipment disposal values.
TRACTORS
In the early 1990s, the Company's management and drivers worked with the
Company's principal tractor supplier, Freightliner, to design improvements in
its conventional tractors, such as more spacious and functional sleeper
compartments and improved aerodynamics. In 1996, the Company was among the
first to purchase the new Freightliner Century Class tractors, which provide
superior levels of operating safety, fuel efficiency, information management
capabilities and driver comforts. At December 31, 1997, 1,730 Century Class
tractors were operating in the Company's fleet.
The Company was among the first to use Detroit Diesel 60 Series engines,
which provide significant performance improvements and maintenance cost
reductions over non-electronic engines. The Company's engines are designed with
enough power to enable the tractor to stay with the flow of traffic on most
upgrades, which enhances safety and minimizes driver frustration. In addition,
they contain electronic speed controls. Many of the Company's tractors are also
equipped with anti-lock braking systems for improved safety.
Tractors are typically replaced every 36 to 48 months, generally well in
advance of the need for major engine overhauls. This schedule can be
accelerated or delayed based on resale values in the used truck market and
the differential between those values and new truck prices. The Company
maintains third party relationships that enable it to retail, rather than
wholesale, a large percentage of used equipment. Management believes that this
practice has resulted in significant gains through the sale of used trucks over
what could have been obtained from trade-in values offered by the manufacturer.
TRAILERS
The Company's dry van trailers have cubic capacity that is among the largest in
the industry. In 1997, the Company began purchasing composite plate trailers
from Wabash National Corporation that are more durable, have greater cubic
capacity and stiffer sidewalls, and do not fracture as easily as conventional
aluminum trailers. At December 31, 1997, the Company's fleet of 5,875 trailers
included approximately 1,100 Wabash composite plate trailers.
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COMPETITION
The transportation services business is extremely competitive. The Company
competes primarily with other truckload carriers and, particularly in the longer
haul markets, with intermodal transportation, railroads and providers of
deferred air-freight service. Competition from railroads and intermodal
transportation likely would increase if state or federal highway fuel taxes were
increased without a corresponding increase in taxes imposed on fuel used by
railroads.
Generally, competition for the freight transported by the Company is based
more on service and efficiency than on freight rates. However, historically,
increased competition has created downward pressure on the truckload industry's
pricing structure. Prolonged weakness in freight markets or downward pressure on
freight rates could adversely affect the Company's results of operations or
financial condition. Some competitors have greater financial resources, operate
more equipment and transport more freight than the Company.
REGULATION
The Company is a motor carrier that is subject to safety rules and regulations
promulgated by the Department of Transportation and various laws and regulations
enforced by state agencies. These regulatory authorities have broad powers,
generally governing activities such as authority to engage in motor carrier
operations, accounting systems, certain mergers, consolidations, acquisitions
and periodic financial reporting. Subject to federal, state and provincial
regulatory authorities, the Company may transport most types of freight to and
from any point in the United States, Mexico and certain Canadian provinces over
any route selected by the Company. The trucking industry is subject to possible
regulatory and legislative changes (such as increasingly stringent environmental
regulations or limits on vehicle weight and size) that may affect the economics
of the industry by requiring changes in operating practices or by affecting the
cost of providing truckload services.
The Company has underground storage tanks for diesel fuel in use at
terminals in Birmingham, Alabama; Tunnel Hill, Georgia; Lincoln, Nebraska;
Medway, Ohio; Oklahoma City, Oklahoma; and Chattanooga, Tennessee. As a result,
the Company is subject to regulations promulgated by the Environmental
Protection Agency ("EPA") in 1988 governing the design, construction and
operation of underground fuel storage tanks from installation to closure. For
underground fuel storage tanks in existence at the time the regulations were
promulgated in 1988, which include tanks at the terminals in Chattanooga and
Medway, the regulations require that tanks be upgraded to meet specified
standards concerning corrosion protection, spill or overfill protection and
release detection on a phased timetable which began in 1989 and ends in 1998.
The Company believes all of its tanks are in compliance with EPA regulations.
SAFETY AND RISK MANAGEMENT
The Company is committed to safe driving. The Company regularly communicates
with drivers to promote safety and to instill safe work habits through Company
media, safety review sessions and ethics and responsibility training. These
programs reinforce the importance of driving safely, abiding by all laws and
regulations such as speed limits and driving hours, performing regular equipment
inspections and acting as good citizens on the road. The Company's accident
review committee meets regularly to review any new accidents, take appropriate
action related to drivers, examine accident trends and implement changes in
procedures or communications to address any safety issues.
Management's emphasis on safety also is demonstrated through its equipment
specifications, such as anti-lock brakes, electronic engines, special mirrors,
conspicuity tape and the implementation of Eaton Vorad collision avoidance
systems on all Freightliner Century Class tractors. The Eaton Vorad system is
designed to provide drivers with visible and audible warnings when other
vehicles are beside them and when vehicles ahead are traveling at slower speeds
than the truck. The system provides drivers with additional response time to
prevent accidents.
The Company requires prospective drivers to meet higher qualification
standards than those required by the DOT. The DOT requires the Company's
drivers to obtain national commercial driver's licenses pursuant to the
regulations promulgated by the DOT. The DOT also requires that the employer
implement a drug-testing program in accordance with DOT regulations. The
Company's program includes pre-employment, random, reasonable cause, post-
accident and post-injury drug testing.
Interstate motor carrier operations are subject to safety requirements
prescribed by the DOT. Such matters as equipment weight and dimensions are also
subject to federal and state regulations. DOT evaluates carriers and provides
safety fitness ratings based on conformance with requirements and accident
frequency. U.S. Xpress and
9
CSI/Crown each have satisfactory safety fitness ratings. Victory Express,
which was acquired by the Company in early 1998, also has a satisfactory safety
fitness rating.
The Company secures appropriate insurance coverage at cost-effective rates.
The primary claims arising in the Company's business consist of cargo loss and
damage and auto liability (personal injury and property damage). The Company
currently purchases primary and excess coverage for these types of claims in
levels which management believes are sufficient to adequately protect the
Company from significant claims. The Company also maintains primary and excess
coverage for employee medical expenses and hospitalization, damage to physical
properties and equipment damage resulting from collisions or other losses.
PERSONNEL
The Company considers relations with its employees, all of whom are non-union,
to be good. At December 31, 1997, the Company and its subsidiaries employed
5,315 persons. A petition filed July 23, 1997 by the International Brotherhood
of Teamsters, Local 528, pursuant to Section 9 of the Labor Management Relations
Act and seeking collective bargaining rights with respect to a group of
approximately 140 employees at the CSI/Crown facility in Tunnel Hill, Georgia
has been withdrawn by the Teamsters without election. All unfair labor practice
charges filed by the union in connection with the petition for recognition have
been settled.
