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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the Fiscal Year Ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from ______________ to ______________
Commission file number 000-20793
SMITHWAY MOTOR XPRESS CORP.
(Exact name of registrant as specified in its charter)
Nevada 42-1433844
- --------------------------------------------- -------------------------------
(State or Other Jurisdiction of Incorporation (I.R.S. Employer Identification
or Organization) No.)
2031 Quail Avenue
Fort Dodge, Iowa 50501
- --------------------------------------------- -------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 515/576-7418
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
$0.01 Par Value Class A Common Stock Nasdaq - Small Cap Market System
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES [ ] NO [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $2,020,177 as of June 30, 2003 (based upon the $0.85 per share
closing price on that date as reported by Nasdaq). In making this calculation
the registrant has assumed, without admitting for any purpose, that all
executive officers, directors, and holders of more than 10% of a class of
outstanding common stock, and no other persons, are affiliates, and has excluded
stock options.
As of June 30, 2003, the registrant had 3,846,821 shares of Class A Common Stock
and 1,000,000 shares of Class B Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: The information set forth under Part III,
Items 10, 11, 12, and 13 of this Report is incorporated by reference from the
registrant's definitive proxy statement for the 2004 annual meeting of
stockholders that will be filed no later than April 29, 2004.
1
Cross Reference Index
The following cross reference index indicates the document and location of
the information contained herein and incorporated by reference into the Form
10-K.
Document and Location
Part I
Item 1 Business Page 3 through 7 herein
Item 2 Properties Page 8 herein
Item 3 Legal Proceedings Page 8 herein
Item 4 Submission of Matters to a Vote of Security Holders Page 8 herein
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters Page 9 herein
Item 6 Selected Financial and Operating Data Page 10 herein
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations Page 11 through 23 herein
Item 7A Quantitative and Qualitative Disclosures About Market Risk Page 23 herein
Item 8 Financial Statements and Supplementary Data Page 24 herein
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure Page 24 herein
Item 9A Controls and Procedures Page 24 herein
Part III
Item 10 Directors and Executive Officers of the Registrant Proxy Statement
Item 11 Executive Compensation Proxy Statement
Item 12 Security Ownership of Certain Beneficial Owners and
Management Proxy Statement
Item 13 Certain Relationships and Related Party Transactions Proxy Statement
Item 14 Principal Accountant Fees and Services Proxy Statement
Part IV
Item 15 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K Page 27 through 29 herein
This report contains "forward-looking statements." These statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those anticipated. See "Management Discussion and
Analysis of Financial Condition and Results of Operations - Factors That May
Affect Future Results" for additional information and factors to be considered
concerning forward-looking statements.
2
PART I
ITEM 1. BUSINESS
The Company
Smithway Motor Xpress Corp. ("Smithway", "Company", "we", "us", or "our")
is a truckload carrier that provides nationwide transportation of diversified
freight, concentrating primarily on the flatbed segment of the truckload market.
We use our "Smithway Network" of 17 computer-connected field offices, commission
agencies, and company-owned terminals to offer comprehensive truckload
transportation services to shippers located predominantly between the Rocky
Mountains in the West and the Appalachian Mountains in the East, and in eight
Canadian provinces.
Prior to 1984, we specialized in transporting building materials on flatbed
trailers. William G. Smith became President of Smithway in 1984, and led the
effort to diversify our customer and freight base, form the Smithway Network of
locations, and implement systems to support the Company's growth.
We acquired the operations of nine trucking companies between June 1995 and
March 2001. Through acquisitions and internal growth we expanded from $77
million in revenue in 1995 to $199 million in 2000. Since 2000, revenues have
declined and we have continued to incur net losses. In the second quarter of
2003, we established and began to implement the first phase of a profit
improvement plan designed to return us to profitability by achieving a more
streamlined and efficient operation. As part of the plan, terminals were closed,
unseated tractors were disposed, and personnel was reduced. We are encouraged by
the improvement in operating ratio and tractor utilization (average revenue per
tractor per week), and the decline in the amount of net loss. We remain focused
on the second phase of the plan, which includes upgrading our tractor fleet, and
continuing to focus on revenue enhancements and cost controls.
Smithway Motor Xpress Corp. was incorporated in Nevada in January 1995 to
serve as a holding company and conduct our initial public offering, which
occurred in June 1996. References to the "Company", "Smithway", "we", "us", or
"our" herein refer to the consolidated operations of Smithway Motor Xpress
Corp., a Nevada corporation, and its wholly owned subsidiaries, Smithway Motor
Xpress, Inc., an Iowa corporation, East West Motor Express, Inc., a South Dakota
corporation, SMSD Acquisition Corp., a South Dakota corporation, and New
Horizons Leasing, Inc., an Iowa corporation.
Our headquarters are located at 2031 Quail Avenue, Fort Dodge, Iowa 50501,
and our website address is www.smxc.com. Information on our website is not
incorporated by reference into this annual report. Our Annual Report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all other
reports we file with the SEC pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 are available free of charge through our
website.
Operations
We integrate our sales and dispatch functions throughout our
computer-connected "Smithway Network." The Smithway Network consists of our
headquarters in Fort Dodge, Iowa and 16 terminals, field offices, and
independent agencies. The headquarters and 14 terminals and field offices are
managed by Smithway employees, while the two agencies are managed by independent
commission agents. The customer sales representatives and agents at each
location have front-line responsibility for booking freight in their regions.
Fleet managers at the Fort Dodge, Iowa headquarters coordinate all load
movements via computer link to optimize load selection and promote proper fleet
balance among regions. Sales and dispatch functions for traffic are generally
performed at terminals within the sales region.
Agents are the primary contact for shippers within their region and have
regular contact with drivers and independent contractors. Our agents are paid a
commission on revenue they generate. Agent contracts typically are cancelable on
14 days' notice. In addition to sales and customer service benefits, we believe
agents offer the advantage of minimizing capital investment and fixed costs,
because agents are responsible for all of their own expenses. The number of
agents has decreased over the past four years.
3
Customers and Marketing
Our sales force includes nine sales representatives, personnel at 15
terminals and field offices, and two independent commission agents. National
sales representatives focus on national customers, while sales personnel at
terminals, field offices, and agencies are responsible for regional customer
contact. Our sales force emphasizes rapid response time to customer requests for
equipment, undamaged and on-time pickup and delivery, one of the nation's
largest fleets of flatbed equipment, safe and professional drivers, logistics
management, dedicated fleet capability, and our strategically located Smithway
Network. We believe that few other carriers operating principally in the Midwest
flatbed market offer similar size and service. Consequently, we seek primarily
service-sensitive freight rather than competing for all freight on the basis of
price.
In 2003, our top 50, 25, 10, and 5 customers accounted for approximately
48%, 40%, 29%, and 21% of revenue, respectively. No single customer accounted
for 10% or more of our revenue during 2003.
Technology
We believe that advances in technology can enhance our operating efficiency
and customer service. During the summer of 2002, we installed a new operating
system and freight selection software to improve the efficiency of our
operations. After some initial difficulties in the integration process, we are
now able to optimize the software to receive the benefits of full functionality.
This software was designed specifically for the trucking industry to allow
managers to coordinate available equipment with the transportation needs of
customers, monitor truck productivity and fuel consumption, and schedule regular
equipment maintenance. It also is designed to allow immediate access to current
information regarding driver and equipment status and location, special load and
equipment instructions, routing, and dispatching.
We operate communication units in all company-owned tractors and offer
rental of these units as an option to our independent contractors. We believe
on-board communication capability can reduce unnecessary stops and out-of-route
miles because drivers are not forced to find a telephone to contact us or
receive instructions. In addition, drivers can immediately report breakdowns or
other emergency conditions. The system also enables us to advise customers of
the location of freight in transit through its hourly position reports of each
tractor's location.
We also offer our customers electronic data interchange, which allows
customers to communicate directly with us via computer link or the Internet and
obtain location updates of in-transit freight, expected delivery times, and
account payment instructions.
Drivers, Independent Contractors, and Other Personnel
We seek company and independent contractor drivers who safely manage their
equipment and treat freight transportation as a business. We have historically
operated a fleet comprised of substantial numbers of both company-owned and
independent contractor tractors. We believe a mixed fleet offers competitive
advantages because we are able to recruit from both driver pools. We intend to
retain a mixed fleet in the future to insure that recruiting efforts toward
either group are not damaged by becoming categorized as predominantly either a
company-owned or independent contractor fleet, although several factors may
cause fluctuations in the fleet mix from time-to-time.
Beginning in 2001 and continuing through 2003, the combination of high fuel
prices, increasing insurance costs, a slowing economy, and tightened credit
standards placed extreme pressure on independent contractors. Many were forced
to exit their business. At year-end, our number of independent contractors had
decreased by approximately 25% from year-end 2001. The decline in the number of
independent contractors has slowed significantly, however, since September,
2003, as freight demand and the general economy have improved.
We have implemented several policies to promote driver and independent
contractor recruiting and retention. These include maintaining an open-door
policy with easy access to senior executives, appointing an advisory board
comprised of top drivers and independent contractors to consult with management,
and assigning each driver and independent contractor to a particular driver
manager to insure personal contact. In addition, we operate over relatively
short-to-medium distances (659-mile average length of haul in 2003) to return
drivers home as frequently as possible, and, in 2003, a temporary sign-on bonus
was implemented for new drivers to enhance driver recruiting.
4
We are not a party to a collective bargaining agreement and our employees
are not represented by a union. At December 31, 2003, we had 720 Company
drivers, 246 non-driver employees, and 430 independent contractors. We believe
that we have good relationships with our employees and independent contractors.
Safety and Insurance
Our active safety and loss prevention program has resulted in the
Department of Transportation's highest safety and fitness rating (satisfactory)
and numerous safety awards. Our safety and loss prevention program includes
pre-screening, initial orientation, six weeks on-the-road training for drivers
without substantial experience, and safety bonuses.
We currently maintain insurance covering losses in excess of a $250,000
self-insured retention for casualty insurance, which includes cargo loss,
personal injury, property damage, and physical damage claims. We also have a
$250,000 self-insured retention for workers' compensation claims in states where
a self-insured retention is allowed. Our primary casualty and workers'
compensation insurance policies have a limit of $2.0 million per occurrence. We
do not have excess insurance coverage above the primary policy limit. We have
experienced casualty claims in excess of $2.0 million in the past. The lack of
excess coverage and high self-insured retention increases our risk associated
with frequency and severity of accidents and could increase our expenses or make
them more volatile from period to period. Furthermore, if we experience claims
that exceed the limits of insurance coverage, or if we experience claims for
which coverage is not provided, our financial condition and results of
operations could suffer a materially adverse effect. All policies are scheduled
for renewal in July 2004.
Revenue Equipment
Our equipment strategy for company-owned tractors (as opposed to
independent contractors' tractors) is to operate tractors for a period that
balances capital expenditure requirements, disposition values, driver
acceptability, repair and maintenance expense, and fuel efficiency. As a result
of advances in the manufacturing of tractors and major components and the
depressed value of used equipment, in 2000 we extended the average trade cycle
mileage from 550,000 to 600,000 miles. We expect to maintain this trade cycle at
least through 2004. Generally, mileage in excess of 500,000 miles exceeds
warranty limits. We have seen an increase in maintenance expense in recent
periods due to our extended trade cycle, however further increases in repair and
maintenance expense are expected to be minimal as we begin to replace older
equipment as part of the second phase of our profit improvement plan. There is
much uncertainty surrounding the performance of tractors built after October
2002 with new engines that meet higher emissions standards mandated by the EPA.
The cost of operating tractors containing the new, EPA-compliant engines is
expected to be somewhat higher than the cost of operating tractors containing
engines manufactured prior to October 2002, due primarily to lower anticipated
fuel efficiency and higher anticipated maintenance expenses. In addition,
increased costs associated with the manufacturing of the new, EPA-compliant
engines, changes in the market for used tractors, and difficult market
conditions faced by tractor manufacturers may result in increased equipment
prices and increased operating expenses.
We operate conventional (engine forward) tractors with standard engine and
drivetrain components, and trailers with standard brakes and tires to minimize
our inventory of spare parts. All equipment is subject to our regular
maintenance program, and also is inspected and maintained each time it passes
through one of our maintenance facilities. Our company-owned tractor fleet had
an average age of 44 months at December 31, 2003. In 2003, we purchased a
limited amount of new equipment because of capital constraints and reduced the
size of our tractor fleet by disposing of unseated tractors in order to reduce
the costs associated with financing unprofitable equipment. We have successfully
negotiated for the purchase and financing of 215 new tractors in 2004. Of these
units, 165 will be replacement units, and the remaining 50 will be replacement
or additional units depending on driver availability. These units will slightly
reduce the average age of our fleet and further increases in maintenance
expenses are expected to be minimal.
Competition
The truckload segment of the trucking industry is highly competitive and
fragmented, and no carrier or group of carriers dominates the flatbed or van
market. We compete primarily with other regional, short-to-medium-haul carriers
and private truck fleets used by shippers to transport their own products in
proprietary equipment. Competition is based primarily upon service and price. We
also compete to a limited extent with rail and rail-truck
5
intermodal service, but attempt to limit this competition by seeking
service-sensitive freight and focusing on short-to-medium lengths of haul.
Although we believe the approximately 800 company drivers and independent
contractors dedicated to our flatbed operation at December 31, 2003, rank our
flatbed division among the ten largest such fleets in that industry segment,
there are other trucking companies, including diversified carriers with large
flatbed fleets, that possess substantially greater financial resources and
operate more equipment than us.
Fuel Availability and Cost
We actively manage fuel costs. Company drivers purchase virtually all of
our fuel through service centers with which we have volume purchasing
arrangements. In addition, we periodically consider entering into options,
futures contracts, and price swap agreements on heating oil, which is derived
from the same petroleum products as diesel fuel, in an effort to partially hedge
increases in fuel prices. We did not have any options, futures contracts, or
price swap agreements in place at any time since 2000. Most of our contracts
with customers contain fuel surcharge provisions, and we also attempt to recover
increases in fuel prices through higher rates. However, increases in fuel prices
generally are not fully offset through these measures.
Shortages of fuel, increases in fuel prices, or rationing of petroleum
products could have a materially adverse effect on our operations and
profitability. Throughout 2000 we experienced significant increases in the cost
of diesel fuel. There was a short period of decreased fuel prices starting at
the end of 2001 and continuing through the first quarter of 2002. Since the
second quarter of 2002 fuel prices have continued to increase. It is uncertain
whether fuel prices will continue to increase or will decrease, or the extent we
can recoup a portion of these costs through fuel surcharges.
Regulation
The United States Department of Transportation, or DOT, and various state
and local agencies exercise broad powers over our business, generally governing
such activities as authorization to engage in motor carrier operations, safety,
and insurance requirements. In 2003, the DOT adopted revised hours-of-service
regulations for drivers that became effective on January 4, 2004. These revised
regulations represent the most significant changes to the hours-of-service
regulations in over 60 years.
