Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Quarterly Report Pursuant To Section 13 or 15 (d) of The Securities
Exchange Act of 1934 For The Quarter Ended September 30, 1998
[ ] Transition Report Pursuant To Section 13 or 15 (d) of The
Securities Exchange Act of 1934
Commission file number 1-19773
OTR EXPRESS, INC.
(Exact name of registrant as specified in its charter)
Kansas 48-0993128
(State or other jurisdiction of (IRS Employer
incorporation of organization) Identification No.)
804 N. Meadowbrook Drive
PO Box 2819, Olathe, Kansas 66063-0819
(Address of principal executive offices) (Zip Code)
(913) 829-1616
(Registrant's telephone number, including area code)
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
1,835,955
(Number of shares of common stock outstanding as of October 31, 1998)
<PAGE>
PART 1 FINANCIAL INFORMATION
<TABLE>
ITEM 1. FINANCIAL STATEMENTS
OTR EXPRESS, INC.
BALANCE SHEETS
<CAPTION>
September 30 December 31
1998 1997
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 98,780 $ 318,760
Accounts receivable, freight 8,073,390 7,542,557
Accounts receivable, other 286,784 193,803
Inventory 612,825 687,303
Prepaid expenses and other 881,967 480,976
TOTAL CURRENT ASSETS 9,953,746 9,223,399
PROPERTY AND EQUIPMENT 49,306,742 46,810,777
TOTAL ASSETS $59,260,488 $56,034,176
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, trade $ 2,490,083 $ 1,603,654
Accrued payroll and taxes 1,402,122 861,857
Other accrued expenses 1,381,068 1,414,721
Current portion of long-term debt 14,251,316 14,259,700
TOTAL CURRENT LIABILITIES 19,524,589 18,139,932
LONG-TERM DEBT 27,778,740 26,688,357
DEFERRED INCOME TAXES 2,249,000 1,859,803
STOCKHOLDERS' EQUITY 9,708,159 9,346,084
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $59,260,488 $56,034,176
</TABLE>
<PAGE>
<TABLE>
OTR EXPRESS, INC.
STATEMENTS OF OPERATIONS
<CAPTION>
Third Quarter Ended Nine Months Ended
(Unaudited) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
OPERATING REVENUE
Freight revenue $17,557,144 $16,090,407 $50,170,412 $43,735,279
Brokerage revenue 1,000,291 964,033 2,883,630 2,813,077
Total operating revenue 18,557,435 17,054,440 53,054,042 46,548,356
OPERATING EXPENSES
Salaries, wages and
benefits 7,281,667 6,796,283 20,439,710 18,536,457
Purchased transportation 2,046,838 933,557 5,287,331 2,720,936
Fuel 1,359,233 1,907,885 4,428,208 5,608,360
Maintenance 1,252,013 965,354 3,490,530 2,753,653
Depreciation 1,913,997 1,936,104 5,744,316 5,463,196
Insurance and claims 330,739 543,278 1,430,479 1,394,666
Taxes and licenses 1,770,504 1,597,689 5,057,739 4,564,974
Supplies and other 1,331,410 946,851 3,555,164 2,648,135
Total operating expenses 17,286,401 15,627,001 49,433,477 43,690,377
Operating income 1,271,034 1,427,439 3,620,565 2,857,979
Interest expense 842,752 900,833 2,516,001 2,421,301
Income before income taxes 428,282 526,606 1,104,564 436,678
Income tax expense 154,000 200,111 411,561 165,938
Net income $ 274,282 $ 326,495 $ 693,003 $ 270,740
Weighted average number
of shares
Basic 1,835,955 1,840,515 1,836,475 1,840,742
Diluted 1,841,132 1,840,515 1,845,803 1,840,742
Earnings per share
Basic $ 0.15 $ 0.18 $ 0.38 $ 0.15
Diluted 0.15 0.18 0.38 0.15
</TABLE>
<PAGE>
<TABLE>
OTR EXPRESS, INC.