On January 1, 1997, the Company entered into an arrangement with a third
party in which the Company outsources payroll and benefits administration,
unemployment insurance and workers' compensation. Under this arrangement, the
Company pays the third party a fixed amount per employee. The Company believes
that this arrangement enables it to achieve cost savings on payroll
administration, personnel benefits and insurance premiums.
DRIVERS
At December 31, 1997, the Company employed 3,970 drivers. Employment turnover
of over-the-road drivers is a significant industry-wide problem. Recruiting,
training and retention of qualified drivers is essential to support the
Company's continued growth. Management believes that one of the key elements to
retaining professional drivers is providing competitive compensation. Most
companies in the truckload industry pay drivers based on the miles that they
drive and provide various additional bonuses and incentives. Management
believes that drivers' primary interest in compensation is their take-home pay
rather than their base mileage pay. While other carriers may offer marginally
higher mileage pay, management believes that the Company's drivers' compensation
is comparable to those of other carriers because the Company's high equipment
utilization maximizes driver productivity, miles driven and pay.
To maintain high equipment utilization, particularly during periods of
rapid additions of equipment to the fleet and periods of soft freight demand,
the Company has implemented a number of ongoing initiatives to retain existing
drivers and recruit new ones, such as handling driver-friendly freight, adopting
an attractive compensation and benefits package, providing equipment with
desirable driver amenities and providing a Company-wide culture of support for
drivers' needs.
DRIVER RECRUITING
Management believes that meeting drivers' reasonable expectations is critical to
driver satisfaction and retention. Driver recruiters are trained to provide
candidates with a realistic view of work requirements and the lifestyles
required of a long-haul, over-the-road driver. The Company's recruiting efforts
include targeted advertising, recruitment by the Company drivers and other
methods. Detailed statistics are continually maintained and evaluated to
determine the effectiveness of recruiting efforts. The Company compensates its
drivers for successful recruiting efforts and periodically holds special
incentive contests to encourage drivers to assist with recruiting.
The Company also maintains a "quick response" system that investigates
prospective drivers' credentials and driving histories and in most instances
approves drivers for hiring within one business day of application. Management
believes that this system is critical to hiring quality drivers who are making a
job change and may have applied to several prospective employers at the same
time. New driver candidates are carefully screened on the basis of prior
driving and safety records. In accordance with DOT requirements, the Company
operates a drug-free workplace. Accordingly, all drivers are required to submit
to pre-employment, random, reasonable cause, post-accident and post-injury drug
testing.
10
DRIVER TRAINING
The Company works closely with a community college in Oklahoma to recruit and
train prospective drivers. All new drivers, regardless of experience, are
trained under strict guidelines. A two-day orientation program provides drivers
with information about the Company, its equipment and its expectations. The
orientation program also stresses safety instruction and proper operation of the
tractors and trailers used by the Company. New drivers with less over-the-road
experience are placed in the Company's driver training program and teamed with
driver trainers to gain additional over-the-road experience. Driver trainers
are carefully selected based on driving and safety records and receive
additional instruction prior to being assigned to the driver training program.
The Company has found that drivers completing this driver training program tend
to have better safety and retention records.
Through the acquisition of Victory Express in January 1998, the Company
acquired a driver training school operated by Victory Express at its facility in
Medway, Ohio. At the time of the acquisition, approximately 120 students were
enrolled. Management believes that continued effective operation of this driver
training school will provide the Company with an additional source of new
drivers.
DRIVER COMPENSATION AND BENEFITS
The Company's compensation and benefits package has been structured to attract
and retain quality drivers. Company drivers are compensated primarily on the
basis of miles driven, with base pay per mile increasing with a driver's length
of employment. Because the Company has an average length of haul that is longer
than most truckload carriers, drivers accumulate more miles and thus earn above
average pay. Drivers also can earn additional mileage pay through safety and
mileage incentive bonuses. Based on recent surveys performed by the Company
with respect to compensation paid by competitors, management believes the
Company's driver compensation ranks among the highest in the truckload industry.
Employee benefits include paid holidays and vacations, health insurance, an
Employee Stock Purchase Plan, and a 401(k) retirement plan in which the Company
matches 50% of employee contributions, up to six percent of compensation.
DRIVER AMENITIES
The Company's late-model, conventional tractors are designed for driver comfort
and safety. Standard equipment includes double sleeper bunks, extra large cabs,
air-ride suspensions and additional storage for personal items. The Company
also has developed specific satellite communications applications that enable
drivers to remain in touch with their families, receive information about pay
and expense advances, directions to customer locations, weather updates and load
assignments. The Company also provides pre-paid telephone calling cards that
contain 30 minutes of free calling time per month to drivers. Drivers have the
ability to add time to the cards by charging a personal credit card or through
payroll deduction. In 1996 the Company began testing a system in which drivers
could send and receive electronic mail via the Internet using their satellite
communications system. The costs of e-mail messaging are paid by drivers
through their telephone calling cards. In 1996, the Company began purchasing
Freightliner Century Class tractors, which set a new industry standard for
efficiency and driver amenities.
11
ITEM 2. PROPERTIES
All of the Company's offices and terminals are leased. The Company's
headquarters are located in two leased buildings in Chattanooga, Tennessee.
U.S. Xpress is also based in Chattanooga. At year-end 1997, U.S. Xpress
operated terminal facilities in these locations: Birmingham, Alabama; Fontana
and Sacramento, California; Tunnel Hill, Georgia; Boise, Idaho; Lincoln,
Nebraska; Hillside, New Jersey; Vandalia, Ohio; Oklahoma City, Oklahoma; N.
Sioux City, South Dakota; Houston and Tyler, Texas; and Green Bay, Wisconsin.
Seven of these terminals include maintenance facilities. Several terminals
include driver lounges and customer service functions for local pickups and
deliveries. Effective January 29, 1998, the Company acquired Victory Express,
Inc., which operates a terminal, maintenance facility, and driver training
school in Medway, Ohio. In conjunction with the acquisition, the Vandalia, Ohio
facility was closed in February 1998 and its operations were merged into the
Medway facility.
CSI/Crown is based in Tunnel Hill, Georgia, approximately 25 miles from
Chattanooga location. The Tunnel Hill facility includes a 101-door loading dock
facility in which floorcovering shipments from multiple manufacturers are
consolidated into truckloads for delivery to company-owned and agent-operated
distribution service centers shipments. At year-end 1997, CSI/Crown operated 25
distribution service centers, all of which were leased properties.