There are several hours of service changes that may have a positive or
negative effect on driver hours (and miles). The new rules allow drivers to
drive up to 11 hours instead of the 10 hours permitted under prior regulations,
subject to the new 14-hour on-duty maximum described below. The rules will
require a driver's off-duty period to be 10 hours, compared to 8 hours under
prior regulations. In general, drivers may not drive beyond 14 hours in a
24-hour period, compared to not being permitted to drive after 15 hours on-duty
under the prior rules. During the new 14-hour consecutive on-duty period, the
only way to extend the on-duty period is by the use of a sleeper berth period of
at least two hours that is later coupled with a second sleeper berth break to
equal 10 hours. Under the prior rules, during the 15-hour on-duty period,
drivers were allowed to take multiple breaks of varying lengths of time, which
could be either off-duty time or sleeper berth time, that did not count against
the 15-hour period. There was no change to the rule that precludes drivers from
driving after being on-duty for a maximum of 70 hours in 8 consecutive days.
However, under the new rules, drivers can "restart" their 8-day clock by taking
at least 34 consecutive hours off duty.
While we believe the 11-hour and the 34-hour restart rules may have a
slight positive effect on driving hours, we anticipate that the 15-hour to
14-hour rule change likely will have a more significant negative impact on
driving hours for the truckload industry. The prior 15-hour rule worked like a
stopwatch and allowed drivers to stop and start their on-duty time as they
chose. The new 14-hour rule is like a running clock. Once the driver goes
on-duty and the clock starts, the driver is limited to one timeout, or the clock
keeps running. As a result of this change, issues that cause driver delays such
as multiple stop shipments, unloading/loading delays, and equipment maintenance
could result in a reduction in driver miles.
We expect that the new rules could initially reduce our and other truckload
carrier's average miles per truck. As time goes on and we and our drivers gain
more experience with the new rules, however, we anticipate that we will be able
to gradually reduce any decline in average miles per truck. We have implemented
several steps to minimize the economic impact of the new hours-of-service rules
on our business. We have negotiated delay time charges with the majority of our
customers. In addition, we have conducted training programs for our driver and
operations personnel regarding the new hours-of-service requirements. Prior to
the effectiveness of the new rules,
6
we also initiated discussions with many of our customers regarding steps that
they can take to assist us in managing our drivers' non-driving activities, such
as loading, unloading, or waiting, and we plan to continue to actively
communicate with our customers regarding these matters in the future. In
situations where shippers are unable or unwilling to take these steps, we expect
to assess detention and other charges to offset losses in productivity resulting
from the new hours-of-service regulations. Steps such as these are especially
important in our flatbed operations, in which more of our freight is loaded on
trailers while the driver and tractor wait, in comparison with dry van freight.
It is still too early to ascertain the ultimate effect of these rules. However,
based on our initial experience, our preliminary expectation is that for some
period of time there will be decreased productivity on at least a portion of our
fleet.
Our operations also are subject to various federal, state, and local
environmental laws and regulations, implemented principally by the EPA and
similar state regulatory agencies, governing the management of hazardous wastes,
the discharge of pollutants into the air and surface and underground waters, and
the disposal of certain substances. We transport certain commodities that may be
deemed hazardous substances. Our Fort Dodge, Iowa headquarters and Black Hawk,
South Dakota and Des Moines, Iowa terminals have above-ground fuel storage tanks
and fueling facilities. Our terminal in Cohasset, Minnesota has an underground
fuel storage tank which is no longer in use. If we should be involved in a spill
or other accident involving hazardous substances, if any such substances were
found on our properties, or if we were found to be in violation of applicable
laws and regulations, we could be responsible for clean-up costs, property
damage, and fines or other penalties, any one of which could have a materially
adverse effect. We believe that our operations are in material compliance with
current laws and regulations and we do not know of any existing condition that
would cause compliance with applicable environmental regulations to have a
material effect on our capital expenditures, earnings, or competitive position.
If we should fail to comply with applicable regulations, we could be subject to
substantial fines or penalties and to civil or criminal liability.
7
ITEM 2. PROPERTIES
Smithway's headquarters consists of 38,340 square feet of office space and
51,000 square feet of equipment maintenance and wash facilities, located on 31
acres near Fort Dodge, Iowa. The Smithway Network consists of locations in or
near the following cities with the facilities noted:
Driver
Company Locations Maintenance Recruitment Dispatch Sales Ownership
----------------- ----------- ----------- -------- ----- ---------
Birmingham, Alabama.............. X X X Leased+
Black Hawk, South Dakota......... X X X X Owned
Chicago, Illinois................ X X Owned
Cohasset, Minnesota.............. X X Owned
Denver, Colorado................. X X Leased+
Des Moines, Iowa ................ X X X Owned
Enid, Oklahoma .................. X Leased+
Fort Dodge, Iowa................. X X X X Owned
Houston, Texas................... X X Leased+
Joplin, Missouri................. X X Owned
McPherson, Kansas................ X X X Owned
Oklahoma City, Oklahoma.......... X X X X Owned
Oshkosh, Wisconsin............... X X Leased+
Phoenix, Arizona................. X X Leased+
St. Paul, Minnesota.............. X X Leased+
Agent Locations
Detroit, Michigan ............... X X
Toledo, Ohio .................... X X
- ---------------------------
+ Month-to-month leases.
ITEM 3. LEGAL PROCEEDINGS
From time-to-time we are party to litigation and administrative proceedings
arising in the ordinary course of business. These proceedings primarily involve
claims for personal injury and property damage incurred in the transportation of
freight. We are not aware of any claims or threatened claims that might have a
materially adverse effect upon our operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 24, 2003, we held our annual meeting of stockholders for the
purpose of (a) ratifying the selection of KPMG LLP as our independent auditors
for the fiscal year ending December 31, 2003, and (b) electing five directors
for one-year terms. Proxies for the meeting were solicited pursuant to Section
14(a) of the Securities Exchange Act of 1934, and there was no solicitation in
opposition to our nominees. Each of our nominees for director as listed in the
Company's proxy statement was elected. The voting tabulation on the selection of
accountants was 5,290,260 votes "FOR", 24,465 votes "AGAINST", and 1,927 votes
"ABSTAIN." The voting tabulation on the election of directors was as follows:
- -------------------------------------------------------------------------------
| | Shares | Shares |
| | Voted | Voted |
| | "FOR" | "ABSTAIN" or "WITHHOLD |
| | | AUTHORITY" |
|---------------------------|-----------------------|-------------------------|
| William G. Smith | 5,275,799 | 40,853 |
|---------------------------|-----------------------|-------------------------|
| G. Larry Owens | 5,274,716 | 41,936 |
|---------------------------|-----------------------|-------------------------|
| Terry G. Christenberry | 5,275,609 | 41,043 |
|---------------------------|-----------------------|-------------------------|
| Herbert D. Ihle | 5,275,609 | 41,043 |
|---------------------------|-----------------------|-------------------------|
| Robert E. Rich | 5,275,609 | 41,043 |
- -------------------------------------------------------------------------------
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Price Range of Common Stock. Our Class A Common Stock is traded on the
Nasdaq Small Cap Market under the symbol "SMXC." The following table sets forth,
for the periods indicated, the high and low bid information per share of our
Class A Common Stock as quoted through the Nasdaq Small Cap Market. Such
quotations reflect inter-dealer prices, without retail markups, markdowns or
commissions and, therefore, may not necessarily represent actual transactions.
Period High Low
--------------------------- -------------- ----------------
Calendar Year 2003
1st Quarter $ 1.65 $ 0.73
2nd Quarter $ 1.17 $ 0.65
3rd Quarter $ 1.62 $ 0.79
4th Quarter $ 1.95 $ 1.05
Period High Low
--------------------------- -------------- ----------------
Calendar Year 2002
1st Quarter $ 2.65 $ 1.66
2nd Quarter $ 2.23 $ 1.23
3rd Quarter $ 1.79 $ 0.97
4th Quarter $ 1.45 $ 0.69
As of February 13, 2004, we had 314 stockholders of record of our Class A
Common Stock. However, we believe that many additional holders of Class A Common
Stock are unidentified because a substantial number of our shares are held of
record by brokers or dealers for their customers in street names.
Dividend Policy. We have never declared and paid a cash dividend on our
Class A Common Stock. It is the current intention of our Board of Directors to
continue to retain any earnings to finance the growth of our business rather
than to pay dividends. Future payments of cash dividends will depend upon our
financial condition, results of operations, and capital commitments,
restrictions under then-existing agreements, and other factors deemed relevant
by the Board of Directors.
See "Securities Authorized for Issuance Under Equity Compensation Plans"
under Item 12 in Part III of this Annual Report for certain information
concerning shares of our Class A Common Stock authorized for issuance under our
equity compensation plans.
9
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
Years Ended December 31,
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
Statement of Operations Data: (In thousands, except per share and operating data)
Operating revenue............................... $ 196,945 $ 198,990 $ 190,826 $ 169,468 $ 165,329
Operating expenses:
Purchased transportation...................... 79,735 77,755 70,129 62,364 55,596
Compensation and employee benefits............ 49,255 51,718 54,394 51,834 50,328
Fuel, supplies, and maintenance............... 23,754 30,995 32,894 27,722 29,857
Insurance and claims.......................... 4,212 3,426 5,325 7,324 5,571
Taxes and licenses............................ 4,045 3,943 3,817 3,444 3,444
General and administrative.................... 7,491 8,319 8,294 7,153 6,934
Communications and utilities.................. 2,190 2,052 2,123 1,783 1,463
Depreciation and amortization................. 15,800 19,325 18,778 19,725(1) 14,239
------------------------------------------------------------------
Total operating expenses................... 186,482 197,533 195,754 181,349 167,432
------------------------------------------------------------------
Earnings (loss) from operations............ 10,463 1,457 (4,928) (11,881) (2,103)
Interest expense (net).......................... 3,715 4,029 3,004 1,915 1,755
------------------------------------------------------------------
Earnings (loss) before income taxes............. 6,748 (2,572) (7,932) (13,796) (3,858)
Income taxes (benefit).......................... 2,822 (581) (2,721) (5,118) (1,270)
------------------------------------------------------------------
Net earnings (loss)............................. 3,926 (1,991) (5,211) (8,678)(2) (2,588)
==================================================================
Basic and diluted earnings (loss) per common
share........................................... $ 0.78 $ (0.40) $ (1.07) $ (1.79) $ (0.53)
==================================================================
Operating Data: (3)
Operating ratio (4)............................. 94.7% 99.3% 102.6% 107.0% 101.3%
Average revenue per tractor per week(5)......... $ 2,299 $ 2,261 $ 2,189 $ 2,162 $ 2,367
Average revenue per loaded mile(5).............. $ 1.33 $ 1.32 $ 1.34 $ 1.37 $ 1.37
Average length of haul in miles................. 678 712 697 664 659
Company tractors at end of period............... 844 887 939 773 750
Independent contractor tractors at end of period 689 614 575 521 430
Weighted average tractors during period......... 1,532 1,515 1,530 1,410 1,234
Trailers at end of period....................... 2,783 2,679 2,781 2,480 2,278
Weighted average shares outstanding:
Basic......................................... 5,031 5,009 4,852 4,846 4,846
Diluted....................................... 5,032 5,009 4,852 4,846 4,846
Balance Sheet Data (at end of period):
Working capital................................. $ 5,159 $ 3,300 $ (55) $ (4,128) $ (3,782)
Net property and equipment...................... 94,305 86,748 79,045 67,570 54,399
Total assets.................................... 125,014 115,828 106,436 89,409 76,680
Long-term debt, including current maturities.... 59,515 52,334 49,742 43,820 33,617
Total stockholders' equity...................... 39,508 37,233 31,866 23,193 20,605
- ----------------------------
(1) Includes an impairment charge for goodwill of $3,300 pre-tax.
(2) Includes an impairment charge for goodwill of $2,057 net of tax.
(3) Excludes brokerage activities except as to operating ratio.
(4) Operating expenses as a percentage of operating revenue.
(5) Net of fuel surcharges.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Except for the historical information contained herein, the discussion in
this annual report on Form 10-K contains forward-looking statements that involve
risk, assumptions, and uncertainties that are difficult to predict. Words such
as "believe", "may", "could", "expects", "likely", variations of these words,
and similar expressions, are intended to identify such forward-looking
statements. Our actual results could differ materially from those discussed
herein. Factors that could cause or contribute to such differences include, but
are not limited to, those discussed below in the section entitled "Factors That
May Affect Future Results," as well as those discussed in this item and
elsewhere in this annual report on Form 10-K.
Business Overview
We are a truckload carrier that provides nationwide transportation of
diversified freight, concentrating primarily on the flatbed segment of the
truckload market. We offer comprehensive truckload transportation services to
shippers located predominantly between the Rocky Mountains in the West and the
Appalachian Mountains in the East, and in the southern provinces of Canada.
Beginning in 2000 and continuing through the present, truckload carriers
have operated in a very difficult business environment. A combination of high
fuel prices, rising insurance premiums, tightened credit standards, a depressed
used truck market, a declining number of independent contractors, and slowing
freight demand associated with an economic downturn affected the profitability
of many trucking companies, including Smithway. In addition to these general
industry factors, the impact of the economic downturn on our customer base has
been particularly severe, resulting in a more pronounced weakening in our
freight demand than that experienced by truckload carriers generally. Since the
fourth quarter of 2000, several customers have experienced economic
difficulties, some of which have declared bankruptcy. It has only been in the
last half of 2003, that our industry has begun to feel the positive effects of
an increase in freight demand and general economic improvement.
Since the year 2000, our revenues have decreased 16.9%, to $165 million in
2003 from $199 million in 2000, and, although our net loss of $2.6 million for
the year ending December 2003 was an improvement over our net losses of $5.2
million and $8.7 million for the years 2001 and 2002, respectively, we have not
operated profitably since 1999. The operating losses have had an adverse effect
on our liquidity, and we were in violation of financial covenants under our
primary financing arrangement several times during the year 2003. We obtained
waivers for each such violation and since the beginning of 2003, have
successfully negotiated several amendments to the financing arrangement to
provide for a remaining term of at least one year.
In the second quarter of 2003, we began to implement a plan designed to
return Smithway to profitability by achieving a more streamlined and efficient
operation. The main goals of the first phase of the plan were to reduce fixed
costs, eliminate less productive assets, and increase the productivity of
remaining assets. As part of this plan, we have, among other things:
o Consolidated operations by closing 6 terminals, including two with
maintenance facilities;
o Improved our ratio of tractors to non-driving personnel by reducing
our headcount;
o Reduced the size of our tractor and trailer fleets to better match the
revenue base; and
o Focused our equipment on the most profitable customers, lanes, and
loads.