STATEMENTS OF CASH FLOWS
<CAPTION>
Nine Months Ended
September 30
(Unaudited) 1998 1997
<S> <C> <C>
OPERATING ACTIVITIES
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 7,313,699 $ 5,040,646
INVESTING ACTIVITIES
Acquisition of property and equipment (10,338,723) (16,051,953)
Proceeds from disposition of property
and equipment 2,069,723 5,670,599
NET CASH USED IN INVESTING ACTIVITIES (8,269,000) (10,381,354)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 14,278,340 19,397,920
Repayments of long-term debt (13,180,734) (15,508,806)
Net increase (decrease) in bank note payable (304,812) 1,667,923
Other (57,473) (9,650)
NET CASH PROVIDED BY
FINANCING ACTIVITIES 735,321 5,547,387
NET INCREASE (DECREASE) IN CASH (219,980) 206,679
CASH, BEGINNING OF PERIOD 318,760 43,107
CASH, END OF PERIOD $ 98,780 $ 249,786
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest $ 2,516,001 $ 2,413,733
Cash paid (received) for income taxes 22,364 (3,526)
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES
Guarantee of executive officers stock
purchase plan loans $ 289,205 $ -
</TABLE>
<PAGE>
OTR EXPRESS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - FINANCIAL STATEMENT PRESENTATION
The financial statements included herein have been prepared by management,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations, although management believes that the
disclosures are adequate to enable a reasonable understanding of the
information presented. In the opinion of management, all adjustments
considered necessary for a fair presentation of the financial statements
have been included. For further information, refer to the Company's
financial statements and footnotes thereto included in the Annual Report
and Form 10-K for the year ended December 31, 1997.
NOTE 2 - LONG-TERM DEBT
During the nine months ended September 30, 1998, the Company financed the
purchase of revenue equipment through the issuance of long-term debt
totaling $9,600,000. This debt bears interest at effective rates between
6.53% and 7.54%. The Company refinanced encumbered revenue equipment and
computer equipment through the issuance of long-term debt totaling
$4,445,000. This debt bears interest at effective rates of 7.45% and
8.38%, respectively.
NOTE 3 - EARNINGS PER SHARE
In February, 1997 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128, "Earnings Per Share", effective
for periods ending after December 15, 1997, requiring presentation of basic
and diluted earnings per share. SFAS 128 supersedes Accounting Principles
Board Opinion (APB) No. 15 and related pronouncements and replaces the
computations of primary and fully diluted earnings per share (EPS) with
basic and diluted EPS, respectively. Basic earnings per share is based
upon the weighted average common shares outstanding during the year.
Diluted earnings per share is based upon the weighted average common and
common equivalent shares outstanding during each year. Employee stock
options are the company's only common stock equivalents; there are no other
potentially dilutive securities. There was no effect of this accounting
change on previously reported earnings per share.
<PAGE>
NOTE 4 - COMMITMENTS AND CONTINGENCIES
The Company has agreed to guarantee payment of four key executive stock
loans for such executives' private purchase of approximately
69,000 shares of the Company's common stock. The Company has agreed to
guarantee payment of the stock loans to the extent that the pledged value
of the stock purchase (equal to one-half of its market value) is less than
the outstanding principal balance of such loans.
The amount of the Company's guarantee as of September 30, 1998 was
approximately $289,000. Stockholders' equity was reduced by this amount
and long-term debt was increased by this amount to record the guarantee.
At September 30, 1998, the Company had purchase and finance commitments
outstanding for additional revenue equipment of approximately $11,700,000.
The Company anticipates receiving proceeds from the sale or trade-in of
134 tractors in association with these commitments.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION
Overview. The discussion set forth below as well as other documents
incorporated by reference herein and oral statements made by officers of
the Company relating thereto, may contain forward looking statements. Such
comments are based upon information currently available to management and
management's perception thereof as of the date of this Form 10-Q. Actual
results of the Company's operations could materially differ from those
forward looking statements. Such differences could be caused by a number
of factors including, but not limited to, potential adverse effects of
regulation; changes in competition and the effects of such changes;
increased competition; changes in fuel prices; changes in economic,
political or regulatory environments; litigation involving the Company;
changes in the availability of a stable labor force; ability of the Company
to hire drivers meeting Company standards; changes in management
strategies; environmental or tax matters; and risks described from time to
time in reports filed by the Company with the Securities and Exchange
Commission. Readers should take these factors into account in evaluating
any such forward looking statements.
<PAGE>
RESULTS OF OPERATIONS
Third Quarter Ended Nine Months Ended
(Unaudited) 1998 1997 1998 1997
Operating Revenue $18,557,435 $17,054,440 $53,054,042 $46,548,356
Operating Expenses 17,286,401 15,627,001 49,433,477 43,690,377
Interest Expense 842,752 900,833 2,516,001 2,421,301
Net Income 274,282 326,495 693,003 270,740
3rd Quarter 1998 v. 1997
Operating Revenue. Operating revenue improved by 8.8% in the third
quarter ended September 30, 1998 compared to 1997. Freight revenue
increased by 9.1% and brokerage revenue increased by 3.8%.