In late 1997, site preparation construction began for a new headquarters
facility in Chattanooga, Tennessee. The Company expects construction of the
facility to be completed in late 1998 or early 1999.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to various legal proceedings arising in the normal course
of its business. Management does not believe that the outcome of any of these
proceedings will have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended December 31, 1997, no matters were submitted to a vote
of security holders.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK AND STOCKHOLDER DATA The Company's Class A Common Stock is traded on the NASDAQ National Market System under the symbol
XPRSA. At March 13, 1998, there were 149 registered stockholders and an estimated 1,650 beneficial owners. At March 13, 1998 there
were 12,006,440 shares of Class A Common Stock outstanding and 3,040,262 shares of Class B Common Stock outstanding. Listed below is
the trading activity for each quarter in the last two fiscal years:
Average
Quarter Ending High Low Daily Volume
- --------------------------------------------------------------------------------
June 30, 1996 8.50 6.625 8,998
September 30, 1996 9.75 5.75 19,869
December 31, 1996 16.125 8.50 36,735
March 31, 1997 17.75 12.25 22,081
June 30, 1997 20.50 17.125 34,115
September 30, 1997 20.75 19.00 77,765
December 31, 1997 24.625 21.00 63,526
DIVIDENDS
The Company does not pay cash dividends and intends to continue to retain
earnings to finance growth of the Company.
ANNUAL STOCKHOLDERS' MEETING
The annual meeting of stockholders will be held at 2:00 p.m. EDT on May 12, 1998
at the Tennessee Aquarium in Chattanooga, Tennessee.
STOCKHOLDER COMMUNICATIONS
Company news may be obtained through the Company's Internet web site at
www.usxpress.com and through most news and financial services. A complete
investor package, which includes the Company's annual report filed on Form 10-K,
most recent 10-Q and general information about the Company, may also be
requested through the web site, or by contacting the Company's investor
relations office.
STOCKHOLDER RECORDS
Registered stockholders with questions concerning statements, changes of
address, stock transfers or replacement of stock certificates should contact the
Company's stock transfer agent and registrar:
BankBoston,NA
c/o Boston Equiserve LP
Shareholder Services
Mail Stop 45-02-64
P.O. Box 8040
Boston, MA 02266-8040
(781)575-3001
13
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share and operating data)
NINE MONTHS ENDED YEAR ENDED
December 31, March 31,
-------------------- --------------------------------------------
1997 /(4)/ 1996 1997 1996 1995 1994
- -------------------------------------- -------- -------- -------- -------- -------- --------
Income Statement Data/(1)/
Operating revenue:
U.S. Xpress $290,800 $228,484 $307,928 $261,533 $236,552 $197,351
CSI/Crown 57,645 51,158 65,845 47,817 23,915 24,001
Intercompany (6,173) (8,386) (10,954) (9,653) (6,136) (5,948)
-------- -------- -------- -------- -------- --------
Consolidated $342,272 $271,256 $362,819 $299,697 $254,331 $215,404
======== ======== ======== ======== ======== ========
Income from operations $ 26,126 $ 14,736 $ 19,716 $ 5,251 $ 18,159 $ 14,095
Income before taxes $ 21,983 $ 10,627 $ 14,236 $ 75 $ 13,557 $ 9,714
Net income $ 13,191 $ 5,708 $ 7,878 $ 94 $ 8,263 $ 6,042
Earnings per share - basic $ .98 $ .47 $ .65 $ .01 $ .77 $ .63
Weighted average number
of shares outstanding - basic 13,467 12,081 12,082 12,003 10,705 9,665
Earnings per share - diluted $ .97 $ .47 $ .65 $ .01 $ .76 $ .63
Weighted average number
of shares outstanding - diluted 13,582 12,151 12,168 12,076 10,806 9,665
Truckload Operating Data/(2)/
Total revenue miles (in thousands) 241,541 194,324 261,596 222,496 204,804 180,609
Tractor miles (in thousands) 265,102 209,935 282,985 239,599 216,581 190,098
Tractors at end of period 2,839 2,214 2,246 1,975 1,721 1,504
Average number of tractors 2,615 2,091 2,111 1,848 1,613 1,414
Trailers at end of period 5,875 5,331 5,520 4,396 3,643 2,394
Total loads 239,730 187,986 254,214 185,565 142,742 123,261
Average revenue per mile $ 1.16 $ 1.16 $ 1.15 $ 1.14 $ 1.14 $ 1.09
Average revenue per tractor per week $ 2,734 $ 2,794 $ 2,761 $ 2,646 $ 2,807 $ 2,796
BALANCE SHEET DATA
Working capital $ 44,813 $ 23,097 $ 33,829 $ 19,606 $ 10,786 $ 2,636
Total assets 233,777 183,479 178,084 177,821 146,070 103,385
Long-term debt,
net of current maturities 52,120 65,509 59,318 61,789 46,157 49,871
Stockholders' equity/(3)/ 128,493 60,990 63,162 55,086 54,082 13,436
- --------------
/(1)/ Data for U.S. Xpress includes data for all truckload operations. Data for
CSI/Crown includes data for CSI/Reeves from its date of acquisition in August
1995.
/(2)/ Average revenue per mile is net of fuel surcharges. Tractor and trailer data includes
owned and leased equipment.
/(3)/ Reflects the sale by the Company of 2,500,000 shares of Class A Common
Stock in fiscal 1995 and 2,885,000 shares of Class A Common Stock in the 1997
transition period.
/(4)/ Effective December 31, 1997, the Company changed its year-end to December
31 from March 31. As a result, the transition period ended December 31, 1997
is a nine-month period.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(dollars in thousands, except per share data)
Effective December 31, 1997 the Company changed its fiscal year for financial
reporting purposes from a March 31 year-end to a December 31 year-end.
Throughout this report, 1997 transition period relates to the nine-month
period ended December 31, 1997, while fiscal 1997 and fiscal 1996 refer to
the fiscal years ended March 31, 1997 and March 31, 1996, respectively.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the components of the
consolidated statements of operations expressed as a percentage of operating
revenue:
% of Revenues
Nine Months Ended Twelve Months Ended
December 31, March 31,
1997 1996 1997 1996
------ ------ ------ ------
Operating Revenue 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
OPERATING EXPENSES:
Salaries, Wages and Benefits 40.5 40.7 41.0 43.0
Fuel and Fuel Taxes 15.3 16.6 16.9 16.3
Vehicle Rents 6.4 5.7 6.0 5.8
Depreciation & Amortization 2.6 3.8 3.6 5.2
Purchased Transportation 8.5 6.5 6.3 6.6
Operating Expenses & Supplies 6.6 6.3 6.3 7.1
Insurance Premiums & Claims 3.3 4.5 4.2 4.3
Operating Taxes & Licenses 1.5 1.7 1.6 1.7
Communications & Utilities 1.7 1.8 1.7 1.8
General & Other Operating 6.0 7.0 7.0 6.4
----- ----- ----- -----
Total Operating Expenses 92.4 94.6 94.6 98.2
----- ----- ----- -----
Income from Operations 7.6 5.4 5.4 1.8
Other Income (Expense)
Interest Expense (1.2) (1.5) (1.5) (1.8)
Other Income (Expense) -- -- -- --
----- ----- ----- -----
(1.2) (1.5) (1.5) (1.8)
Income Before Income Tax Provision 6.4 3.9 3.9 0.0
Income Tax Provision 2.6 1.8 1.7 --
Net Income 3.8% 2.1% 2.2% --
===== ===== ===== =====
15
COMPARISON OF THE NINE-MONTH PERIOD ENDED DECEMBER 31, 1997 TO THE
NINE-MONTH PERIOD ENDED DECEMBER 31, 1996 (UNAUDITED)
OPERATING REVENUE during the 1997 transition period increased $71,000 or 26.2%
to $342,300 compared to $271,300 during the same period in 1996. This increase
resulted primarily from a 24.3% increase in revenue miles, which was partially
due to the April 1997 acquisition of JTI, Inc. Additionally, the non-truckload
revenue from CSI/Crown and U.S. Xpress' logistics operations increased $11,100
or 14.8%. The acquisition of JTI and Rosedale together contributed $32,700 of
the $71,000 increase.