We are encouraged by the initial results of the plan. Revenue decreased by
only 2.4% despite a 12.4% reduction in weighted average tractors and over a 20%
decrease in the number of terminals. Average revenue per tractor per week, our
main measure of asset productivity, improved 9.5%, to $2,367 in 2003 from $2,162
in 2002, as we increased miles per tractor, reduced non-revenue miles, and
reduced the number of tractors without drivers. In addition, we reduced our
fixed costs of terminals, equipment, and non-driving personnel, although these
savings were partially offset by higher maintenance and fuel costs per mile. The
net result was an improvement of 570 basis points in our operating ratio, to
101.3% in 2003 from 107.0% in 2002.
11
The second phase of the plan, which we expect to implement in 2004, focuses
on revenue enhancements, replacing our highest mileage tractors, and continuing
our cost control efforts. The major components of this phase include the
following:
o We are currently engaged in a broad-based effort to raise our revenue
per loaded mile, both generally and in respect of the new federally
mandated hours-of-service requirements that may affect our
productivity if we are not adequately compensated for lost driving
time.
o We may selectively increase the size of our fleet, particularly
through recruiting additional independent contractors and pursuing
opportunities to take over dedicated fleets currently operated by
shippers for their own account.
o We intend to replace between 165 and 215 of our highest mileage
tractors, and we believe the savings in maintenance costs as well as
better driver retention will more than offset increased capital costs.
We have received a financing commitment for 215 new tractors.
o We intend to continue our cost control efforts.
Based on the success of the first phase of the profit improvement plan, we
were in compliance with all of the financial covenants under our financing
arrangement at December 31, 2003, and have successfully negotiated for the
purchase and financing of 215 new tractors in 2004. Based upon our improving
results, anticipated future cash flows, current availability under the financing
arrangement with LaSalle Bank, and sources of equipment financing that we expect
to be available, we do not expect to experience significant liquidity
constraints in the foreseeable future.
Revenues and Expenses
We generate substantially all of our revenue by transporting freight for
our customers. Generally, we are paid by the mile for our services. We also
derive revenue from fuel surcharges, loading and unloading activities, equipment
detention, and other accessorial services. The main factors that affect our
revenue are the revenue per mile we receive from our customers, the percentage
of miles for which we are compensated, and the number of miles we generate with
our equipment. These factors relate, among other things, to the United States
economy, inventory levels, the level of capacity in the trucking industry,
specific customer demand, and driver availability. We monitor our revenue
production primarily through average revenue per tractor per week.
In 2003, our average revenue per tractor per week (excluding fuel
surcharge, brokerage, and other revenues) increased to $2,367 from $2,162 in
2002. We are encouraged by this improvement and by the fact that our operating
revenue decreased only $4.1 million (2.4%), to $165.3 million in 2003 from
$169.5 million in 2002, while weighted average tractors decreased 12.5% to 1,234
in 2003 from 1,410 in 2002. This reduction was part of our planned disposition
of unseated company-owned tractors. In addition, we contracted with fewer
independent contractor providers of equipment. The decrease in the number of
independent contractors primarily occurred in the first three quarters of 2003
and has slowed substantially since September 2003 as freight demand has
increased and the economy has begun to rebound.
The main factors that impact our profitability on the expense side are the
variable costs of transporting freight for our customers. These costs include
fuel expense, driver-related expenses, such as wages, benefits, training, and
recruitment, and independent contractor costs, which are recorded under
purchased transportation. Expenses that have both fixed and variable components
include maintenance and tire expense and our total cost of insurance and claims.
These expenses generally vary with the miles we travel, but also have a
controllable component based on safety, fleet age, efficiency, and other
factors. Our main fixed costs are the acquisition and financing of long-term
assets, such as revenue equipment and the compensation of non-driver personnel.
Effectively controlling our expenses is a key component of our profit
improvement plan.
12
Results of Operations
The following table sets forth the percentage relationship of certain items
to revenue for the periods indicated:
2001 2002 2003
---- ---- ----
Operating revenue............................. 100.0% 100.0% 100.0%
Operating expenses:
Purchased transportation................... 36.8 36.8 33.6
Compensation and employee benefits......... 28.5 30.6 30.4
Fuel, supplies, and maintenance............ 17.2 16.4 18.1
Insurance and claims....................... 2.8 4.3 3.4
Taxes and licenses......................... 2.0 2.0 2.1
General and administrative................. 4.3 4.2 4.2
Communication and utilities................ 1.1 1.1 0.9
Depreciation and amortization.............. 9.8 11.6 8.6
---------------------------------------------------
Total operating expenses................... 102.6 107.0 101.3
---------------------------------------------------
Earnings (loss) from operations................ (2.6) (7.0) (1.3)
Interest expense, net.......................... 1.6 1.1 1.1
---------------------------------------------------
Loss before income taxes....................... (4.2) (8.1) (2.3)
Income taxes (benefit)......................... (1.4) (3.0) (0.8)
---------------------------------------------------
Net loss....................................... (2.7)% (5.1)% (1.6)%
===================================================
Comparison of year ended December 31, 2003 to year ended December 31, 2002.
Operating revenue decreased $4.1 million (2.4%), to $165.3 million in 2003
from $169.5 million in 2002. The decrease in operating revenue resulted from our
planned reduction in fleet size to reduce the number of unmanned company-owned
tractors as well as from our yield management efforts, in which we ceased
hauling certain unprofitable freight. In addition, we contracted with fewer
independent contractor providers of equipment. The reduction in fleet size and
yield enhancement efforts were consistent with our strategy of focusing on asset
productivity. We believe a certain level of success has been achieved, as our
weighted average number of tractors decreased 12.5% while operating revenue
decreased only 2.4%.
Average operating revenue per tractor per week, our main measure of asset
productivity, increased significantly to $2,577 in 2003 from $2,311 in 2002.
Operating revenue includes revenue from operating our trucks as well as other,
more volatile, revenue items, including fuel surcharge, brokerage, and other
revenue. We believe the analysis of tractor productivity is more meaningful if
fuel surcharge, brokerage, and other revenue are excluded from the computation.
Average revenue per tractor per week (excluding fuel surcharge, brokerage, and
other revenue) increased to $2,367 in 2003 from $2,162 in 2002, primarily due to
increased production from our seated equipment and a lower number of unseated
company tractors. For the year, revenue per loaded mile (excluding fuel
surcharge, brokerage, and other revenue) remained relatively constant at $1.37
as rates were lower in the first half of the year and higher during the latter
part of 2003. Fuel surcharge revenue increased $2.7 million to $5.8 million in
2003 from $3.1 million in 2002. During 2003 and 2002, approximately $4.0 million
and $1.8 million, respectively, of the fuel surcharge revenue collected helped
to offset our fuel costs. The remainder was passed through to independent
contractors.
Purchased transportation consists primarily of payments to independent
contractor providers of revenue equipment, expenses related to brokerage
activities, and payments under operating leases of revenue equipment. Purchased
transportation decreased $6.8 million (10.9%), to $55.6 million in 2003 from
$62.4 million in 2002. As a percentage of revenue, purchased transportation
decreased to 33.6% in 2003 from 36.8% in 2002. The changes reflect a decrease in
the percentage of the fleet supplied by independent contractors and in the
number of independent contractors. The percentage of total operating revenue
provided by independent contractors decreased to 35.6% in 2003 from 39.9% in
2002. We believe the decline in independent contractors as a percentage of our
total fleet is attributable to high fuel costs, high insurance costs, tighter
credit standards, and slow freight demand, which have diminished the pool of
drivers interested in becoming or remaining independent contractors. The decline
in independent contractors has slowed significantly since September, 2003 as
freight demand and the general economy has improved.
13
Compensation and employee benefits decreased $1.5 million (2.9%), to $50.3
million in 2003 from $51.8 million in 2002. As a percentage of revenue,
compensation and employee benefits decreased slightly to 30.4% in 2003 from
30.6% in 2002. This reflects a $2.4 million decrease in wages paid to non-driver
employees. These factors were partially offset by an increase in the percentage
of the fleet comprised of company-owned tractors and additional wages paid to
new drivers for sign-on bonuses implemented to enhance driver recruiting.
Additionally, in 2002 we recorded a $650,000 increase in reserves for workers'
compensation losses, including losses which have been incurred but not yet
reported to us. Finally, health claims and premiums increased in 2003 compared
with 2002, and we expect this trend to continue in future periods.
Fuel, supplies, and maintenance increased $2.1 million (7.7%), to $29.9
million in 2003 from $27.7 million in 2002. As a percentage of revenue, fuel,
supplies, and maintenance increased to 18.1% of revenue in 2003 compared with
16.4% in 2002. This reflects an increase in the percentage of the fleet
comprised of company-owned tractors, higher fuel prices, and a slight increase
in maintenance costs. We have seen an increase in maintenance expense in recent
periods due to our extended trade cycle, however further increases in repair and
maintenance expense are expected to be minimal as we begin to replace older
equipment as part of the second phase of our profit improvement plan. Fuel
prices increased approximately 18% to an average of $1.47 per gallon in 2003
from $1.25 per gallon in 2002. The increase in fuel prices was partially offset
by a $2.2 million increase in fuel surcharge revenue, which is included in
operating revenue.
Insurance and claims decreased $1.8 million (23.9%), to $5.6 million in
2003 from $7.3 million in 2002. As a percentage of revenue, insurance and claims
decreased to 3.4% of revenue in 2003 compared with 4.3% in 2002. In 2002,
insurance and claims included a $1.2 million increase in reserves for auto
liability losses. The increase in liability reserves related primarily to a
change in estimating the ultimate costs of claims that occurred in prior years
and did not recur in 2003. Also, in July 2003, due to our financial condition
and the rising cost of insurance, we discontinued our excess insurance coverage,
leaving $2 million of primary coverage with a $250,000 self-insured retention,
allowing for a substantial reduction in premiums. We have had a $250,000
self-insured retention since July 1, 2002. In January 2003, we exercised an
option to retroactively increase the deductible for our auto liability policy to
$125,000 per incident beginning July 1, 2001 through June 30, 2002 which reduced
our expense by $467,000. No changes were made to the other policies during that
period. Prior to that time the retention was $50,000. The lack of excess
coverage and high self-insured retention increases our risk associated with
frequency and severity of accidents and could increase our expenses or make them
more volatile from period to period. Furthermore, if we experience claims that
exceed the limits of our insurance coverage, or if we experience claims for
which coverage is not provided, our financial condition and results of
operations could suffer a materially adverse effect. The insurance policies are
scheduled for renewal on July 1, 2004. Upon renewal, we expect no changes in our
self-insured retention level or our excess insurance coverage limit. If we are
unable to renew the policies on their current terms, we may modify the
self-insured retention amount.
Taxes and licenses remained constant at $3.4 million in 2003 and 2002. The
decrease in the number of company-owned tractors subject to annual license and
permit costs was offset by an increase in the need for over-dimensional permits.
As a percentage of revenue, taxes and licenses remained relatively constant at
2.1% of revenue in 2003 compared with 2.0% of revenue in 2002.
General and administrative expenses decreased $219,000 (3.1%), to $6.9
million in 2003 from $7.2 million in 2002. As a percentage of revenue, general
and administrative expenses remained constant at 4.2% of revenue in both years.
Communications and utilities decreased $320,000 (17.9%), to $1.5
million in 2003 from $1.8 million in 2002. As a percentage of revenue,
communications and utilities remained relatively constant at 0.9% of revenue in
2003 compared with 1.1% of revenue in 2002.
Depreciation and amortization decreased $5.5 million (27.8%), to $14.2
million in 2003 from $19.7 million in 2002. In accordance with industry
practices, the gain or loss on retirement, sale, or write-down of equipment is
included in depreciation and amortization. In 2003 and 2002, depreciation and
amortization included net gains from the sale of equipment of $439,000 and
$792,000, respectively. In 2002 depreciation and amortization included $3.3
million for goodwill impairment. As a percentage of revenue, depreciation and
amortization decreased to 8.6% of revenue in 2003 compared with 11.6% in 2002.
Excluding the 2002 goodwill impairment charge, depreciation and amortization was
9.5% of revenue in 2002. The decreases as a percentage of revenue were
attributable to a smaller
14
fleet of company-owned equipment, and some of our older equipment still
generates revenue but is no longer being depreciated. In the short-term, we
expect that the presence of older equipment which is not being depreciated will
more than offset increases in depreciation resulting from the addition of new
equipment to our fleet. Over the long-term, as we continue to upgrade our
equipment fleet, we expect depreciation expense to increase.
Interest expense, net, decreased $160,000 (8.4%), to $1.8 million in 2003
from $1.9 million in 2002. This decrease was attributable to lower average debt
outstanding, partially offset by higher interest rates. As a percentage of
revenue, interest expense, net, remained constant at 1.1% of revenue in both
2002 and 2003.
As a result of the foregoing, our pre-tax margin increased to (2.3%) in
2003 from (8.1%) in 2002.
Our income tax benefit in 2003 was $1.3 million, or 32.9% of loss before
income taxes. Our income tax benefit in 2002 was $5.1 million, or 37.1% of loss
before income taxes. In both years, the effective tax rate is different from the
expected combined tax rate for a company headquartered in Iowa because of the
cost of nondeductible driver per diem expense absorbed by us. The impact of
paying per diem travel expenses varies depending upon the ratio of drivers to
independent contractors and the level of our pre-tax loss.
As a result of the factors described above, net loss was $2.6 million in
2003 (1.6% of revenue), compared with net loss of $8.7 million in 2002 (5.1% of
revenue).
Comparison of year ended December 31, 2002 to year ended December 31, 2001.
Operating revenue decreased $21.4 million (11.2%), to $169.5 million in
2002 from $190.8 million in 2001. Lower weighted-average tractors, decreased
fuel surcharge revenue, decreased brokerage revenue, and lower average revenue
per tractor per week were responsible for the decrease in operating revenue.
Weighted-average tractors decreased to 1,410 in 2002 from 1,530 in 2001 as we
disposed of a portion of our unseated company-owned tractors in the last half of
2002 and contracted with fewer independent contractor providers of equipment.
Fuel surcharge revenue decreased $3.2 million to $3.1 million in 2002 from $6.3
million in 2001. During 2002 and 2001, approximately $1.8 million and $3.5
million, respectively, of the fuel surcharge revenue collected helped to offset
our fuel costs. The remainder was passed through to independent contractors.
Additionally, soft freight demand caused a $2.2 million decrease in brokerage
revenue, to $7.3 million in 2002 from $9.5 million in 2001. Finally, average
revenue per tractor per week (excluding revenue from brokerage operations and
fuel surcharges) decreased to $2,162 in 2002 from $2,189 in 2001, primarily due
to a higher number of unseated company-owned tractors during the first half of
2002 and lower weekly production caused by soft freight demand. These factors
were partially offset by an increase in revenue per loaded mile, net of
surcharges, to $1.37 in 2002 from $1.34 in 2001.