Freight revenue improved due to increases in rate per mile and average
number of units in service. The rate per mile increased to $1.069 in the
third quarter of 1998 compared to $1.039 in 1997. The higher rate is
primarily a result of a higher level of direct shipper miles in 1998
compared to 1997 and a rate increase effective May 1998. The average number
of tractors in service increased by 9.0% to 583 in the third quarter of
1998 compared to 535 in 1997. Tractors in service in 1998 includes 39
owner operators. The Company did not utilize owner operators in the third
quarter of 1997. Average miles per truck per week decreased to 2,159 from
2,217 in 1997 primarily due to higher unmanned trucks in 1998.
Operating Expenses. The operating ratio (total operating expenses as a
percent of operating revenue) increased to 93.2% in the third quarter of
1998 compared to 91.6% in 1997.
Salaries, wages and benefits decreased to 39.2% of revenue in 1998 from
39.8% in 1997 primarily because revenue per truck per week increased.
Also, the addition of owner operators, who own their trucks and contract
with the Company to haul freight, increased the revenues but not the wages.
Owner operators pay their own expenses, including payroll taxes, fuel,
insurance, licenses and interest expense. The cost of owner operators is
classified in purchased transportation.
Purchased transportation, which represents payments to other trucklines
for hauling loads contracted through the Company's freight brokerage
division and the cost of owner operators, increased to 11.0% of revenue in
1998 from 5.5% in 1997. The increase is a result of the addition of owner
operators to the fleet beginning in October 1997.
<PAGE>
Fuel was 7.3% of revenue in 1998 compared to 11.2% in 1997. This is a
result of lower diesel fuel prices nationwide in 1998, higher revenue rates
per mile and the addition of owner operators.
Maintenance as a percent of revenue increased from 5.7% in 1997 to 6.7%
in 1998 as a result of longer holding periods on tractors and an increase in
trailer maintenance costs due to a substantial increase in the number of
trailers in the fleet.
Insurance and claims represented 1.9% and 3.2% of revenue in the third
quarter of 1998 and 1997, respectively. This is a result of more favorable
loss experience, lower premium rates per mile and increased revenue rate
per mile. The Company's insurance program for liability, physical damage,
cargo damage and worker's compensation involves insurance with varying
deductible levels. Claims in excess of these deductible levels are covered
by insurance in the amounts management considers adequate. The Company
accrues the estimated cost of the uninsured portion of pending claims.
These accruals are estimated based on management's evaluation of the nature
and severity of individual claims and an estimate of future claims
development based on historical claims development trends. Insurance and
claims expense will vary as a percentage of revenue from period to period
based on the frequency and severity of claims incurred in a given period as
well as changes in claims development trends.
Depreciation as a percent of revenue decreased to 10.3% in 1998 from
11.3% in 1997 as a result of higher revenue per truck per week and the
addition of owner operators.
Supplies and other expenses increased to 7.3% of revenue in 1998 from
5.5% in 1997 as a result of an increase in advertising costs for new
drivers and a write-off of costs associated with a planned stock offering
that was suspended due to unfavorable market conditions.
Interest Expense. Interest expense decreased to 4.5% of revenue in 1998
from 5.3% in 1997 as a result of lower interest rates and the addition of
owner operators.
Net Income. The Company reported net income of $274,000, or $0.15 per
share (basic and diluted), for the third quarter of 1998 compared to
$326,000, or $0.18 per share (basic and diluted), in 1997. The effective
income tax rate was 36.0% in 1998 compared to 38.0% in 1997.
Nine Months Comparison 1998 v. 1997
Operating Revenue. Operating revenue for the nine months ended
September 30, 1998 increased by 14.0% to compared to 1997. Freight revenue
increased by 14.7% and brokerage revenue increased by 2.5%.
Freight revenue improved due to an increase in the rate per mile,
tractor utilization and average number of units in service. The rate per
mile increased to $1.055 during the period from $1.028 in 1997. The higher
rate is primarily a result of a higher level of direct shipper miles in
1998 compared to 1997 and a rate increase effective May 1998. The average
number of tractors in service was 571 for the first nine months of 1998
compared to 522 in 1997. The average number of tractors in service in
<PAGE>
1998 includes 34 owner operator drivers. There were no owner operator drivers
in the first nine months of 1997. Average miles per truck per week also
increased to 2,149 from 2,103 due to improved demand from the Company's
direct shipper customers and the placement of additional drop trailers at
customer locations to enable more drivers to load and unload more
efficiently. The Company's empty mile percent increased to 9.2% from 7.6%
in 1997. Brokerage revenue decreased to 5.4% of revenue from 6.0% in 1997.