OPERATING EXPENSES represented 92.4% of operating revenue for the 1997
transition period, compared to 94.6% during the same period in 1996.
SALARIES, WAGES AND EMPLOYEE BENEFITS as a percentage of operating revenue was
40.5% for the 1997 transition period, compared to 40.7% during the same period
in 1996. This decrease was due primarily to the growth of the owner operator
fleet and to revenues growing faster than non-driver wages. These improvements
were offset in part by an increase in driver pay of approximately two cents per
mile or approximately 6% implemented in July 1997.
FUEL AND FUEL TAXES as a percentage of operating revenue was 15.3% for the 1997
transition period, compared to 16.6% during the same period in 1996. This
decrease was primarily attributable to a 3.73% decrease in the average price per
gallon, as well as a 1.48% increase in average miles per gallon. The Company
uses purchase commitments to mitigate the effects of changes in fuel prices.
VEHICLE RENTS as a percentage of operating revenue was 6.4% for the 1997
transition period, compared to 5.7% for the same period in 1996. Depreciation
and amortization, net of gain on disposition on equipment, as a percentage of
operating revenue was 2.6% for the 1997 transition period versus 3.8% in 1996.
Overall, as a percentage of operating revenue, vehicle rents and depreciation
were 9.0% for the 1997 transition period, compared to 9.5% in 1996. This
decrease was due to the growth of the owner operator fleet and an increase of
$0.8 million of gains on sale of revenue equipment. Owner-operators do not
require company expenditures for revenue equipment. The Company recorded gains
on the sale of revenue equipment of $1,700 for the 1997 transition period,
compared to $900 for the same period in 1996. The gains on these sales are
recorded as a reduction of depreciation expense.
INSURANCE PREMIUMS AND CLAIMS as a percentage of operating revenue was 3.3% for
the 1997 transition period, compared to 4.5% for the same period in 1996. This
decrease was due primarily to overall improvements in insurance and claims cost
obtained through various insurance policies entered into in early 1997.
Additionally, the increases in non-truckload revenue and the use of owner-
operators do not require any additional company expenditures for insurance.
PURCHASED TRANSPORTATION as a percentage of operating revenue was 8.5% for the
1997 transition period, compared to 6.5% for the same period in 1996. This
increase was due in part to the $11,100 increase in non-truckload revenue from
CSI/Crown and U.S. Xpress' logistics operations, which is serviced by outside
agents. This increase was also the result of the growth of the owner operator
fleet to 130 at December 31, 1997 from 33 at December 31, 1996.
GENERAL AND OTHER OPERATING EXPENSES as a percentage of operating revenue was
6.0% for the 1997 transition period, compared to 7.0% for the same period in
1996. This decrease is due to a 10.6% drop in the sale of installation supplies
and a corresponding drop in the cost of goods sold related to those sales.
INCOME FROM OPERATIONS for the 1997 transition period increased $11,400, or
77.6%, to $26,100 from $14,700 during the same period in 1996. As a percentage
of operating revenue, income from operations was 7.6% for the 1997 transition
period, compared to 5.4% during the same period in 1996.
16
COMPARISON OF THE TWELVE MONTHS ENDED MARCH 31, 1997 TO THE
TWELVE MONTHS ENDED MARCH 31, 1996
The Company's initiatives to improve equipment utilization and to reduce
operating expenses as a percent of revenue had favorable results for the fiscal
year ended March 31, 1997. In this period, utilization for the combined
truckload operations increased 4.3% to $2.761 in revenue per tractor per week,
compared to $2.646 during the same period in 1996. The operating ratio
(operating expenses as a percentage of revenue) improved 3.6 percentage points,
reflecting a 21.1% increase in revenue versus a 16.5% increase in operating
expenses. The smaller increase in operating expenses, compared to revenues, was
due to reductions in several fixed and variable expense items.
OPERATING REVENUE during the fiscal year ended March 31, 1997 increased
$63,100 or 21.1% to $362,800 compared to $299,700 during the same period in
1996. This increase resulted partially from the fiscal 1996 acquisitions of
CSI/Reeves and Hall Systems, which together contributed $29,700 of the $63,100
increase. U.S. Xpress linehaul operations contributed $33,400 to the increase.
Increased U.S. Xpress linehaul revenue resulted from increased revenue miles and
a slight increase in the rate per revenue mile.
OPERATING EXPENSES represented 94.6% of operating revenue for the year
ended March 31, 1997, compared to 98.2% during the same period in 1996.
SALARIES, WAGES AND EMPLOYEE BENEFITS as a percentage of operating revenue
was 41.0% for the year ended March 31, 1997, compared to 43.0% during the same
period in 1996. This decrease is a result of salaries and wages for both Hall
Systems and CSI/Crown representing a lower percentage of operating revenue due
to the utilization of owner-operators at Hall Systems and the utilization of
outside linehaul carriers at CSI/Crown. All owner-operator expenses and
purchased linehaul services are reflected as purchased transportation.
FUEL AND FUEL TAXES as a percentage of operating revenue was 16.9% for the
year ended March 31, 1997, compared to 16.3% during the same period in 1996.
This increase was primarily attributable to an 11.0% increase in the average
price per gallon, offset by a 2.2% increase in average miles per gallon.
VEHICLE RENTS as a percentage of operating revenue was 6.0% for the year
ended March 31, 1997, compared to 5.8% for the same period in 1996.
Depreciation and amortization, net of gain on disposition of equipment, as a
percentage of operating revenue was 3.6% for the year ended March 31, 1997,
compared to 5.2% during the same period in 1996. Overall, as a percentage of
operating revenue, vehicle rents and depreciation were 9.6% for the year ended
March 31, 1997, compared to 11.0% during the same period in 1996. This decrease
was due in part to increased non-transportation revenue from CSI/Crown and an
increase in owner-operator revenue from Hall Systems, both of which do not
require expenditures for revenue equipment. Additionally, utilization for U.S.