Purchased transportation consists primarily of payments to independent
contractor providers of revenue equipment, expenses related to brokerage
activities, and payments under operating leases of revenue equipment. Purchased
transportation decreased $7.8 million (11.1%), to $62.4 million in 2002 from
$70.1 million in 2001, as we contracted with fewer independent contractor
providers of revenue equipment. We believe the decline in independent
contractors as a percentage of our total fleet is attributable to high fuel
costs, high insurance costs, tighter credit standards, and slow freight demand,
which have diminished the pool of drivers interested in becoming or remaining
independent contractors. As a percentage of revenue, purchased transportation
remained constant at 36.8% in both years, as the drop in total operating revenue
more than exceeded the drop in independent contractor revenue.
Compensation and employee benefits decreased $2.6 million (4.7%), to $51.8
million in 2002 from $54.4 million in 2001. As a percentage of revenue,
compensation and employee benefits increased to 30.6% in 2002 from 28.5% in
2001. The increase was primarily attributable to a $650 increase in reserves for
workers' compensation losses, including losses which have been incurred but not
yet reported to us. Additionally, wages paid to drivers for unloaded miles
increased during the year as weak freight demand caused an increase in deadhead
miles. Finally, health claims and premiums increased in 2002 compared with 2001,
and we expect this trend to continue in future periods.
Fuel, supplies, and maintenance decreased $5.2 million (15.7%), to $27.7
million in 2002 from $32.9 million in 2002. As a percentage of revenue, fuel,
supplies, and maintenance decreased to 16.4% of revenue in 2002 compared with
17.2% in 2001. This decrease was attributable primarily to lower fuel prices,
which decreased approximately 9% to an average of $1.25 per gallon in 2002 from
$1.38 per gallon in 2001. The price decrease was
15
partially offset by higher non-billable miles for which we incur fuel expense
but do not receive fuel surcharges. Although average fuel prices were lower than
2001 levels, fuel prices have risen over the last three quarters of 2002, and
have continued to rise in 2003. Cost savings resulting from lower fuel prices
were partially offset by higher maintenance expense resulting from (i) an
increase in the percentage of our total fleet supplied by company-owned
equipment, and (ii) a slightly older fleet, as a result of our decision to
further extend the trade cycle for tractors. Although the average age of our
tractor fleet decreased during 2002 due to the sale of older equipment that was
not replaced, we incurred increased maintenance expense on the aging units that
remained in service.
Insurance and claims increased $2.0 million (37.5%), to $7.3 million in
2002 from $5.3 million in 2001. As a percentage of revenue, insurance and claims
increased to 4.3% of revenue in 2002 compared with 2.8% in 2001. The increase
was attributable to a $1.2 million increase in reserves for auto liability
losses. The increase in liability reserves relates primarily to a change in the
method of estimating the ultimate costs of claims, as well as the establishment
of a reserve for incurred but not reported claims. Despite the increase in
reserves, in 2002 we had our best safety year, in terms of accidents per million
miles, since going public in 1996. The cost of insurance and claims increased
substantially on July 1, 2002, when we increased our self-insured retention from
$50,000 to $250,000 per occurrence without a premium reduction that fully offset
the increase in retention. The higher self-insured retention increases our risk
associated with frequency and severity of accidents and could increase our
expenses or make them more volatile from period to period.
Taxes and licenses decreased $373,000 (9.8%), to $3.4 million in 2002 from
$3.8 million in 2001, reflecting a decrease in the number of company-owned
tractors subject to annual license and permit costs. As a percentage of revenue,
taxes and licenses remained constant at 2.0% of revenue in 2002 and 2001.
General and administrative expenses decreased $1.1 million (13.8%), to $7.2
million in 2002 from $8.3 million in 2001. As a percentage of revenue, general
and administrative expenses remained relatively constant at 4.2% of revenue in
2002 compared with 4.3% of revenue in 2001.
Communications and utilities decreased $340 (16.0%), to $1.8 million in
2002 from $2.1 million in 2001. As a percentage of revenue, communications and
utilities remained constant at 1.1% of revenue in both years.
Depreciation and amortization increased $947,000 (5.0%), to $19.7 million
in 2002 from $18.8 million in 2001. During the annual goodwill impairment
analysis required by Statement of Financial Accounting Standard (SFAS) 142, we
determined that a portion of our goodwill had become impaired during the year
primarily as a result of continuing operating losses. As a result, we wrote off
$3.3 million of goodwill in the fourth quarter of 2002. In 2001, we committed to
a plan to replace our proprietary computer operating system with third party
software. Accordingly, we wrote off the $707,000 carrying value of our existing
software during the fourth quarter of 2001. In accordance with industry
practices, the gain or loss on retirement, sale, or write-down of equipment is
included in depreciation and amortization. In 2002 and 2001, depreciation and
amortization included net gains from the sale of equipment of $792,000 and
$187,000, respectively. In addition, 2002 included $3.3 million for goodwill
impairment and 2001 included $707,000 for the write-off of a proprietary
operating system. Increasing costs of new equipment continued to increase
depreciation per tractor. As a percentage of revenue, depreciation and
amortization increased to 11.6% of revenue in 2002 compared with 9.8% in 2001,
primarily as a result of these factors. Excluding the write-offs, depreciation
and amortization remained constant at 9.5% of revenue in 2001 and 2002.
Interest expense, net, decreased $1.1 million (36.2%), to $1.9 million in
2002 from $3.0 million in 2001. This decrease was attributable to lower interest
rates and lower average debt outstanding. As a percentage of revenue, interest
expense, net, decreased to 1.1% of revenue in 2002 compared with 1.6% in 2001.
As a result of the foregoing, our pre-tax margin decreased to (8.1%) in
2002 from (4.2%) in 2001.
Our income tax benefit in 2002 was $5.1 million, or 37.1% of loss before
income taxes. Our income tax benefit in 2001 was $2.7 million, or 34.3% of loss
before income taxes. In both years, the effective tax rate is different from the
expected combined tax rate for a company headquartered in Iowa because of the
cost of nondeductible driver per diem expense absorbed by us. The impact of
paying per diem travel expenses varies depending upon the ratio of drivers to
independent contractors and the level of our pre-tax loss.
As a result of the factors described above, net loss was $8.7 million in
2002 (5.1% of revenue), compared with net loss of $5.2 million in 2001 (2.7% of
revenue).
16
Liquidity and Capital Resources
Uses and Sources of Cash
We require cash to fund working capital requirements and to service our
debt. We have historically financed acquisitions of new equipment with
borrowings under installment notes payable to commercial lending institutions
and equipment manufacturers, borrowings under lines of credit, cash flow from
operations, and equipment leases from third-party lessors. We also have obtained
a portion of our revenue equipment fleet from independent contractors who own
and operate the equipment, which reduces overall capital expenditure
requirements compared with providing a fleet of entirely company-owned
equipment.
Our primary sources of liquidity have been funds provided by operations and
borrowings under credit arrangements with financial institutions and equipment
manufacturers. We are experiencing improved cash flow as losses decrease. As of
the date of this report, we have adequate borrowing availability on our line of
credit to finance any near-term needs for working capital. We have successfully
negotiated, subject to certain conditions, for the purchase and financing of 215
new tractors scheduled for delivery during 2004. Our ability to fund cash
requirements in future periods will depend on our ability to comply with
covenants contained in financing arrangements and the availability of other
financing options, as well as our financial condition and results of operations.
Our financial condition and results of operations will depend on insurance and
claims experience, general shipping demand by the Company's customers, fuel
prices, the availability of drivers and independent contractors, continued
success in implementing the profit improvement plan described above, and other
factors.
Although in the first quarter we experienced the traditional lag in
shipping demand for flatbed freight, and there were weather-related and
hours-of-service operational issues, we expect the first quarter of 2004 to show
improvement over the first quarter of 2003. Going forward, we believe that
seasonal improvements in shipping demand and continued focus on the profit
improvement plan should generate the required improvements. However, there is no
assurance the improvements will occur as planned. Assuming the improvements do
occur as planned, we believe there will be sufficient cash flow to meet our
liquidity requirements at least through December 31, 2004. To the extent that
actual results or events differ from our financial projections or business
plans, our liquidity may be adversely affected and we may be unable to meet our
financial covenants. In such event, we believe we could renegotiate the terms of
our debt or that alternative financing would be available, although this cannot
be assured.
Although there can be no assurance, we believe that cash generated by
operations and available sources of financing for acquisitions of revenue
equipment will be adequate to meet our currently anticipated working capital
requirements and other cash needs through 2004. We will require additional
sources of financing over the long-term to upgrade our tractor and trailer
fleets. To the extent that actual results or events differ from our financial
projections or business plans, our liquidity may be adversely affected and we
may be unable to meet our financial covenants. Specifically, our short- and
long-term liquidity may be adversely affected by one or more of the following
factors: costs associated with insurance and claims; weak freight demand or a
loss in customer relationships or volume; the impact of new hours-of-service
regulations on asset productivity; the ability to attract and retain sufficient
numbers of qualified drivers and independent contractors; elevated fuel prices
and the ability to collect fuel surcharges; inability to maintain compliance
with, or negotiate amendments to, loan covenants; the ability to finance the
tractors and trailers delivered and scheduled for delivery; and the possibility
of shortened payment terms by our suppliers and vendors worried about our
ability to meet payment obligations. Based upon our improving results,
anticipated future cash flows, current availability under the financing
arrangement with LaSalle Bank, and sources of equipment financing that we expect
to be available, we do not expect to experience significant liquidity
constraints in the foreseeable future.
Net cash provided by operating activities was $14.3 million, $9.3 million,
and $11.7 million for the years ended December 31, 2001, 2002, and 2003,
respectively. Historically, our principal use of cash from operations is to
service debt and to internally finance acquisitions of revenue equipment. Total
receivables decreased (increased) $2.8 million, $2.4 million, and ($572,000) for
the years ended December 31, 2001, 2002, and 2003, respectively. The average age
of our trade accounts receivable was approximately 37 days for 2001, 34 days for
2002, and 34 days for 2003.
Net cash (used in) provided by investing activities was ($4.0) million,
$3.3 million, and $2.9 million for the years ended December 31, 2001, 2002, and
2003, respectively. Such amounts related primarily to purchases, sales,
17
and trades of revenue equipment and payments made for the acquisition of Skipper
Transportation, Inc. in 2001. In 2003, sales of tractors and trailers as part of
decreasing the size of our company-owned tractor and trailer fleet more than
offset the few purchases of revenue equipment.
Net cash used in financing activities of $9.9 million, $13.2 million, and
$14.4 million for the years ended December 31, 2001, 2002, and 2003,
respectively, consisted primarily of net payments of principal under our
long-term debt agreements.
We have a financing arrangement with LaSalle Bank, which expires on January
1, 2005, and provides for automatic month-to-month renewals under certain
conditions after that date. LaSalle may terminate the arrangement prior to
January 1, 2005, in the event of default, as discussed below, and may terminate
at anytime during the renewal terms. At several times since the beginning of
2003, the financing arrangement has been amended to provide for a remaining term
of at least one year. The arrangement provides for a term loan, a revolving line
of credit, a capital expenditure loan, and financing for letters of credit. The
combination of all loans with LaSalle Bank cannot exceed the lesser of $25
million or a specified borrowing base.
At December 31, 2003, the term loan had a principal balance of $9.7
million, payable in 48 remaining equal monthly principal installments of
$201,000. The revolving line of credit allows for borrowings up to 85 percent of
eligible receivables. At December 31, 2003, total borrowings under the revolving
line were $426,000. The capital expenditure loan allows for borrowing up to 80
percent of the purchase price of revenue equipment purchased with such advances,
provided borrowings under the capital expenditure loan are limited to $2.0
million annually, and $4.0 million over the term of the arrangement. At December
31, 2003, the amount owed under capital expenditure notes was $1.0 million. At
December 31, 2003, we had outstanding letters of credit totaling $7.9 million
for self-insured amounts under our insurance programs. These letters of credit
directly reduce the amount of potential borrowings available under the financing
arrangement. Any increase in self-insured retention, as well as increases in
claim reserves, may require additional letters of credit to be posted, which
would negatively affect our liquidity. At December 31, 2003, our borrowing limit
under the financing arrangement was $21.7 million, leaving approximately $2.8
million in remaining availability at such date.
We are required to pay a facility fee on the LaSalle financing arrangement
of .25% of the maximum loan limit ($25 million). Borrowings under the
arrangement are secured by liens on revenue equipment, accounts receivable, and
certain other assets. The interest rate on outstanding borrowings under the
arrangement is equal to LaSalle's prime rate plus two percent.
The LaSalle financing arrangement requires compliance with certain
financial covenants, including compliance with a minimum tangible net worth,
capital expenditure limits, and a fixed charge coverage ratio. We were in
compliance with these covenants at December 31, 2003 and we believe we will
remain in compliance, although there can be no assurance that the required
financial performance will be achieved. In addition, equipment financing
provided by a manufacturer contains a minimum tangible net worth requirement. We
were in compliance with the required minimum tangible net worth requirement for
December 31, 2003 and we expect to remain in compliance going forward. If we
fail to maintain compliance with these financial covenants, or to obtain a
waiver of any noncompliance, the lenders will have the right to declare all sums
immediately due and pursue other remedies. In such event, we believe we could
renegotiate the terms of our debt or that alternative financing would be
available, although this cannot be assured. As of the filing date, we were in
compliance with all financial covenants.
Contractual Obligations and Commercial Commitments
The following tables set forth the contractual obligations and other
commercial commitments as of December 31, 2003:
Payments (in thousands) due by period
Less than 1-3 3-5 More than
Contractual Obligations Total 1 year years years 5 years
-------- ---------- -------- ------- ----------
Long-term debt............................... $33,191 $10,582 $15,623 $6,986 $ -
Operating leases............................. 982 227 401 277 77
-------- ---------- -------- ------- ----------
Total .................................. $34,173 $10,809 $16,024 $7,263 $ 77
======== ========== ======== ======= ==========
We had no other commercial commitments at December 31, 2003.
18
Off-Balance Sheet Arrangements
Our liquidity is not materially affected by off-balance sheet transactions.
During 2003, we incurred minimal rental expense related to operating leases. We
do not expect to utilize operating leases to finance any material amount of
revenue equipment going forward.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make decisions based upon estimates, assumptions, and factors we consider as
relevant to the circumstances. Such decisions include the selection of
applicable accounting principles and the use of judgment in their application,
the results of which impact reported amounts and disclosures. Changes in future
economic conditions or other business circumstances may affect the outcomes of
our estimates and assumptions. Accordingly, actual results could differ from
those anticipated. A summary of the significant accounting policies followed in
preparation of the financial statements is contained in Note 1 of the
consolidated financial statements attached hereto. Other footnotes describe
various elements of the financial statements and the assumptions on which
specific amounts were determined.