Operating Expenses. The operating ratio improved to 93.2% for the first
nine months of 1998 compared to 93.9% in 1997.
Salaries, wages and benefits decreased to 38.5% of revenue in 1998 from
39.8% in 1997 primarily because of increased revenue rates per mile and the
addition of owner operators in October 1997.
Purchased transportation, which represents payments to other trucklines
for hauling loads contracted through the Company's freight brokerage
division, and the cost of owner operator drivers, increased to 10.0% of
revenue in 1998 from 5.9% in 1997. The increase is a result of the
addition of owner operators to the fleet beginning in October 1997.
Fuel was 8.3% of revenue in 1998 compared to 12.1% in 1997. This is a
result of lower diesel fuel prices nationwide in 1998, higher revenue rates
per mile and the addition of owner operator drivers.
Maintenance expense increased to 6.6% of revenue in the first nine
months of 1998 from 5.9% in 1997. The increase is a result of a longer
holding period on tractors and additional trailer maintenance costs due to
a substantial increase in the number of trailers in the fleet.
Insurance and claims represented 2.7% and 3.0% of operating revenue for
the first nine months of 1998 and 1997, respectively. This is a result of
lower premiums on insurance policies, more favorable loss experience and an
increase in revenue rates per mile. The Company's insurance program for
liability, physical damage, cargo damage and worker's compensation involves
insurance with varying deductible levels. Claims in excess of these
deductible levels are covered by insurance in the amounts management
considers adequate. The Company accrues the estimated cost of the
uninsured portion of pending claims. These accruals are estimated based on
management's evaluation of the nature and severity of individual claims and
an estimate of future claims development based on historical claims
development trends.
Depreciation as a percent of revenue decreased to 10.8% in 1998 from
11.7% in 1997 as a result of higher revenue per truck per week and the
addition of owner operator drivers.
Supplies and other expenses increased to 6.8% of revenue in 1998 from
5.7% in 1997 as a result of an increase in advertising costs for new
drivers and a write-off of costs in the third quarter associated with a
planned stock offering that was suspended due to unfavorable market
conditions.
<PAGE>
Interest Expense. Interest expense decreased to 4.7% of revenue in 1998
from 5.2% in 1997 as a result of lower interest rates and the addition of
owner operators.
Net Income. The Company reported net income of $693,000, or $0.38 per
share (basic and diluted), for the first nine months of 1998 compared to a
net income of $271,000, or $0.15 per share (basic and diluted), in 1997.
The effective income tax rate was 37.3% in 1998 compared to 38.0% in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The growth of the Company's business has required significant
investments in new revenue equipment, which has been acquired primarily
through secured borrowings. Capital expenditures for revenue equipment
purchases totaled $9,600,000 for the nine months ended September 30, 1998.
The Company received $2,013,000 in proceeds from the disposition of revenue
equipment. The Company has outstanding purchase commitments for 134
replacement tractors at a cost of $10.7 million and 48 expansion trailers
at a cost of $1.0 million. The Company has finance commitments for all of
the expansion trailers and replacement tractors totaling $11.7 million at
rates that will be fixed at time of origination. The remaining 134
replacement tractors are scheduled for delivery between October 1998 and
March 1999. The Company's other capital expenditures will be financed
through internally generated funds and secured borrowings.
Historically, the Company has obtained loans for revenue equipment which
are of shorter duration than the economic useful lives of the equipment.
While such loans have current maturities that tend to create working
capital deficits that could adversely affect cash flows, it was
management's belief that these factors were mitigated by the more
attractive interest rates and terms available on these shorter maturities.
This financing practice has been a significant cause of the working capital
deficit which has existed since the Company's inception. This method of
financing can be expected to continue to produce working capital deficits
in the future. The Company's working capital deficit at September 30, 1998
was $9.6 million. Primarily due to the Company's equity position and the
potential for refinancing of both unencumbered and encumbered assets,
working capital deficits historically have not been a barrier to the
Company's ability to borrow funds for operations and expansion.