Xpress linehaul operations increased to $2,761 in revenue per tractor per week
for the year ended March 31, 1997, a 4.3% increase from the previous fiscal
year, which reduced the number of tractors required.
PURCHASED TRANSPORTATION as a percentage of operating revenue was 6.3% for
the fiscal year 1997, compared to 6.6% in the same period in 1996. This
decrease is due to increased non-transportation revenue at CSI/Crown which does
not require expenditures for purchased transportation.
OPERATING EXPENSES AND SUPPLIES as a percentage of operating revenue was
6.3% for the year ended March 31, 1997, compared to 7.1% during the same period
in 1996. This decrease results from two factors: 1) an increase in
non-transportation revenue from CSI/Crown and an increase in owner-operator
revenue from Hall Systems, which do not require incremental company expenditures
for operating expenses and supplies; and 2) reductions in maintenance expenses.
GENERAL AND OTHER OPERATING EXPENSES during the year ended March 31, 1997
was $25,400 compared to $19,100 during the same period in 1996. This increase is
due to an increase in installation supplies sold to $11,000 in 1997,
17
from $6,600 in 1996. This expense item reflects the cost of carpet installation
supplies which are sold through CSI/Crown retail outlets.
INCOME FROM OPERATIONS for the year ended March 31, 1997 increased $14,400
or 271.7% to $19,700 from $5,300 during the same period in 1996. As a
percentage of operating revenue, income from operations was 5.4% during the year
ended March 31, 1997, compared to 1.8% during the same period in 1996.
INCOME TAX PROVISION for the year ended March 31, 1997 was $6,400 compared to a
$19 benefit during the same period in 1996. This reflects an effective federal
and state income tax rate of 44.7% for fiscal 1997, compared to the combined
statutory federal and state rate of approximately 39.0%. This higher rate is
primarily the result of non-deductible per diems paid to drivers during part of
fiscal 1997. Subsequent to December 31, 1996, per diems paid to U.S. Xpress
drivers were eliminated.
SPECIAL CONSIDERATIONS
The trucking industry is affected by economic risks and uncertainties, some of
which are beyond its control. These include economic recessions and downturns in
customers' business cycles, increases in fuel prices, the availability of
qualified drivers and fluctuations in interest rates.
The trucking industry is highly competitive and includes numerous regional,
inter-regional and national truckload carriers. Some of these carriers have
greater financial resources, equipment and freight capacity than the Company.
Management believes its strategies of controlled growth and focused marketing
will continue to provide freight at sufficient volumes and prices to remain
profitable. Changes in economic conditions could reduce both the amount of
freight available and freight rates, which could have a material adverse effect
on the Company's results.
Fuel is one of the Company's largest expenditures. In periods of high fuel
prices, the Company offsets the effect of price increases through fuel
surcharges to customers or through rate increases in lieu of fuel surcharges.
The Company also periodically hedges against future fuel price increases by
purchasing defined quantities of fuel for future delivery at contracted prices.
Future increases or decreases in fuel prices are uncertain. To the extent the
Company is unable to offset fuel price increases through fuel surcharges, rate
increases or hedges, increased fuel prices could have a material adverse effect
on the Company's results.
Competition for available qualified drivers in the truckload industry is
intense, and will likely remain so for the foreseeable future. The Company and
many of its competitors experience high rates of turnover and occasionally have
difficulty in attracting and retaining qualified drivers in sufficient numbers
to operate all available equipment. Management believes the Company's current
pay structure, benefits, policies and procedures related to drivers are
effective in attracting and retaining drivers. However, there can be no
assurance that it will not be affected by a shortage of qualified drivers in the
future. The inability to attract and retain qualified drivers would have a
material adverse effect on the Company's results.
The trucking industry is extremely capital intensive. The Company depends
on operating leases, lines of credit, secured equipment financing and cash flows
from operations to finance the expansion and maintenance of its modern and cost
efficient revenue equipment and facilities. At present, the Company is more
highly leveraged than some of its competitiors. If the Company were unable in
the future to obtain financing at acceptable levels, it could be forced to limit
the growth or replacement of its equipment and facilities. If interest rates
increased significantly, it could have a material adverse effect on the
Company's results.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity during the nine month transition
period ended December 31, 1997 were funds provided by operations, borrowings
under long-term debt facilities, lines of credit, proceeds from the sale of
equipment, the use of operating leases for revenue equipment, and proceeds from
the sale of common stock. At December 31, 1997 the Company had in place a
$50,000 credit facility with a group of banks, of which $17,500 was available
for borrowing. In 1998, the Company's primary sources of liquidity are expected
to be funds provided by operations, borrowings under lines of credit, and
operating lease financing for the acquisition of revenue equipment.
Cash generated from operations increased to $17,300 in the 1997 transition
period from $7,900 for the twelve months ended March 31, 1997. Net cash used in
investment activities was $47,300 in the 1997 transition period and $3,200 for
the twelve months ended March 31, 1997. Of the net cash used in investment
activities in the 1997 transition period, $58,700 was used to acquire
additional property and equipment, compared to $24,900 for the twelve
18
months ended March 31, 1997. The increase in purchases of property and equipment
is due primarily to the purchase of revenue equipment previously financed with
operating leases.
Net cash provided by financing activities was $27,600 in the 1997
transition period compared to $4,100 used in the twelve months ended March 31,
1997. The increase was due primarily to proceeds received from the sale of
common stock through the public offering in August 1997. As a result, the net
repayments on the lines of credit and long-term debt during the 1997 transition
period were $24,300 compared to $4,200 in the twelve months ended March 31,
1997. Net payments under lines of credit were $3,000 in the 1997 transition
period, compared to net borrowings of $1,000 for the twelve months ended March
31, 1997.
In January 1998, the Company obtained a new revolving line of credit with
capacity up to $200,000. A portion of the availability under this new line was
immediately used to payoff certain existing long-term indebtedness bearing
higher interest rates.
Management believes that funds provided by operations, borrowings under
installment notes payable, operating lease financing and available borrowings
under the Company's existing line of credit will be sufficient to fund its cash
needs and anticipated capital expenditures through at least the next twelve
months.
INFLATION
Inflation has not had a material effect on the Company's results of operations
or financial condition during the past three years. However, inflation higher
than experienced during the past three years could have an adverse effect on the
Company's future results.
SEASONALITY
In the trucking industry, revenue generally shows a seasonal pattern as
customers reduce shipments during and after the winter holiday season and its
inherent weather variations. The Company's operating expenses also have
historically been higher in the winter months, due primarily to decreased fuel
efficiency and increased maintenance costs for revenue equipment in colder
weather.
ACQUISITION OF VICTORY EXPRESS, INC.
Effective January 29, 1998, the Company acquired Victory Express, Inc., a non-
union truckload carrier based in Medway, Ohio, for $51 million in cash and
assumption of approximately $2 million in debt. Prior to the acquisition,
Victory had annual revenues of approximately $65 million. Victory Express
serves customers located primarily in the Midwest and on the Eastern seaboard.