Our critical accounting policies include the following:
Revenue Recognition
We generally recognize operating revenue when the freight to be transported
has been loaded. We operate primarily in the short-to-medium length haul
category of the trucking industry; therefore, our typical customer delivery is
completed one day after pickup. Accordingly, this method of revenue recognition
is not materially different from recognizing revenue based on completion of
delivery. We recognize operating revenue when the freight is delivered for
longer haul loads where delivery is completed more than one day after pickup.
Amounts payable to independent contractors for purchased transportation, to
Company drivers for wages, and other direct expenses are accrued when the
related revenue is recognized.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided by
use of the straight-line and declining-balance methods over lives of 5 to 39
years for buildings and improvements, 5 years for tractors, 7 years for
trailers, and 3 to 10 years for other equipment. Tires purchased as part of
revenue equipment are capitalized as a cost of the equipment. Replacement tires
are expensed when placed in service. Expenditures for maintenance and minor
repairs are charged to operations, and expenditures for major replacements and
betterments are capitalized. The cost and related accumulated depreciation on
property and equipment retired, traded, or sold are eliminated from the property
accounts at the time of retirement, trade, or sale. The gain or loss on
retirement or sale is included in depreciation and amortization in the
consolidated statements of operation. Gains on trade-ins are included in the
basis of the new asset. Judgments concerning salvage values and useful lives can
have a significant impact.
Estimated Liability for Insurance Claims
Losses resulting from auto liability, physical damage, workers'
compensation, and cargo loss and damage are covered by insurance subject to
certain self-retention levels. Losses resulting from uninsured claims are
recognized when such losses are incurred. We estimate and accrue a liability for
our share of ultimate settlements using all available information. We accrue for
claims reported, as well as for claims incurred but not reported, based upon our
past experience. Expenses depend on actual loss experience and changes in
estimates of settlement amounts for open claims which have not been fully
resolved. However, final settlement of these claims could differ materially from
the amounts we have accrued at year-end. Our judgment concerning the ultimate
cost of claims and modification of initial reserved amounts is an important part
of establishing claims reserves, and is of increasing significance with higher
self-insured retention and lack of excess coverage.
19
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net undiscounted cash
flows expected to be generated by the asset. Our judgment concerning future cash
flows is an important part of this determination. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less the costs to sell.
New Accounting Pronouncements
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
associated with Exit or Disposal Activities." SFAS 146 supersedes EITF No. 94-3.
The principal difference between SFAS 146 and EITF No. 94-3 relates to when an
entity can recognize a liability related to exit or disposal activities. SFAS
146 requires a liability be recognized for a cost associated with an exit or
disposal activity when the liability is incurred. EITF No. 94-3 allowed a
liability, related to an exit or disposal activity, to be recognized at the date
an entity commits to an exit plan. The provisions of SFAS 146 were effective on
January 1, 2003. The adoption of SFAS No. 146 has not had an impact on our
financial statements as of December 31, 2003.
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others." This
interpretation elaborates on disclosure requirements of obligations by a
guarantor under certain guarantees. This interpretation also requires a
guarantor to recognize, at the inception of a guarantee, a liability for the
fair value of an obligation undertaken in issuing a guarantee. We applied the
provisions of Interpretation No. 45 for initial recognition and measurement
provisions to guarantees issued or modified after December 31, 2002, as
required. We did not have any guarantees, including indirect guarantees of
indebtedness of others, as of December 31, 2003, which would require disclosure
under Interpretation No. 45.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities." In December 2003, the FASB issued FASB
Interpretation No. 46 (revised December 2003), "Consolidation of Variable
Interest Entities." FIN No. 46, as revised, requires an entity to consolidate a
variable interest entity if it is designated as the primary beneficiary of that
entity even if the entity does not have a majority of voting interests. A
variable interest entity is generally defined as an entity where its equity is
unable to finance its activities or where the owners of the entity lack the risk
and rewards of ownership. The provisions of this interpretation must be applied
at the beginning of the first interim or annual period ending after March 15,
2004. The application of this interpretation is not expected to have a material
effect on our consolidated financial statements.
In April 2003, the Financial Accounting Standards Board issued SFAS No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments embedded in other contracts and for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." It applies to contracts entered into or modified after June
30, 2003, except as stated within the statement, and is to be applied
prospectively. The adoption of SFAS No. 149 did not have a material impact on
our consolidated financial statements.
On May 15, 2003, the Financial Accounting Standards Board issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity." SFAS No. 150 requires issuers to classify as
liabilities (or assets in some circumstances) three classes of freestanding
financial instruments that embody obligations for the issuer. Generally, SFAS
No. 150 applies to financial instruments entered into or modified after May 31,
2003 and otherwise became effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a
material impact on our consolidated financial statements.
In December 2003, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 104 ("SAB No. 104"), "Revenue Recognition", which
codifies, revises and rescinds certain sections of SAB No. 101, "Revenue
Recognition", in order to make this interpretive guidance consistent with
current authoritative accounting and auditing guidance and Securities and
Exchange Commission rules and regulations. The changes noted in SAB No. 104 did
not have a material effect on our consolidated financial statements.
20
Related Party Transactions
In August 2003, we generated approximately $213,000 of cash and avoided
future premium payments by selling one of our two life insurance policies
covering our late Chief Executive Officer to such officer for the cash surrender
value. The transferred policy has a death benefit of $1 million and the policy
retained by us has a death benefit of $750,000. The transaction was approved by
the disinterested directors.
During the years ended December 31, 2001, and 2002 there were no material
transactions with related parties.
Inflation and Fuel Costs
Most of our operating expenses are inflation-sensitive, with inflation
generally producing increased costs of operation. During the past three years,
the most significant effects of inflation have been on revenue equipment prices,
the compensation paid to drivers, and fuel prices. Innovations in equipment
technology and comfort have resulted in higher tractor prices, and there has
been an industry-wide increase in wages paid to attract and retain qualified
drivers. We attempt to limit the effects of inflation through increases in
freight rates and certain cost control efforts. The failure to obtain rate
increases in the future could adversely affect profitability. High fuel prices
also decrease our profitability. Most of our contracts with customers contain
fuel surcharge provisions. Although we attempt to pass through increases in fuel
prices to customers in the form of surcharges and higher rates, the fuel price
increases are not fully recovered.
Seasonality
In the trucking industry results of operations show a seasonal pattern
because customers generally reduce shipments during the winter season, and we
experience some seasonality due to the open, flatbed nature of the majority of
our trailers. We at times have experienced delays in meeting shipment schedules
as a result of severe weather conditions, particularly during the winter months.
In addition, our operating expenses have been higher in the winter months due to
decreased fuel efficiency and increased maintenance costs in colder weather.
Factors That May Affect Future Results
We may from time-to-time make written or oral forward-looking statements.
Written forward-looking statements may appear in documents filed with the
Securities and Exchange Commission, in press releases, and in reports to
stockholders. The Private Securities Litigation Reform Act of 1995 contains a
safe harbor for forward-looking statements. We rely on this safe harbor in
making such disclosures. In connection with this "safe harbor" provision, we
hereby identify important factors that could cause actual results to differ
materially from those contained in any forward-looking statement made by us or
on our behalf. Factors that might cause such a difference include, but are not
limited to, the following:
Losses and Liquidity Concerns. We have reported operating losses for the
past three years and a net loss for the past four years. Failure to turn around
the losses could result in further violation of current and future financing
covenants, which could accelerate our indebtedness. In such an event, our
liquidity, financial condition, and results of operations would be materially
and adversely impacted. Although we have been encouraged by the recent
improvements, there is no assurance that we will not experience liquidity
constraints going forward.
Insurance. The lack of excess coverage and high self-insured retention
increases our risk associated with the frequency and severity of accidents and
could increase our expenses or make them more volatile from period to period.
Furthermore, if we experience claims that exceed the limits of our insurance
coverage, or if we experience claims for which coverage is not provided, our
financial condition and results of operations could suffer a materially adverse
effect.
General Economic and Business Factors. Our business is dependent upon a
number of factors that may have a materially adverse effect on our results of
operations, many of which are beyond our control. These factors include excess
capacity in the trucking industry, significant increases or rapid fluctuations
in fuel prices, interest rates, fuel taxes, and insurance and claims costs, to
the extent not offset by increases in freight rates or fuel surcharges. Our
results of operations also are affected by recessionary economic cycles and
downturns in customers'
21
business cycles, particularly in market segments and industries in which we have
a concentration of customers. In addition, our results of operations are
affected by seasonal factors. Customers tend to reduce shipments during the
winter months. Despite higher oil inventories, concerns in oil producing
countries have caused fuel prices to rise throughout 2003. Shortages of fuel,
increases in fuel prices, or rationing of petroleum products could have a
materially adverse effect on our operating results.
Capital Requirements. The trucking industry is very capital intensive.
Historically, we have depended on cash from operations, equipment financing, and
debt financing for funds to update our revenue equipment fleet. Since 2001 we
have slowed our growth and extended our trade cycle on tractors and trailers. We
had minimal capital expenditures in 2003. We have successfully negotiated,
subject to certain conditions, for the purchase and financing of 215 new
tractors scheduled for delivery during 2004. Going forward we will need to
continue to upgrade our tractor and trailer fleets. We expect to pay for the
projected capital expenditures with cash flows from operations and borrowings
from equipment manufacturers or under the financing arrangement with LaSalle
Bank. If we are unable to generate sufficient cash from operations and obtain
financing on favorable terms in the future, we may have to enter into less
favorable financing arrangements or operate our revenue equipment for longer
periods, any of which could have a materially adverse effect on our
profitability.
Revenue Equipment. In the short-term, we expect the presence of older
equipment which is not being depreciated will more than offset increases in
depreciation resulting from the new equipment purchases. Over the long-term, as
we continue to upgrade our equipment fleet, we expect depreciation expense to
increase. If revenue production does not increase or remains constant, the
increased depreciation could have a materially adverse effect on operating
results.
Recruitment, Retention, and Compensation of Qualified Drivers and
Independent Contractors. Competition for drivers and independent contractors is
intense in the trucking industry. There is, and historically has been, an
industry-wide shortage of qualified drivers and independent contractors. We have
successfully reduced the number of company-owned tractors without drivers during
2003 by improving recruiting and retention of drivers and by disposing of
unseated equipment. In addition, independent contractors have decreased
industry-wide for a variety of economic reasons. The decline in independent
contractors has slowed significantly since September 2003. The shortage of
drivers and independent contractors has constrained revenue production. Failure
to recruit additional drivers and independent contractors could force us to
increase compensation or limit fleet size, either of which could have a
materially adverse effect on operating results.
Competition. The trucking industry is highly competitive and fragmented. We
compete with other truckload carriers, private fleets operated by existing and
potential customers, and to some extent railroads and rail-intermodal service.
Competition is based primarily on service, efficiency, and freight rates. Many
competitors offer transportation service at lower rates than us. Our results
could suffer if we cannot obtain higher rates.
Acquisitions. In March 2001, we acquired the assets of Skipper
Transportation, Inc., a small flatbed carrier headquartered in Birmingham,
Alabama. This is the only acquisition we have made during the past three years.
In 2004, we hope to expand the size of our tractor fleet through the acquisition
of one identified dedicated fleet operation, which will add approximately 20
independent contractors during the course of the year. Acquisitions involve
numerous risks, including: difficulties in assimilating the acquired company's
operations; the diversion of management's attention from other business
concerns; the risks of entering into markets in which management has no or only
limited direct experience; and the potential loss of customers, key employees
and drivers of the acquired company, all of which could have a materially
adverse effect on our business and operating results. If we make any
acquisitions in the future, there can be no assurance that we will be able to
successfully integrate the acquired companies or assets into our business.
Regulation. The trucking industry is subject to various governmental
regulations. Effective January 1, 2004, the DOT established new hours of service
rules which effectively reduced the hours-in-service during which a driver may
operate a tractor by redefining periods of service. The EPA has promulgated air
emission standards that have increased the cost of tractor engines and reduce
fuel mileage. Although we are unable to predict the nature of any changes in
regulations, the cost of any changes, if implemented, may adversely affect our
profitability. We have implemented several steps to address asset productivity
issues caused by these regulations. The predominately flatbed nature of our
operations, in which more of the freight is loaded on the trailers while the
driver and tractor wait, has caused increased operational and productivity
issues. It is still too early to ascertain the ultimate effect of these
regulations. However, based on our initial experience, our preliminary
expectation is that for some period of
22
time there will be decreased productivity on at least a portion of our fleet. If
we are unable to pass these additional costs through to shippers, our operating
results could be materially and adversely affected.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of market risks, most importantly the effects
of the price and availability of diesel fuel and changes in interest rates.
Commodity Price Risk
Our operations are heavily dependent upon the use of diesel fuel. The price
and availability of diesel fuel can vary and are subject to political, economic,
and market factors that are beyond our control. Significant increases in diesel
fuel prices could materially and adversely affect our results of operations and
financial condition.
We presently use fuel surcharges to address the risk of increasing fuel
prices. We believe these fuel surcharges are an effective means of mitigating
the risk of increasing fuel prices, although the competitive nature of our
industry prevents us from recovering the full amount of fuel price increases
through the use of such surcharges.
In the past, we have used derivative instruments, including heating oil
price swap agreements, to reduce a portion of our exposure to fuel price
fluctuations. Since 2000 we have had no such agreements in place. We do not
trade in such derivatives with the objective of earning financial gains on price
fluctuations.
Interest Rate Risk
We also are exposed to market risks from changes in certain interest rates
on our debt. Our financing arrangement with LaSalle Bank provides for a variable
interest rate based on LaSalle's prime rate plus two percent, provided there has
been no default. In addition, approximately $21.5 million of our other debt
carries variable interest rates. This variable interest exposes us to the risk
that interest rates may rise. Assuming borrowing levels at December 31, 2003, a
one-point increase in the prime rate would increase annual interest expense by
approximately $325,000. The remainder of our other debt carries fixed interest
rates and exposes us to the risk that interest rates may fall. At December 31,
2003, approximately 97% of our debt carries a variable interest rate and the
remainder is fixed.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our audited financial statements, including our consolidated balance sheets
and consolidated statements of operations, cash flows, stockholders' equity, and
notes related thereto, are included at pages 31 to 47 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
No reports on Form 8-K have been filed within the twenty-four months prior
to December 31, 2003, involving a change of accountants or disagreements on
accounting and financial disclosure.
ITEM 9A. CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Exchange Act, we have carried out an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the
end of the period covered by this report. This evaluation was carried out under
the supervision and with the participation of our management, including our
Chief Executive Officer and our Chief Financial Officer. Based upon that
evaluation, our Chief Executive Officer and our Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of
December 31, 2003. During our fourth fiscal quarter, there were no changes in
our internal control over financial reporting that have materially affected, or
that are reasonably likely to materially affect, our internal control over
financial reporting. We intend to periodically evaluate our disclosure controls
and procedures as required by the Exchange Act Rules.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in the
Company's reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer as appropriate, to allow timely decisions regarding
disclosures.