In June 1997, the Company entered into a new revolving line of credit
agreement with a financial institution. The maximum borrowing on the line
was $7.0 million through December 31, 1997. Since the Company's tangible
net worth exceeded $9.0 million based on the December 31, 1997 audited
financial statements, under the terms of the credit agreement the maximum
borrowing on the line increased to $8.0 million. The line bears interest
at a variable rate, based upon the prime rate or LIBOR, at the Company's
election, expires June 9, 2000 and is secured by accounts receivable of the
Company. The agreement allows for maximum advances of 85% of eligible
accounts receivable less than 60 days past invoice date. The agreement
contains certain covenants relating to tangible net
<PAGE>
worth, leverage ratios, debt service coverage and other factors. The Company
was in compliance with all required covenants at September 30, 1998. The
Company had borrowings of $3.5 million under this line at September 30, 1998.
A total of $1.3 million of the available credit line was committed for letters
of credit issued by the financial institution. Additionally, approximately
$289,000 of the available line of credit was committed for the Company's
Guaranty of Executive Officer Stock Loans.
At September 30, 1998, the Company owned 30 tractors which were not
pledged as collateral for any liabilities and were free and clear of any
debt obligations. This equipment has an approximate market value of $1.1
million.
In management's opinion, the Company has adequate liquidity for the
foreseeable future based upon funds expected to be generated from
operations, the availability of equity in the Company's assets and the
Company's ability to obtain secured equipment financing.
Year 2000 Issue
The Company has completed a comprehensive review of its Year 2000 issues
and its internal systems (information technology "IT" and non-IT). The
Company's application software programs which have been developed
internally will be Year 2000 compliant with minor modifications that the
Company's IT department will complete. Certain of the Company's
application and equipment software programs are purchased from and/or
maintained by vendors. The Company is working with these software vendors to
verify that these applications become Year 2000 compliant.
The Company believes that with modifications to existing software, the
cost of which is not expected to be material, the Year 2000 issue will not
pose significant operational problems for the Company. Through September 30,
1998, the Company has incurred less than $5,000 in costs relating to the
Year 2000 issue.
As part of the Company's comprehensive review, it is continuing to verify
the Year 2000 readiness of third parties (vendors and customers) with whom
the Company has material relationships. At present the Company is not able
to determine with certainty the effect on the Company's result of operations,
liquidity, and financial condition in the event the Company's material vendors
and customers are not Year 2000 compliant. The Company will continue to
monitor the progress of its material vendors and customers and formulate a
contingency plan at that point in time when and if the Company does not believe
a material vendor or customer will be compliant.
PART II OTHER INFORMATION
ITEM 1 - Legal
Proceedings.....................................................*
ITEM 2 - Changes in Securities and Use of Proceeds..............*
ITEM 3 - Defaults Upon Senior Securities........................*
ITEM 4 - Submission of Matters to a Vote of Security Holders....*
A special meeting of shareholders of the registrant was held on July 10,
1998. The stockholders approved the amendment of the Company's Articles of
Incorporation to increase the number of authorized shares of Common Stock
of the Company from 5,000,000 to 20,000,000 shares.
Stockholders representing at least 1,423,919 shares or 78% were present in
person or by proxy at the Special Meeting. A tabulation with approval of
the amendment of the Company's Articles of Incorporation is as follows:
<PAGE>
Votes
Votes Votes Against or
Cast For Withheld
Approval of the amendment of the
Company's Articles of Incorporation 1,423,919 1,277,934 145,985
ITEM 5 - Other Information..............................*
* No information submitted under this caption.
ITEM 6 - Exhibits and Reports on Form 8-K
The Company did not file any exhibits or reports on Form 8-K during the
nine months ended September 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OTR EXPRESS, INC.
(Registrant)
Date: November 13, 1998 /s/ Gary J. Klusman
By: Gary J. Klusman
President and Principal
Executive Officer
Date: November 13, 1998 /s/ Steven W. Ruben
By: Steven W. Ruben
Principal Financial Officer
and Principal Accounting
Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 98,780
<SECURITIES> 0
<RECEIVABLES> 8,151,874
<ALLOWANCES> 78,484
<INVENTORY> 612,825
<CURRENT-ASSETS> 9,953,746
<PP&E> 68,459,843
<DEPRECIATION> 19,153,101
<TOTAL-ASSETS> 59,260,488
<CURRENT-LIABILITIES> 19,524,589
<BONDS> 0
<COMMON> 18,527
0
0
<OTHER-SE> 9,689,632
<TOTAL-LIABILITY-AND-EQUITY> 59,260,488
<SALES> 53,054,042
<TOTAL-REVENUES> 53,054,042
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 49,395,576
<LOSS-PROVISION> 37,901
<INTEREST-EXPENSE> 2,516,001
<INCOME-PRETAX> 1,104,564
<INCOME-TAX> 411,561
<INCOME-CONTINUING> 693,003
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 693,003
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.38
</TABLE>