Other areas of the country served by Victory Express include Georgia, Texas and
California. The company employs approximately 790 persons, including
approximately 640 drivers and driver trainees.
Through this acquisition, management expects the Company to significantly
expand its regional capabilities in the Midwest and extend its regional service
capabilities to the East Coast. Victory Express' customer base is largely
centered in automotive, paper, retail and air freight markets. In addition,
U.S. Xpress continues to be presented with opportunities for additional business
from its customers in the Midwest
YEAR 2000 COMPLIANCE
Some computer systems that use two digits to indicate a year will not be able to
process data properly for the year 2000. The Company has assessed the ability of
its computer software and operating systems to function in the year 2000 and
beyond. Systems in use by the Company in operations, accounting and purchasing
are year 2000 compliant.
Testing of all U.S. Xpress systems for year 2000 compliance is scheduled
for July 1998. Systems in use at CSI/Crown are presently 50% compliant with year
2000 requirements. Programming to make all CSI/Crown systems year 2000 compliant
is expected to be completed by December 1998. Testing of all CSI/Crown systems
is scheduled for March 1999.
A load optimization system purchased from Sabre Group is year 2000
compliant. A new version of the Q-Tracks satellite communication system that is
year 2000 compliant has been purchased from Qualcomm, Inc. This system is being
installed and is expected to be operational in June 1998. The Company does not
currently have any information concerning the year 2000 compliance status of its
other suppliers and customers. In the event that any of the Company's
significant suppliers or customers do not successfully and timely achieve year
2000 compliance, the Company's business or operations could be adversely
affected. The Company does not expect the costs of achieving year 2000
compliance to be material.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of U.S. Xpress Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of U.S. Xpress
Enterprises, Inc. (a Nevada corporation) and subsidiaries as of December 31,
1997 and March 31, 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for the nine months ended December 31, 1997
and the years ended March 31, 1997 and 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of U.S. Xpress Enterprises, Inc.
and subsidiaries as of December 31, 1997 and March 31, 1997, and the results of
their operations and their cash flows for the nine months ended December 31,
1997 and the years ended March 31, 1997 and 1996 in conformity with generally
accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Chattanooga, Tennessee
February 5, 1998
20
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
NINE MONTHS ENDED YEAR ENDED
DECEMBER 31 MARCH 31
---------------- ------------------------
1997 1997 1996
---------------- -------- --------
OPERATING REVENUE $342,272 $362,819 $299,697
-------- -------- --------
OPERATING EXPENSES:
Salaries, wages and benefits 138,582 148,850 129,311
Fuel and fuel taxes 52,438 61,268 48,782
Vehicle rents 21,912 21,603 17,263
Depreciation and amortization, net of gain
on disposition of equipment 8,806 13,203 15,445
Purchased transportation 29,205 22,682 19,929
Operating expenses and supplies 22,459 22,503 21,321
Insurance premiums and claims 11,425 15,265 12,874
Operating taxes and licenses 5,228 5,984 5,227
Communications and utilities 5,683 6,301 5,343
General and other operating expenses 20,408 25,444 19,075
Equity in earnings of unconsolidated affiliate - - (124)
-------- -------- --------
Total operating expenses 316,146 343,103 294,446
-------- -------- --------
INCOME FROM OPERATIONS 26,126 19,716 5,251
-------- -------- --------
Other income (expense):
Interest expense (4,168) (5,542) (5,251)
Other income 25 62 75
-------- -------- --------
(4,143) (5,480) (5,176)
-------- -------- --------
Income before income taxes 21,983 14,236 75
Income tax (provision) benefit (8,792) (6,358) 19
-------- -------- --------
NET INCOME $ 13,191 $ 7,878 $ 94
======== ======== ========
EARNINGS PER SHARE - BASIC $ .98 $ .65 $ .01
======== ======== ========
Weighted average shares - basic 13,467 12,082 12,003
======== ======== ========
EARNINGS PER SHARE - DILUTED $ .97 $ .65 $ .01
======== ======== ========
Weighted average shares - diluted 13,582 12,168 12,076
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
21
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
DECEMBER 31, 1997 MARCH 31, 1997
------------------ ---------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,734 $ 5,092
Customer receivables, net of allowance of $2,900 and $2,733 58,496 50,056
Other receivables 9,085 3,969
Prepaid insurance and licenses 1,488 3,853
Operating and installation supplies 4,213 4,904
Deferred income taxes 3,092 4,443
Other current assets 508 719
-------- --------
Total current assets 79,616 73,036
-------- --------
PROPERTY AND EQUIPMENT, AT COST
Land and buildings 6,845 2,717
Revenue and service equipment 151,081 112,076
Furniture and equipment 13,062 11,265
Leasehold improvements 9,411 7,619
-------- --------
180,399 133,677
Less accumulated depreciation and amortization (44,344) (39,803)
-------- --------
Net property and equipment 136,055 93,874
-------- --------
OTHER ASSETS
Goodwill, net 12,593 7,700
Other 5,513 3,474
-------- --------
Total other assets 18,106 11,174
-------- --------
TOTAL ASSETS $233,777 $178,084
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 8,634 $ 8,708
Accrued wages and benefits 4,325 5,086
Claims and insurance accruals 5,750 9,601
Other accrued liabilities 5,200 2,804
Current maturities of long-term debt 10,894 13,008
-------- --------
Total current liabilities 34,803 39,207
-------- --------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 52,120 59,318
-------- --------
DEFERRED INCOME TAXES 17,352 14,543
-------- --------
OTHER LONG-TERM LIABILITIES 1,009 1,854
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 2, 6 and 8)
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value, 2,000,000 shares authorized, no shares issued - -
Common Stock Class A, $.01 par value, 30,000,000 shares authorized,
11,979,584 and 9,046,044 shares issued and outstanding at
December 31, 1997 and March 31, 1997, respectively 120 90
Common Stock Class B, $.01 par value, 7,500,000 shares authorized, 3,040,262
shares issued and outstanding at December 31, 1997 and March 31, 1997 30 30
Additional paid-in capital 85,942 33,832
Retained earnings 42,634 29,443
Notes receivable from stockholders (233) (233)
-------- --------
Total stockholders' equity 128,493 63,162
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $233,777 $178,084
======== ========
The accompanying notes are an integral part of these consolidated balance sheets.