We have confidence in our internal controls and procedures. Nevertheless,
our management, including our Chief Executive Officer and our Chief Financial
Officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent all errors or intentional fraud. An internal
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of such internal
controls are met. Further, the design of an internal control system must reflect
the fact that there are resource constraints, and the benefits of controls must
be considered relative to their costs. Because of the inherent limitations in
all internal control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within the
Company have been detected.
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information respecting executive officers and directors set forth under
the captions "Election of Directors; Information Concerning Directors and
Executive Officers," "Corporate Governance; The Board of Directors and Its
Committees; Committees of the Board of Directors," "Corporate Governance;
Section 16(a) Beneficial Ownership Reporting Compliance," and "Corporate
Governance; Code of Ethics" in our Proxy Statement for the 2004 annual meeting
of stockholders, which will be filed with the Securities and Exchange Commission
in accordance with Rule 14a-6 promulgated under the Securities Exchange Act of
1934, as amended (the "Proxy Statement"), is incorporated herein by reference;
provided, that the "Audit Committee Report for 2003" contained in the Proxy
Statement is not incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information respecting executive and director compensation set forth
under the captions "Executive Compensation" and "Corporate Governance; The Board
of Directors and Its Committees; Board of Directors" in the Proxy Statement is
incorporated herein by reference; provided, that the "Compensation Committee
Report on Executive Compensation" contained in the Proxy Statement is not
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information respecting security ownership of certain beneficial
owners and management set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated herein
by reference.
Securities Authorized For Issuance Under Equity Compensation Plans. The
following table provides information as of December 31, 2003, regarding
compensation plans under which the Company's equity securities are authorized
for issuance:
(a) (b) (c)
----------------------- -------------------- -----------------------
Number of securities
remaining available for
future issuance under
Number of securities to Weighted-average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
warrants, and rights warrants, and rights column (a))
Plan Category
- ----------------------- ----------------------- -------------------- -----------------------
Equity compensation
plans approved by
security holders 315,150 $3.78 609,850
Equity compensation
plans not approved by
security holders 12,000 $2.60 0
----------------------- -------------------- -----------------------
Total 327,150 $3.74 609,850
25
On July 27, 2000, we made a one-time grant to each of our three
non-employee directors of an option to purchase 4,000 shares of our Class A
Common Stock. The exercise price was set at 85% of the closing price on the date
of the grant ($2.60), and the options vested immediately. The options expire on
July 27, 2006. These grants were not subject to stockholder approval.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information respecting certain relationships and transactions of
management set forth under the captions "Executive Compensation; Compensation
Committee Interlocks, Insider Participation, and Related Party Transactions" in
the Proxy Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information respecting accountant fees and services set forth under the
caption "Ratification of Selection of Independent Auditors; Principal Accounting
Fees and Services" in the Proxy Statement is incorporated herein by reference.
26
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
Our audited financial statements are set forth at the following pages of
this report:
Independent Auditors' Report......................... Page 31 herein
Consolidated Balance Sheets.......................... Page 32 through 33 herein
Consolidated Statements of Operations................ Page 34 herein
Consolidated Statements of Stockholders' Equity..... Page 35 herein
Consolidated Statements of Cash Flows................ Page 36 through 37 herein
Notes to Consolidated Financial Statements........... Page 38 through 47 herein
2. Financial Statement Schedules.
Financial statement schedules are not required because all required
information is included in the financial statements or is immaterial.
3. Exhibits
See list under Item 15(c) below, with management compensatory plans and
arrangements being listed under 10.1, 10.2, 10.3, 10.5, 10.7, 10.8, 10.9, and
10.10.
(b) Reports on Form 8-K
During the fourth quarter ended December 31, 2003, the Company filed with,
or furnished to, the Securities and Exchange Commission the following Current
Report on Form 8-K:
Current Report on Form 8-K dated October 24, 2003 (furnished to the
Commission on October 29, 2003) regarding the issuance of a press release to
report the Company's financial results for the quarter and nine months ended
September 30, 2003.
(c) Exhibits
Exhibit
Number Description
3.1 * Articles of Incorporation.
3.2 # Amended and Restated Bylaws (as in effect on March 5, 2004).
4.1 * Articles of Incorporation.
4.2 # Amended and Restated Bylaws (as in effect on March 5, 2004) (incorporated by reference
to Exhibit 3.2 filed on this Form 10-K).
10.1 * Outside Director Stock Plan dated March 1, 1995.
10.2 * Incentive Stock Plan adopted March 1, 1995.
10.3 * 401(k) Plan adopted August 14, 1992, as amended.
10.4 * Form of Agency Agreement between Smithway Motor Xpress, Inc. and its independent
commission agents.
10.5 * Memorandum of officer incentive compensation policy.
10.6 * Form of Independent Contractor Agreement between Smithway Motor Xpress, Inc. and its
independent contractor providers of tractors.
10.7 ** 1997 Profit Incentive Plan, adopted May 8, 1997.
27
10.8 *** Amendment No. 2 to Smithway Motor Xpress Corp. Incentive Stock Plan, adopted May 7, 1999.
10.9 **** Form of Outside Director Stock Option Agreement dated July 27, 2000, between Smithway
Motor Xpress Corp. and each of its non-employee directors.
10.10 ***** New Employee Incentive Stock Plan, adopted August 6, 2001.
10.11 ***** Amended and Restated Loan and Security Agreement dated December 28, 2001, between LaSalle
Bank National Association, Smithway Motor Xpress, Inc., as Borrower, and East West Motor
Xpress, Inc., as Borrower.
10.12 + Third Amendment to Amended and Restated Loan and Security Agreement dated March 5, 2003,
between LaSalle Bank National Association, Smithway Motor Xpress, Inc., as Borrower, and
East West Motor Express, Inc. as Borrower.
10.13 + Fourth Amendment to Amended and Restated Loan and Security Agreement dated March 28, 2003,
between LaSalle Bank National Association, Smithway Motor Xpress, Inc., as Borrower, and
East West Motor Express, Inc. as Borrower.
10.14 ++ Fifth Amendment to Amended and Restated Loan and Security Agreement dated April 15, 2003,
between LaSalle Bank National Association, Smithway Motor Xpress, Inc., as Borrower, and
East West Motor Express, Inc. as Borrower.
10.15 +++ Sixth Amendment to Amended and Restated Loan and Security Agreement dated July 31, 2003,
between LaSalle Bank National Association, Smithway Motor Xpress, Inc., as Borrower, and
East West Motor Express, Inc. as Borrower.
10.16 # Seventh Amendment to Amended and Restated Loan and Security Agreement dated November 10,
2003, between LaSalle Bank National Association, Smithway Motor Xpress, Inc., as Borrower,
and East West Motor Express, Inc. as Borrower.
14 # Code of Ethics.
21 ^ List of Subsidiaries.
23 # Consent of KPMG LLP, independent auditors.
31.1 # Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, by G. Larry Owens, the Company's principal
executive officer.
31.2 # Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, by Douglas C. Sandvig, the Company's
principal financial officer.
32.1 # Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, by G. Larry Owens, the Company's principal executive
officer.
32.2 # Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, by Douglas C. Sandvig, the Company's principal financial
officer.
- ---------------------
* Incorporated by reference from the Company's Registration Statement on Form S-1, Registration No.
33-90356, effective June 27, 1996.
** Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the period ended March
31, 2000. Commission File No. 000-20793, dated May 5, 2000.
*** Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the period ended June 30,
1999. Commission File No. 000-20793, dated August 13, 1999.
**** Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the period ended
28
September 30, 2000. Commission File No. 000-20793, dated November 3, 2000.
***** Incorporated by reference from the Company's Annual report on Form 10-K for the fiscal year ended
December 31, 2001. Commission File No. 000-20793, dated March 28, 2002.
+ Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the period ended March
31, 2003. Commission File No. 000-20793, dated May 13, 2003.
++ Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the period ended June 30,
2003. Commission File No. 000-20793, dated August 14, 2003.
+++ Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the period ended
September 30, 2003. Commission File No. 000-20793, dated November 13, 2003.
^ Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999. Commission File No. 000-20793, dated March 29, 2000.
# Filed herewith.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SMITHWAY MOTOR XPRESS CORP.
Date: March 30, 2004 By: /s/ Douglas C. Sandvig
-------------------------------------------
Douglas C. Sandvig
Senior Vice President, Chief Financial Officer,
and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Position Date
/s/ G. Larry Owens President, Chief Executive Officer, and Secretary;
- -------------------------- Director (principal executive office) March 30, 2004
G. Larry Owens
/s/ Douglas C. Sandvig Senior Vice President, Chief Financial Officer, and
- -------------------------- Treasurer (principal financial officer) March 30, 2004
Douglas C. Sandvig
/s/ Herbert D. Ihle Director March 30, 2004
- --------------------------
Herbert D. Ihle
/s/ Robert E. Rich Director March 30, 2004
- --------------------------
Robert E. Rich
/s/ Terry G. Christenberry Director March 30, 2004
- --------------------------
Terry G. Christenberry
/s/ Marlys L. Smith Director March 30, 2004
- --------------------------
Marlys L. Smith
30
Independent Auditors' Report
To the Stockholders and Board of Directors of Smithway Motor Xpress Corp.:
We have audited the accompanying consolidated balance sheets of Smithway
Motor Xpress Corp. and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 2003.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Smithway
Motor Xpress Corp. and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Des Moines, Iowa
February 6, 2004
31
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
December 31,
------------------------------------------
2002 2003
--------------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 105 $ 355
Receivables:
Trade (note 4)...................................... 13,496 14,231
Other............................................... 622 458
Recoverable income taxes............................ 7 8
Inventories............................................ 868 882
Deposits, primarily with insurers (note 10)............ 753 945
Prepaid expenses....................................... 1,492 1,037
Deferred income taxes (note 5)......................... 2,263 2,322
--------------------- -------------------
Total current assets......................... 19,606 20,238
--------------------- -------------------
Property and equipment (note 4):
Land................................................... 1,548 1,548
Buildings and improvements............................. 8,210 8,209
Tractors............................................... 71,221 69,384
Trailers............................................... 42,517 39,977
Other equipment........................................ 8,105 5,516
--------------------- -------------------
131,601 124,634
Less accumulated depreciation......................... 64,031 70,235
--------------------- -------------------
Net property and equipment................... 67,570 54,399
--------------------- -------------------
Goodwill (note 2)........................................ 1,745 1,745
Other assets............................................. 488 298
--------------------- -------------------
$ 89,409 $ 76,680
===================== ===================
See accompanying notes to consolidated financial statements.
32
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
December 31,
---------------------------------------------
2002 2003
---------------------- ----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (note 4)............................ $ 11,595 $ 10,582
Accounts payable......................................................... 4,556 4,827
Accrued loss reserves (note 10).......................................... 3,882 4,974
Accrued compensation..................................................... 2,152 2,535
Checks in excess of cash balances........................................ 1,086 672
Other accrued expenses................................................... 463 430
---------------------- ----------------------
Total current liabilities...................................... 23,734 24,020
Long-term debt, less current maturities (note 4)........................... 30,533 22,609
Deferred income taxes (note 5)............................................. 10,257 9,020
Line of credit (note 4).................................................... 1,692 426
---------------------- ----------------------
Total liabilities............................................. 66,216 56,075
---------------------- ----------------------
Stockholders' equity (notes 6 and 7):
Preferred stock (.01 par value; authorized 5 million shares; issued none) - -
Common stock:
Class A (.01 par value; authorized 20 million shares;
issued 2002 and 2003 - 4,035,989 shares)..................... 40 40
Class B (.01 par value; authorized 5 million shares;
issued 1 million shares)..................................... 10 10
Additional paid-in capital............................................... 11,393 11,393
Retained earnings........................................................ 12,164 9,576
Reacquired shares, at cost (2002 and 2003 - 189,168 shares) (414) (414)
---------------------- ----------------------
Total stockholders' equity..................................... 23,193 20,605
Commitments (note 10)
---------------------- ----------------------
$ 89,409 $ 76,680
====================== ======================
See accompanying notes to consolidated financial statements.
33
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
Years ended December 31,
----------------------------------------------------------
2001 2002 2003
------------------ ------------------- -------------------
Operating revenue:
Freight..............................................$ 190,165 $ 168,918 $ 164,648
Other.............................................. 661 550 681
------------------ ------------------- -------------------
Operating revenue.............................. 190,826 169,468 165,329
------------------ ------------------- -------------------
Operating expenses:
Purchased transportation............................. 70,129 62,364 55,596
Compensation and employee benefits................... 54,394 51,834 50,328
Fuel, supplies, and maintenance...................... 32,894 27,722 29,857
Insurance and claims................................. 5,325 7,324 5,571
Taxes and licenses................................... 3,817 3,444 3,444
General and administrative........................... 8,294 7,153 6,934
Communications and utilities......................... 2,123 1,783 1,463
Depreciation and amortization (note 2)............... 18,778 19,725 14,239
------------------ ------------------- -------------------
Total operating expenses......................... 195,754 181,349 167,432
------------------ ------------------- -------------------
Loss from operations............................. (4,928) (11,881) (2,103)
Financial (expense) income
Interest expense..................................... (3,052) (1,955) (1,781)
Interest income...................................... 48 40 26
------------------ ------------------- -------------------
Loss before income taxes......................... (7,932) (13,796) (3,858)
Income tax benefit (note 5)............................... (2,721) (5,118) (1,270)
------------------ ------------------- -------------------
Net loss.........................................$ (5,211) $ (8,678) $ (2,588)
================== =================== ===================
Basic and diluted loss per share (note 8).................$ (1.07) $ (1.79) $ (0.53)
================== =================== ===================
See accompanying notes to consolidated financial statements.
34
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2001, 2002, and 2003
(Dollars in thousands)
Additional Total
Common paid-in Retained Reacquired stockholders'
stock capital earnings shares Equity
----------------------------------------------------------------------
Balance at December 31, 2000.................. $ 50 $ 11,396 $ 26,053 $ (266) $ 37,233
Net loss...................................... - - (5,211) - (5,211)
Treasury stock acquired (77,900 shares)....... - - - (166) (166)
Treasury stock reissued (5,516 shares)........ - (2) - 12 10
----------------------------------------------------------------------
Balance at December 31, 2001.................. 50 11,394 20,842 (420) 31,866
Net loss...................................... - - (8,678) - (8,678)
Treasury stock reissued (2,841 shares)........ - (1) - 6 5
----------------------------------------------------------------------
Balance at December 31, 2002.................. 50 11,393 12,164 (414) 23,193
Net loss...................................... - - (2,588) - (2,588)
----------------------------------------------------------------------
Balance at December 31, 2003.................. $ 50 $ 11,393 $ 9,576 $ (414) $ 20,605
======================================================================
See accompanying notes to consolidated financial statements.