22
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
NINE MONTHS ENDED YEAR ENDED
DECEMBER 31 MARCH 31,
------------------ ------------------------
1997 1997 1996
------------------ --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,191 $ 7,878 $ 94
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income tax provision 4,160 3,103 2,737
Depreciation and amortization 10,522 14,492 16,765
Gain on sales of equipment (1,716) (1,289) (1,320)
Equity in earnings of unconsolidated affiliate - - (124)
Changes in operating assets and liabilities, net of acquisitions:
Receivables (5,590) (7,309) (9,674)
Prepaid insurance and licenses 2,828 984 (497)
Operating and installation supplies 729 (575) (688)
Other assets (1,138) (1,141) (559)
Accounts payable and other accrued liabilities (4,867) (7,722) 3,606
Accrued wages and benefits (804) (457) (1,317)
Other 22 18 16
-------- -------- --------
Net cash provided by operating activities 17,337 7,982 9,039
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of property and equipment (58,653) (24,868) (28,247)
Proceeds from sales of property and equipment 16,359 24,618 17,383
Repayment of notes receivable from stockholders - 94 -
Acquisition of business, net of cash acquired (4,990) (3,048) (6,227)
Acquisition of remaining 50% of unconsolidated affiliate,
net of cash acquired - - (239)
-------- -------- --------
Net cash used in investing activities (47,284) (3,204) (17,330)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under lines of credit (3,000) 1,000 30,325
Payment of long-term debt (44,159) (26,450) (36,355)
Borrowings under long-term debt 22,819 21,300 11,468
Proceeds from exercise of stock options 213 128 -
Proceeds from issuance of common stock 51,716 - -
Repurchase of restricted common stock - (42) (42)
Increase in other liabilities - - 906
-------- -------- --------
Net cash provided by (used in) financing activities 27,589 (4,064) 6,302
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,358) 714 (1,989)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,092 4,378 6,367
-------- -------- --------
Cash and Cash Equivalents, end of period $ 2,734 5,092 $ 4,378
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 4,842 5,643 $ 5,198
======== ======== ========
Cash paid (refunded) during the period for income taxes, net $ 2,100 2,766 $ (470)
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF SIGNIFICANT NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of long-term debt in connection with
purchase of business $ - $ 792 $ -
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
23
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
NOTES
ADDITIONAL RECEIVABLE
COMMON STOCK PAID-IN RETAINED FROM
CLASS A CLASS B CAPITAL EARNINGS STOCKHOLDERS TOTAL
-------- ------- ----------- -------- ------------- ---------
BALANCE, MARCH 31, 1995 $ 89 $30 $32,909 $21,471 $(417) $ 54,082
Net income - - - 94 - 94
Repurchase of 18,390 shares of restricted stock (1) - (87) - 45 (43)
Issuance of 1,744 shares of Class A Common
Stock for non-employee director compensation - - 16 - - 16
Issuance of 110,182 shares of Class A Common
Stock for purchase of Hall Systems 1 - 936 - - 937
---- ------- ------- ------- ----- --------
BALANCE, MARCH 31, 1996 89 30 33,774 21,565 (372) 55,086
Net income - - - 7,878 - 7,878
Repurchase of 18,390 shares of restricted stock - - (87) - 45 (42)
Repayment of notes receivable from stockholders - - - - 94 94
Issuance of 2,542 shares of Class A Common
Stock for non-employee director compensation - - 18 - - 18
Proceeds from exercise of 27,008 stock options 1 - 127 - - 128
---- ------- ------- -------- ----- --------
BALANCE, MARCH 31, 1997 90 30 33,832 29,443 (233) 63,162
Net income - - - 13,191 - 13,191
Issuance of 1,210 shares of Class A Common
Stock for non-employee director compensation - - 22 - - 22
Proceeds from exercise of 37,332 stock options - - 213 - - 213
Issuance of 10,000 shares of Class A
Common Stock to officer 1 - 188 - - 189
Issuance of 2,885,000 shares of Class A
Common Stock in secondary offering 29 - 51,687 - - 51,716
---- ------- ------- ------- ----- --------
BALANCE, DECEMBER 31, 1997 $120 $30 $85,942 $42,634 $(233) $128,493
==== ======= ======= ======= ===== ========
The accompanying notes are an integral part of these consolidated statements.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Effective December 31, 1997 the Company changed its fiscal year for financial
reporting purposes from a March 31 year-end to a December 31 year-end. For
purposes of these financial statements and notes to these financial statements,
"1997 transition period" relates to the nine-month period ended December 31,
1997, while "fiscal 1997" and "fiscal 1996" refer to the fiscal years ended
March 31, 1997 and March 31, 1996, respectively.
1. ORGANIZATION AND OPERATIONS
U. S. Xpress Enterprises, Inc. (the "Company") provides transportation services
through two subsidiaries. U.S. Xpress, Inc. ("U.S. Xpress") is a truckload
carrier serving the Continental United States, Canada and Mexico. CSI/Crown,
Inc. ("CSI/Crown") provides transportation and logistics services to the
floorcovering industry.
2. ACQUISITIONS
Effective March 31, 1994, the Company acquired 50% of the outstanding stock of
Hall Systems, Inc. ("Hall Systems") for $625 cash and a $625 note payable.
Effective October 31, 1995, the Company acquired the remaining 50% of the
outstanding stock of Hall Systems for $1,000 cash and 110,182 shares of the
Company's Class A Common Stock in a transaction accounted for by the purchase
method of accounting.
Effective August 31, 1995, the Company acquired 100% of the outstanding stock
of CSI/Reeves, Inc. ("CSI/Reeves") for cash of $6,240 in a transaction accounted
for by the purchase method of accounting. Effective January 1, 1996, CSI/Reeves
was merged into the Company's existing freight consolidator (Crown Transport
Systems, Inc.) to form CSI/Crown, Inc.
In June 1996, the Company acquired certain equipment and the right to fulfill
a contract to provide expedited truckload services in the Western United States
to a major air freight company from Michael Lima Transportation for $3,048 cash
and a $792 note payable. In addition, $1,000 will be paid to the seller on
January 1, 1999 if the Company is able to extend the contract. The pro forma
effect of this transaction on prior period financial statements is immaterial.
Effective April 1, 1997 the Company acquired certain assets from Rosedale
Transport Inc. for $2,300 cash. The acquisition was accounted for as a
purchase.
Effective April 30, 1997, the Company acquired revenue equipment and other
assets from JTI, Inc. ("JTI") for $2,690 cash and the assumption of $17,500 in
debt, in a transaction accounted for by the purchase method of accounting. In
addition to these amounts, the Company will pay the former owners of JTI 25% of
the net income from the JTI division for each of the following 10 years. The
acquired and leased assets include approximately 200 tractors and 400 trailers.
The results of operations of Rosedale Transport and JTI are included in the
accompanying consolidated financial statements from the dates of their
respective acquisitions. On a pro forma (unaudited) basis, operating revenue
for the Company would have been approximately $345,000 and $408,000 for the 1997
transition period and fiscal 1997 had the Rosedale and JTI acquisitions taken
place at the beginning of the respective periods. The impact on net income and
earnings per share is insignificant. This information is for comparative
purposes only and does not purport to be indicative of the results of operations
which would have occured had the transactions been completed at the beginning of
the respective periods or indicative of the results which may occur in the
future.