35
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years ended December 31,
------------------------------------------------
2001 2002 2003
--------------- -------------- ---------------
Cash flows from operating activities:
Net loss......................................................... $ (5,211) $ (8,678) $ (2,588)
--------------- -------------- ---------------
Adjustments to reconcile net loss to cash provided by operating
activities:
Depreciation and amortization................................ 18,778 19,725 14,239
Deferred income taxes (benefit).............................. (129) (5,142) (1,296)
Change in:
Receivables............................................. 2,783 2,364 (572)
Inventories............................................. 29 693 (14)
Deposits, primarily with insurers....................... (379) (214) (192)
Prepaid expenses........................................ 95 (566) 455
Accounts payable and other accrued liabilities.......... (1,653) 1,087 1,713
--------------- -------------- ---------------
Total adjustments................................... 19,524 17,947 14,333
--------------- -------------- ---------------
Net cash provided by operating activities......... 14,313 9,269 11,745
--------------- -------------- ---------------
Cash flows from investing activities:
Payments for acquisitions........................................ (2,954) - -
Purchase of property and equipment............................... (2,537) (1,149) (320)
Proceeds from sale of property and equipment..................... 1,541 4,519 3,036
Other............................................................ (71) (76) 190
--------------- -------------- ---------------
Net cash (used in) provided by investing activities... (4,021) 3,294 2,906
--------------- -------------- ---------------
Cash flows from financing activities:
Net borrowings (repayment) on line of credit.................... 585 1,107 (1,266)
Proceeds from long-term debt.................................... 24,759 - -
Principal payments on long-term debt............................ (35,107) (15,378) (12,721)
Change in checks issued in excess of cash balances.............. - 1,086 (414)
Treasury stock reissued......................................... 10 5 -
Other........................................................... (166) - -
--------------- -------------- ---------------
Net cash used in financing activities.................. (9,919) (13,180) (14,401)
--------------- -------------- ---------------
Net increase (decrease) in cash and cash equivalents... 373 (617) 250
Cash and cash equivalents at beginning of year..................... 349 722 105
--------------- -------------- ---------------
Cash and cash equivalents at end of year........................... $ 722 $ 105 $ 355
=============== ============== ===============
See accompanying notes to consolidated financial statements.
36
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years ended December 31,
------------------------------------------------
2001 2002 2003
--------------- -------------- ---------------
Supplemental disclosure of cash flow information:
Cash paid (received) during year for:
Interest................................................. $ 3,075 $ 2,003 $ 1,746
Income taxes............................................. (788) (1,790) 27
=============== ============== ===============
Supplemental schedules of noncash investing and financing
activities:
Notes payable issued for tractors and trailers.................. $ 7,171 $ 8,349 $ 3,784
Treasury stock reissued......................................... 10 5 -
=============== ============== ===============
Cash payments for acquisitions:
Revenue equipment............................................... $ 2,088 $ - $ -
Intangible assets............................................... 526 - -
Land, buildings, and other assets............................... 340 - -
--------------- -------------- ---------------
$ 2,954 $ - $ -
=============== ============== ===============
See accompanying notes to consolidated financial statements.
37
SMITHWAY MOTOR XPRESS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Note 1: Summary of Significant Accounting Policies
Operations
Smithway Motor Xpress Corp. and subsidiaries (the "Company", "we", "us", or
"our") is a truckload carrier that provides nationwide transportation of
diversified freight, concentrating primarily in flatbed operations. We generally
operate over short-to-medium traffic routes, serving shippers located
predominantly in the central United States. We also operate in the southern
provinces of Canada. Canadian revenues, based on miles driven, were
approximately $649, $477, and $236 for the years ended December 31, 2001, 2002,
and 2003, respectively. The consolidated financial statements include the
accounts of Smithway Motor Xpress Corp. and its three wholly owned subsidiaries.
All significant intercompany balances and transactions have been eliminated in
consolidation.
Liquidity
We incurred losses in 2001, 2002 and 2003. In addition, working capital is
a negative $3,782 at December 31, 2003. We were in compliance with our bank
covenants at December 31, 2003, but were out of compliance at various times
during 2003. We received waivers for every violation. During 2003 there were
several amendments to the financing arrangement. These amendments temporarily
increased the borrowing base, permanently increased the interest rate, and
revised the financial covenants to reflect financial performance that we
believed to be reasonably achievable and, in fact, did achieve. We believe we
will remain in compliance with these financial covenants, although there can be
no assurance that the required financial performance will be achieved.
During 2003, our primary sources of liquidity were funds provided by
operations and borrowings under credit arrangements with financial institutions
and equipment manufacturers. Our ability to fund cash requirements in future
periods will depend on our ability to comply with covenants contained in
financing arrangements and improve our operating results and cash flow. Our
ability to achieve the required improvements will depend on insurance and claims
experience, general shipping demand by our customers, fuel prices, the
availability of drivers and independent contractors, and other factors. We
continue to implement our profit improvement plan that is intended to improve
our operating results and achieve compliance with the financial covenants. We
believe we have achieved a certain level of success, as our weighted average
number of tractors decreased 12.5% in connection with a planned reduction in
fleet size, while operating revenue decreased only 2.4%. In addition, there was
a significant increase in average operating revenue per tractor per week to
$2,577 in 2003 from $2,311 in 2002.
Although in the first quarter of 2004 we experienced the traditional lag in
shipping demand for flatbed freight, and there were weather-related and
hours-of-service operational issues, we believe that seasonal improvements in
shipping demand and continued focus on our profit improvement plan should
generate the required improvements. However, there is no assurance the
improvements will occur as planned. Assuming the improvements do occur as
planned, we believe there will be sufficient cash flow to meet our liquidity
requirements at least through December 31, 2004. To the extent that actual
results or events differ from our financial projections or business plans, our
liquidity may be adversely affected and the Company may be unable to meet our
financial covenants. In such event, our liquidity would be materially and
adversely impacted if alternative financing could not be found.
Customers
We serve a diverse base of shippers. No single customer accounted for more
than 10 percent of our total operating revenues during any of the years ended
December 31, 2001, 2002, and 2003. Our 10 largest customers accounted for
approximately 24 percent, 28 percent, and 29 percent of our total operating
revenues during 2001, 2002, and 2003, respectively. Our largest concentration of
customers is in the steel and building materials industries, which together
accounted for approximately 42 percent, 43 percent, and 51 percent of our total
operating revenues in 2001, 2002, and 2003, respectively.
38
Drivers
We face intense industry competition in attracting and retaining qualified
drivers and independent contractors. This competition from time to time results
in temporarily idling some of our revenue equipment or increasing the
compensation we pay to our drivers and independent contractors.
Use of Estimates
We have made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
Cash and Cash Equivalents
We consider interest-bearing instruments with maturity of three months or
less at the date of purchase to be the equivalent of cash. We did not hold any
cash equivalents as of December 31, 2002 or 2003.
Receivables
Trade receivables are stated net of an allowance for doubtful accounts of
$208 and $291 at December 31, 2002 and 2003, respectively. We monitor and check
the financial status of customers when granting credit. We routinely have
significant dollar transactions with certain customers, however at December 31,
2002 and 2003, no individual customer accounted for more than 10 percent of
total trade receivables.
Inventories
Inventories consist of tractor and trailer supplies and parts. Inventories
are stated at lower of cost (first-in, first-out method) or market.
Prepaid Expenses
Prepaid expenses consist primarily of prepaid insurance premiums and
prepaid licenses. These expenses are amortized over the remaining term of the
policy or license, which does not exceed 12 months.
Accounting for Leases
We are a lessee of revenue equipment under a limited number of operating
leases. Rent expense is charged to operations as it is incurred under the terms
of the respective leases. Under the leases for transportation equipment, we are
responsible for all repairs, maintenance, insurance, and all other operating
expenses. We are also a lessee of terminal property under various short-term
operating leases.
Rent charged to expense on the above leases, expired leases, and short-term
rentals was $1,058 in 2001; $1,030 in 2002; and $511 in 2003. The decrease in
such rentals reflects a reduction of leased tractors and the closing of five
terminals in connection with our operating initiatives.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided by
use of the straight-line and declining-balance methods over lives of 5 to 39
years for buildings and improvements, 5 years for tractors, 7 years for
trailers, and 3 to 10 years for other equipment. Tires purchased as part of
revenue equipment are capitalized as a cost of the equipment. Replacement tires
are expensed when placed in service. Expenditures for maintenance and minor
repairs are charged to operations, and expenditures for major replacements and
betterments are capitalized. The cost and related accumulated depreciation on
property and equipment retired, traded, or sold are eliminated from the property
accounts at the time of retirement, trade, or sale. The gain or loss on
retirement or sale is included in depreciation and amortization in the
consolidated statements of operations. Gains or losses on trade-ins are included
in the basis of the new asset. During 2001, 2002, and 2003, depreciation and
amortization included net gains from the sale of equipment of $187, $792, and
$439, respectively. In addition, 2001 included $707 for the write-off of a
proprietary operating system, and 2002 included a $3,300 write-off for goodwill
impairment.
39
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net undiscounted cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
Revenue Recognition
We generally recognize operating revenue when the freight to be transported
has been loaded. We operate primarily in the short-to-medium length haul
category of the trucking industry; therefore, our typical customer delivery is
completed one day after pickup. Accordingly, this method of revenue recognition
is not materially different from recognizing revenue based on completion of
delivery. We recognize operating revenue when the freight is delivered for
longer haul loads where delivery is completed more than one day after pickup.
Amounts payable to independent contractors for purchased transportation, to
Company drivers for wages, and other direct expenses are accrued when the
related revenue is recognized.
Insurance and Claims
Losses resulting from personal liability, physical damage, workers'
compensation, and cargo loss and damage are covered by insurance subject to a
$250 deductible, per occurrence. We do not have excess insurance coverage above
our primary policy limit of $2,000. Losses resulting from uninsured claims are
recognized when such losses are known and can be estimated. We estimate and
accrue a liability for our share of ultimate settlements using all available
information. Expenses depend on actual loss experience and changes in estimates
of settlement amounts for open claims which have not been fully resolved. These
accruals are based on our evaluation of the nature and severity of the claim and
estimates of future claims development based on historical trends. The amount of
our self-insured retention and the lack of excess coverage makes these estimates
an important accounting judgment. Insurance and claims expense will vary based
on the frequency and severity of claims and the premium expense.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect of a change in tax rates on deferred tax assets
and liabilities is recognized in income in the period that includes the
enactment date.
Stock Option Plans
We have adopted the disclosure provisions of Statement of Financial
Accounting Standards 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure" (SFAS 148). SFAS 148 amends the disclosure requirements of
Statement of Financial Accounting Standards 123, "Accounting for Stock-Based
Compensation" (SFAS 123). As of December 31, 2003, we have has three stock-based
employee compensation plans, which are described more fully in Note 7. We
account for these plans under the recognition and measurement principles of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. No stock-based employee compensation
cost is reflected in net loss, as all options granted under these plans had an
exercise price equal to the market value of the common stock on the date of the
grant.
The following table illustrates the effect on net loss and loss per share
if we had applied the fair value recognition provisions of FASB Statement No.
123, "Accounting for Stock-Based Compensation," to stock-based employee
compensation. We used the Black-Scholes option pricing model to determine the
fair value of stock options for years ended December 31, 2001, 2002, and 2003.
The following assumptions were used in determining the fair value of these
options: weighted-average risk-free interest rate, 4.26% in 2001, 4.55% in 2002,
and 2.84% in
40
2003; weighted-average expected life, 5 years in 2001, 5 years in 2002, and 5
years in 2003; and weighted-average expected volatility, 60% in 2001, 61% in
2002, and 65% in 2003. There were no expected dividends. For purposes of pro
forma disclosures, the estimated fair value of options is amortized to expense
over the options' vesting periods whereas reversal of previous expense
amortization attributable to forfeited options are reflected in the year of
forfeiture.
2001 2002 2003
----------- ------------ ------------
Net loss, as reported $ (5,211) $ (8,678) $ (2,588)
Deduct: Total stock-based
employee compensation (expense)
reversal determined under fair value
based method for all awards, net of
related tax effects (106) (6) 5
----------- ------------ ------------
Pro forma net loss $ (5,317) $ (8,684) $ (2,583)
=========== ============ ============
Loss per share
Basic and Diluted - as reported $ (1.07) $ (1.79) $ (0.53)
Basic and Diluted - pro forma $ (1.10) $ (1.79) $ (0.53)
Net Earnings Per Common Share
Basic earnings per share have been computed by dividing net earnings by the
weighted-average outstanding Class A and Class B common shares during each of
the years. Diluted earnings per share have been calculated by also including in
the computation the effect of employee stock options, nonvested stock, and
similar equity instruments granted to employees as potential common shares.
Because we suffered a net loss for the years ended December 31, 2001, 2002 and
2003, the effects of potential common shares were not included in the
calculation as their effects would be anti-dilutive. Stock options outstanding
at December 31, 2001, 2002 and 2003 totaled 623,000, 384,525 and 327,150,
respectively.
Reclassifications
Certain 2002 balances have been reclassified to conform to 2003
presentation.
Note 2: Goodwill
In 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets."
SFAS 142 requires that goodwill no longer be amortized, but instead be tested
for impairment at least annually. Our initial impairment analysis at January 1,
2002 was based on an independent appraisal and indicated no impairment. At
December 31, 2002 we updated our impairment analysis as required under SFAS 142
using a combination of available market data for similar transportation
companies and an internal update of the appraisal. The analysis indicated the
goodwill in one of our reporting units was impaired, triggered primarily as a
result of the continued losses during 2002. We recorded an impairment charge of
$3,300 during the fourth quarter of 2002, which is included in depreciation and
amortization in the statement of operations and cash flows. At December 31, 2003
we updated our impairment analysis as required under SFAS 142 using an
independent appraisal. The analysis indicated no further impairment.
41
The following table reflects the consolidated results, adjusted as though
the adoption of SFAS 142 occurred as of the beginning of the year ended December
31, 2000.
(Dollars in thousands, except per share amounts) Years Ended December 31,
----------------------------------------
2001 2002 2003
------------ ------------ -----------
Net loss:
As reported $ (5,211) $ (8,678) $ (2,588)
Goodwill amortization, net of tax 466 - -
Goodwill impairment charge, net of tax - 2,057 -
------------ ------------ -----------
Adjusted net loss $ (4,745) $ (6,621) $ (2,588)
=========== ============ ===========
Loss per share - basic and diluted:
As reported $ (1.07) $ (1.79) $ (0.53)
Goodwill amortization, net of tax 0.09 - -
Goodwill impairment charge, net of tax - 0.42 -
------------ ------------ ----------
Adjusted basic and diluted net loss per share $ (0.98) $ (1.37) $ (0.53)
=========== ============ ===========
A roll-forward of goodwill for the years ending December 31, is as follows:
Years ended December 31,
-------------------------------
2002 2003
-------------- --------------
Balance at beginning of year $ 5,016 $ 1,745
Goodwill acquired - -
Goodwill amortization - -
Impairment charge (3,271) -
-------------- --------------
Balance at end of year $ 1,745 $ 1,745
============== ==============
Note 3: Financial Instruments
SFAS 107, "Disclosures About Fair Value of Financial Instruments," defines
the fair value of a financial instrument as the amount at which the instrument
could be exchanged in a current transaction between willing parties. At December
31, 2003, the carrying amounts of cash and cash equivalents, trade receivables,
other receivables, line of credit, accounts payable, and accrued liabilities,
approximate fair value because of the short maturity of those instruments. The
fair value of our long-term debt, including current maturities, was $42,150 and
$33,637 at December 31, 2002 and 2003, respectively, based upon estimated market
rates.
Note 4: Long-Term Debt
We have a financing arrangement with LaSalle Bank, which expires on January
1, 2005, and provides for automatic month-to-month renewals under certain
conditions after that date. LaSalle may terminate the arrangement prior to
January 1, 2005, in the event of default, and may terminate at anytime during
the renewal terms. At several times since the beginning of 2003, the financing
arrangement has been amended to provide for a remaining term of at least one
year.
The agreement provides for a term loan, a revolving line of credit, and a
capital expenditure loan. The term loan has a balance of $9,660 and is payable
in 48 equal monthly installments of $201 in principal. The revolving line of
credit allows for borrowings up to 85 percent of eligible receivables. At
December 31, 2003, total borrowings under the revolving line were $426. The
capital expenditure loan allows for borrowing up to 80 percent of the purchase
price of revenue equipment purchased with such advances provided borrowings
under the capital expenditure loan are limited to $2,000 annually, and $4,000
over the term of the agreement. The capital expenditure loan has a balance of
$951 and is payable in equal monthly installments of $18 in principal. The
combination of all loans with LaSalle Bank cannot exceed $25,000 or a specified
borrowing base.
The financing arrangement also includes financing for letters of credit. At
December 31, 2003, we had outstanding letters of credit totaling $7,874 for
self-insured amounts under our insurance programs. (See note 10).
42
These letters of credit directly reduce the amount of potential borrowings
available under the financing arrangement discussed above. Any increase in
self-insured retention, as well as increases in claim reserves, may require
additional letters of credit to be posted, which would negatively affect our
liquidity.
At December 31, 2003, our borrowing limit under the financing arrangement
was $21.7 million, leaving approximately $2.8 million in remaining availability
at such date.
The LaSalle financing arrangement requires compliance with certain
financial covenants, including compliance with a minimum tangible net worth,
capital expenditure limits, and a fixed charge coverage ratio. We were in
compliance with these requirements at December 31, 2003. We believe we can
maintain compliance with all covenants throughout 2004, although there can be no
assurance that the required financial performance will be achieved.
The weighted average interest rates on debt outstanding at December 31,
2002 and 2003 were approximately 3.80 and 4.02 percent, respectively. In
connection with an early March 2003 amendment, the interest rate on outstanding
borrowings under the arrangement was increased from LaSalle's prime rate to the
prime rate plus two percent. We are required to pay a facility fee on the
financing arrangement of .25% of the maximum loan limit ($25,000). Borrowings
under the agreement are secured by liens on revenue equipment, accounts
receivable, and certain other assets.
Long-term debt also includes equipment notes with balances of $28,059 and
$22,580 at December 31, 2002 and 2003, respectively. Interest rates on the
equipment notes range from 2.21 percent to 13.02 percent with maturities through
2008. The equipment notes are collateralized by the underlying equipment, and
contain a minimum tangible net worth requirement. We were in compliance with the
required minimum tangible net worth requirement for December 31, 2003 and we
expect to remain in compliance going forward.
If we fail to maintain compliance with financial covenants in our borrowing
obligations, or to obtain a waiver of any noncompliance, the lenders will have
the right to declare all sums immediately due and pursue other remedies. In such
event, we believe we could renegotiate the terms of our debt or that alternative
financing would be available, although this cannot be assured..
Future maturities on long-term debt at December 31, 2003 are as follows:
2004, $10,582; 2005, $8,946; 2006, $6,677; 2007, $5,869; 2008, $1,117;
thereafter, $0.
43
Note 5: Income Taxes
Income taxes consisted of the following components for the three years
ended December 31:
2001 2002 2003
------------------------------ ----------------------------------- -------------------------------
Federal State Total Federal State Total Federal State Total
---------- -------- ---------- ----------- ------------ ---------- ---------- --------- ----------
Current $(2,541) $ (51) $(2,592) $ - $ 24 $ 24 $ - $ 26 $ 26
Deferred (112) (17) (129) (4,147) (995) (5,142) (1,045) (251) (1,296)
---------- -------- ---------- ----------- ------------ ---------- ---------- --------- ----------
$(2,653) $ (68) $(2,721) $(4,147) $ (971) $(5,118) $(1,045) $(225) $(1,270)
========== ======== ========== =========== ============ ========== ========== ========= ==========
Total income tax benefit differs from the amount of income tax benefit
computed by applying the normal United States federal income tax rate of 34
percent to income before income tax benefit. The reasons for such differences
are as follows:
Years ended December 31,
-------------------------------------------------------
2001 2002 2003
---------------- --------------- ---------------
Computed "expected" income tax benefit $ (2,696) $ (4,691) $ (1,312)
State income tax benefit, net of federal taxes (313) (641) (149)
Permanent differences, primarily nondeductible
portion of driver per diem and travel expenses 288 214 191
---------------- --------------- ---------------
$ (2,721) $ (5,118) $ (1,270)
================ =============== ===============
Temporary differences between the financial statement basis of assets and
liabilities and the related deferred tax assets and liabilities at December 31,
2002 and 2003, were as follows:
Deferred tax assets attributable to: 2002 2003
------------------ ------------------
Net operating loss carryforwards $ 6,126 $ 4,906
Alternative minimum tax (AMT) credit carryforwards 271 271
Accrued expenses 2,336 2,351
Goodwill 1,265 1,031
Other 20 18
------------------ ------------------
Total gross deferred tax assets 10,018 8,577
------------------ ------------------
Deferred tax liabilities attributable to:
Property and equipment (18,012) (15,275)
------------------- -----------------
Net deferred tax liabilities $ ( 7,994) $ (6,698)
=================== =================
At December 31, 2003, we have net operating loss carryforwards for income
tax purposes of approximately $12,227 which are available to offset future
taxable income. These net operating losses expire during the years 2019 through
2022. The AMT credit carryforwards are available indefinitely to reduce future
income tax liabilities to the extent they exceed AMT liabilities.
We have reviewed the need for a valuation allowance relating to the
deferred tax assets, and have determined that no allowance is needed. We believe
the future deductions will be realized principally through future reversals of
existing taxable temporary differences, and to a lesser extent, future taxable
income. In addition, we have the ability to use tax-planning strategies to
generate taxable income if necessary to realize the deferred tax assets.
Note 6: Stockholders' Equity
On all matters with respect to which our stockholders have a right to vote,
each share of Class A common stock is entitled to one vote, while each share of
Class B common stock is entitled to two votes. The Class B common stock is
convertible into shares of Class A common stock on a share-for-share basis at
the election of the stockholder and will be converted automatically into shares
of Class A common stock upon transfer to any party other than Marlys L. Smith,
her children, her grandchildren, trusts for any of their benefit, and entities
wholly owned by them.
44
Note 7: Stock Plans
We have three stock-based employee compensation plans:
(1) We have reserved 25,000 shares of Class A common stock for issuance
pursuant to an outside director stock option plan. The term of each option
granted under this plan is six years from the grant date. Options fully vest on
the first anniversary of the grant date. The exercise price of each stock option
is 85 percent of the fair market value of the common stock on the date of grant.
In July 2000 we granted outside directors 12,000 stock options in the aggregate
not covered by this plan.
(2) We have reserved 500,000 shares of Class A common stock for issuance
pursuant to an incentive stock option plan. Any shares which expire unexercised
or are forfeited become available again for issuance under the plan. Under this
plan, no awards of incentive stock options may be made after December 31, 2004.
(3) We have reserved 400,000 shares of Class A common stock for issuance
pursuant to a new employee incentive stock option plan adopted during 2001. Any
shares which expire unexercised or are forfeited become available again for
issuance under the plan. Under this plan, no award of incentive stock options
may be made after August 6, 2011.
We account for these plans under the recognition and measurement principles
of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. No stock-based employee compensation
cost is reflected in the statement of operations, as all options granted to
employees under these plans had an exercise price equal to the market value of
the common stock on the date of the grant.
A summary of stock option activity and weighted-average exercise prices
follows:
2001 2002 2003
------------------------------------------------------------------------
Exercise Exercise Exercise
Shares price Shares price Shares price
------------------------------------------------------------------------
Outstanding at beginning of year 345,000 $5.50 623,000 $4.25 384,525 $4.66
Granted 278,000 2.70 27,525 2.31 65,500 1.00
Exercised - - - - - -
Forfeited - - 266,000 3.47 122,875 5.14
------------------------------------------------------------------------
Outstanding at end of year 623,000 $4.25 384,525 $4.66 327,150 $3.74
========================================================================
Options exercisable at end of year 296,400 $5.77 301,725 $5.20 255,350 $4.44
Weighted-average fair value of options
granted during the year $1.49 $1.28 $0.56
A summary of stock options outstanding and exercisable as of December 31,
2003, follows:
Options outstanding Options exercisable
--------------------------------------------------------- --------------------------------
Range of exercise Number Weighted average Weighted average Number Weighted average
prices outstanding remaining life (years) exercise price exercisable exercise price
- ---------------------------------------------------------------------------- --------------------------------
$ 0.82 - $ 3.47 256,150 7.20 $ 1.93 184,350 $ 2.20
$ 7.23 - $ 9.50 36,000 2.08 $ 8.56 36,000 $ 8.56
$11.81 - $14.05 35,000 3.77 $12.00 35,000 $12.00
--------------------------------------------------------- --------------------------------
327,150 6.27 $ 3.74 255,350 $ 4.44
========================================================= ================================
We have reserved 55,000 shares of Class A common stock for issuance
pursuant to an independent contractor driver bonus plan. No shares were awarded
in 2001, 2002 and 2003 under the plan.
We also have a Class A common stock profit incentive plan under which we
will set aside for delivery to certain participants the number of shares of
Class A common stock having a market value on the distribution date equal to a
designated percentage (as determined by the board of directors) of the Company's
consolidated net earnings for the applicable fiscal year. No shares were awarded
in 2001, 2002 and 2003 under the plan.
45
Note 8: Loss per Share
A summary of the basic and diluted loss per share computations is presented
below:
Years ended December 31 2001 2002 2003
- -------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stockholders $ (5,211) $ (8,678) $ (2,588)
---------------------------------------------------
Basic weighted-average shares outstanding 4,852,067 4,845,652 4,846,821
Effect of dilutive stock options - - -
---------------------------------------------------
Diluted weighted-average shares outstanding 4,852,067 4,845,652 4,846,821
===================================================
Basic loss per share $ (1.07) $ (1.79) $ (0.53)
Diluted loss per share $ (1.07) $ (1.79) $ (0.53)
---------------------------------------------------
Note 9: Employees' Profit Sharing and Savings Plan
We have an Employees' Profit Sharing and Savings Plan, which is a qualified
plan under the provisions of Sections 401(a) and 501(a) of the Internal Revenue
Code. Eligible employees are allowed to contribute up to a maximum of 15 percent
of pre-tax compensation into the plan. Employers may make savings, matching, and
discretionary contributions, subject to certain restrictions. During the years
ended December 31, 2001, 2002, and 2003, we made no contributions to the plan.
The plan owns 483,498 shares of the Company's Class A common stock at December
31, 2003.
Note 10: Commitments and Contingent Liabilities
Prior to July 1, 2001, our insurance policies for auto liability, physical
damage, and cargo losses involved a deductible of $50 per incident and our
insurance policy for workers' compensation involved a deductible of $100 per
incident. In January 2003, we exercised an option which retroactively increased
the deductible for our auto liability policy to $125 per incident, for the
policy year beginning July 1, 2001 through June 30, 2002, which reduced our
expense by $467. No changes were made to the other policies during that period.
In response to increasing costs of insurance premiums, we increased the
deductible for all policies to $250 per incident beginning July 1, 2002. At the
July 1, 2003 renewal, we eliminated any coverage over our $2.0 million of
primary coverage and maintained the $250 per incident deductible. At December
31, 2002 and 2003, we had $3,882 and $4,974, respectively, accrued for our
estimated liability for the retained portion of incurred losses related to these
policies.
The insurance companies require us to provide letters of credit to provide
funds for payment of the deductible amounts. At December 31, 2002 and 2003, we
had $7,449 and $7,874 letters of credit issued under the financing arrangement
described in note 4. In addition, funds totaling $654 and $812 were held by the
insurance companies as deposits at December 31, 2002 and 2003, respectively.
Our obligations under non-cancelable operating lease agreements are as
follows: 2004, $227; 2005, $203; 2006, $198; 2007, $198; 2008, $79, thereafter
$77. There are no equipment re-purchase commitments or lease residual guarantees
in place on our fleet. In addition, we have no fuel purchase commitments as of
December 31, 2003.
Our health insurance program is provided as an employee benefit for all
eligible employees and contractors. The plan is self funded for losses up to
$125 per covered member. At December 31, 2002 and 2003, we had approximately
$943 and $1,015, respectively, accrued for our estimated liability related to
these claims.
We are involved in certain legal actions and proceedings arising from the
normal course of operations. We believe that liability, if any, arising from
such legal actions and proceedings will not have a materially adverse effect on
our financial statements.
Note 11: Transactions with Related Parties
In August 2003, we generated approximately $213 of cash and avoided future
premium payments by selling one of our two life insurance policies covering our
late Chief Executive Officer to such officer for the cash surrender value. The
transferred policy has a death benefit of $1,000 and the policy retained by us
has a death benefit of $750. The transaction was approved by the disinterested
directors. During the years ended December 31, 2001, and 2002 there were no
material transactions with related parties.
46
Note 12: Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for the Company for 2002 and 2003 is as
follows:
March 31 June 30 September 30 December 31
---------------------------------------------------------------------
2002
Operating revenue $41,220 $45,239 $43,272 $39,737
Loss from operations (2,700) (1,263) (648) (7,270) (1)
Net loss (2,037) (1,161) (757) (4,723) (1)
Basic and diluted loss per share ($0.42) ($0.24) ($0.16) ($0.97)
2003
Operating revenue $39,886 $42,241 $42,461 $40,741
Earnings (loss) from operations (2,023) (183) 31 72
Net loss (1,558) (458) (305) (268)
Basic and diluted loss per share ($0.32) ($0.09) ($0.06) ($0.06)
- ---------------------------
(1) Fourth quarter 2002 includes a charge of $3,271 ($1,998 after tax) for
impairment of goodwill in one of our reporting units as discussed in note 2
and a charge of $1,800 ($1,100 after tax) for a revision of estimates
related to auto liability and workers' compensation loss reserves.
As a result of rounding, the total of the four quarters may not equal the
results for the year.
47