Subsequent to December 31, 1997, the Company acquired Victory Express, Inc.
for $51,000 in cash and the assumption of approximately $2,000 in debt.
Victory's calendar 1997 revenues were approximately $65,000.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions and accounts have
been eliminated.
25
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid investment instruments with
an original maturity of three months or less.
RECOGNITION OF REVENUE
For financial reporting purposes, the Company generally recognizes revenue and
direct cost when shipments are completed.
CONCENTRATION OF CREDIT RISK
Concentrations of credit risk with respect to customer receivables are limited
due to the large number of entities comprising the Company's customer base and
their dispersion across many different industries. The Company performs ongoing
credit evaluations and generally does not require collateral.
OPERATING AND INSTALLATION SUPPLIES
Operating supplies consist primarily of tires, parts, materials and supplies for
servicing the Company's revenue and service equipment. Installation supplies
consist of various accessories used in the installation of floorcoverings and
are held for sale at various CSI/Crown distribution centers. Operating and
installation supplies are recorded at the lower of cost (on a first-in, first-
out basis) or market. Tires and tubes purchased as part of revenue and service
equipment are capitalized as part of the cost of the equipment. Replacement
tires and tubes are charged to expense when placed in service.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost. Depreciation and amortization of
property and equipment are computed using the straight-line method for financial
reporting purposes and accelerated methods for tax purposes over the estimated
useful lives of the related assets (net of salvage value) as follows:
Buildings 10-30 years
-------------------------------------------------
Revenue and service equipment 3-7 years
-------------------------------------------------
Furniture and equipment 3-7 years
-------------------------------------------------
Leasehold improvements 5-6 years
-------------------------------------------------
The Company recognized $9,895, $13,837 and $16,066 in depreciation expense in
the 1997 transition period, fiscal 1997 and fiscal 1996, respectively. Upon the
retirement of property and equipment, the related asset cost and accumulated
depreciation are removed from the accounts and any gain or loss is reflected in
the Company's statement of operations with the exception of gains on trade-ins,
which are included in the basis of the new asset. Gains on sales of equipment of
$1,716, $1,289 and $1,320 for the 1997 transition period, fiscal 1997 and fiscal
1996, respectively, are included in depreciation expense.
Expenditures for normal maintenance and repairs are expensed. Renewals or
betterments that affect the nature of an asset or increase its useful life are
capitalized.
GOODWILL
The excess of the consideration paid by the Company over the estimated fair
value of net assets acquired has been recorded as goodwill and is being
amortized on the straight-line basis over periods ranging from 20 to 40 years.
The Company continually evaluates whether subsequent events and circumstances
have occurred that indicate that the remaining estimated useful life of goodwill
may warrant revision or that the remaining balance may not be recoverable. When
factors indicate that goodwill should be evaluated for possible impairment, the
Company uses an estimate of the future undiscounted net cash flows of the
related businesses over the remaining life of the goodwill in measuring
26
whether goodwill is recoverable. The Company recognized $323, $272 and $220 of
goodwill amortization expense in the 1997 transition period, fiscal 1997 and
fiscal 1996, respectively. Accumulated amortization was $1,351 at December 31,
1997 and $1,028 at March 31, 1997.
CLAIMS AND INSURANCE ACCRUALS
The primary claims in the Company's business are cargo loss and damage, physical
damage and automobile liability. Prior to January 1, 1997, most of the Company's
insurance provided for large self-insurance levels with excess coverage
sufficient to protect the Company from catastrophic claims. Beginning January
1997, the Company began purchasing policies with low deductibles which
essentially fully insure cargo and auto liability, while physical damage has an
annual aggregate deductible. For claims with self-insurance levels, estimated
costs are accrued based upon information provided by insurance adjustors for
reported claims and adjusted for expected loss development factors and the
estimated liability for claims incurred but not reported.
OTHER LONG-TERM LIABILITIES
Periodically, the Company receives volume rebates from vendors related to
certain operating leases for new revenue and service equipment. Additionally,
certain equipment leases include spare tires, which increase tire inventories.
The Company defers recognition of these rebates and amortizes such amounts as a
reduction of vehicle rent expense over the respective lease terms. At December
31, 1997 and March 31, 1997, other long-term liabilities include deferred rents
of $1,009 and $1,295, respectively.
CONTRACT WAGES
Effective January 1, 1997, the Company entered into an agreement with a
Professional Employer Organization (PE") in which the PEO is a co-employer with
the Company for all of the Company's personnel. The PEO is responsible for
processing and administration of the Company's payroll, including tax reporting,
and provides group health benefits and worker's compensation coverage.
FUEL PURCHASE COMMITMENTS
The Company has only limited involvement with derivative financial instruments
and does not use them for trading purposes. They are periodically used to
mitigate the effects of changes in the price of fuel. At December 31, 1997, the
Company had commitments to purchase amounts ranging from 1,500,000 gallons in
January 1998 to 500,000 gallons in December 1998. Management estimates that the
aggregate commitment at December 31, 1997 will represent less than 15% of the
total fuel to be purchased by the Company in 1998. The fair value of the fuel
contracts is not significant.
EARNINGS PER SHARE
Effective for the period ended December 31, 1997, the Company adopted Statement
of Financial Accounting Standards No. 128 OEarnings Per ShareO ("SFAS No. 128"),
which changes the criteria for reporting earnings per share ("EPS") by replacing
primary EPS with basic EPS and fully diluted EPS with diluted EPS. All prior
EPS data have been restated. The difference in basic and diluted EPS is due to
the assumed conversion of outstanding options resulting in approximately
115,000, 86,000 and 73,000 equivalent shares in the 1997 transition period,
fiscal 1997 and fiscal 1996, respectively.
RECLASSIFICATIONS
Certain reclassifications have been made in the fiscal 1997 and 1996 financial
statements to conform with the 1997 transition period presentation.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, OAccounting for Stock Issued to Employees'
("APB No. 25"). Effective fiscal 1997, the Company adopted the disclosure
option of SFAS No. 123, "Accounting for Stock-Based Compensation."
27
4. INCOME TAXES
The income tax provision (benefit) for the 1997 transition period and fiscal
1997 and 1996 consisted of the following:
1997 TRANSITION
PERIOD FISCAL 1997 FISCAL 1996
--------------- ----------- ------------
CURRENT
Federal $3,854 $2,726 $(2,876)
State 778 529 120
------ ------ -------
4,632 3,255 (2,756)
DEFERRED $4,160 $3,103 $ 2,737
------ ------ -------
$8,792 $6,358 $ (19)
====== ====== =======
The income tax provision (benefit) as reported in the consolidated statements
of operations differs from the amounts computed by applying federal statutory
rates due to the following:
1997 TRANSITITION
PERIOD FISCAL 1997 FISCAL 1996
----------------- ----------- ------------
Federal income tax at statutory rate