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, 1999
[ ] 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
1,782,671
(Number of shares of common stock outstanding as of October 31, 1999)
<PAGE>
PART 1 FINANCIAL INFORMATION
<TABLE>
ITEM 1. FINANCIAL STATEMENTS
OTR EXPRESS, INC.
BALANCE SHEETS
<CAPTION>
(Unaudited) September 30 December 31
1999 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 362,028 $ 521,484
Accounts receivable, freight 9,946,333 8,192,252
Accounts receivable, other 198,329 217,080
Inventory 521,891 534,623
Prepaid expenses and other 815,892 545,734
TOTAL CURRENT ASSETS 11,844,473 10,011,173
PROPERTY AND EQUIPMENT 56,012,983 49,209,269
TOTAL ASSETS $67,857,456 $59,220,442
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, trade $ 2,203,368 $ 2,060,251
Accrued payroll and taxes 1,455,676 1,007,735
Other accrued expenses 1,421,736 1,365,739
Current portion of long-term debt 13,857,060 13,837,296
TOTAL CURRENT LIABILITIES 18,937,840 18,271,021
LONG-TERM DEBT 36,783,765 28,658,211
DEFERRED INCOME TAXES 2,399,900 2,400,000
STOCKHOLDERS' EQUITY 9,735,951 9,891,210
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $67,857,456 $59,220,442
</TABLE>
</PAGE>
<TABLE>
OTR EXPRESS, INC.
STATEMENTS OF OPERATIONS
<CAPTION>
Third Quarter Ended Nine Months Ended
September 30
(Unaudited) 1999 1998 1999 1998
<S> <C> <C> <C> <C>
OPERATING REVENUE
Freight revenue $17,662,448 $17,557,144 $52,766,058 $50,170,412
Logistics revenue 2,839,378 1,000,291 6,988,153 2,883,630
Total operating revenue 20,501,826 18,557,435 59,754,211 53,054,042
OPERATING EXPENSES
Salaries, wages and
benefits 7,288,672 7,281,667 22,145,884 20,439,710
Purchased transportation 4,421,258 2,046,838 10,884,123 5,287,331
Fuel 1,753,410 1,359,233 4,310,199 4,428,208
Maintenance 1,281,177 1,252,013 3,723,757 3,490,530
Depreciation 2,027,498 1,913,997 5,494,547 5,744,316
Insurance and claims 396,001 330,739 1,468,704 1,430,479
Taxes and licenses 1,775,397 1,770,504 5,580,294 5,057,739
Supplies and other 1,163,602 1,331,410 3,445,917 3,555,164
Total operating expenses 20,107,015 17,286,401 57,053,425 49,433,477
Operating income 394,811 1,271,034 2,700,786 3,620,565
Interest expense 922,557 842,752 2,644,127 2,516,001
Income (loss) before
income taxes (527,746) 428,282 56,659 1,104,564
Income tax expense
(benefit) (200,000) 154,000 22,000 411,561
Net income (loss) $ (327,746) $ 274,282 $ 34,659 $ 693,003
Weighted average number
of shares
Basic 1,781,671 1,835,955 1,809,813 1,836,475
Diluted 1,781,991 1,841,132 1,810,266 1,845,803
Earnings (loss) per share
Basic $ (0.18) $ 0.15 $ 0.02 $ 0.38
Diluted (0.18) 0.15 0.02 0.38
</TABLE>
<PAGE>
<TABLE>
OTR EXPRESS, INC.
STATEMENTS OF CASH FLOWS
<CAPTION>
Nine Months Ended
September 30
(Unaudited) 1999 1998
<S> <C> <C>
OPERATING ACTIVITIES
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 4,183,406 $ 7,313,699
INVESTING ACTIVITIES
Acquisition of property and equipment (21,009,148) (10,338,723)
Proceeds from disposition of property and
equipment 8,710,886 2,069,723
NET CASH USED IN INVESTING ACTIVITIES (12,298,262) (8,269,000)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 21,969,823 14,278,340
Repayments of long-term debt (14,579,798) (13,180,734)
Net increase (decrease) in bank note payable 755,293 (304,812)
Other (189,918) (57,473)
NET CASH PROVIDED BY
FINANCING ACTIVITIES 7,955,400 735,321
NET DECREASE IN CASH (159,456) (219,980)
CASH, BEGINNING OF PERIOD 521,484 318,760
CASH, END OF PERIOD $ 362,028 $ 98,780
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest $ 2,644,127 $ 2,516,001
Cash paid for income taxes 22,100 22,364
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 on
Form 10-K for the year ended December 31, 1998.
NOTE 2 - LONG-TERM DEBT
During the nine months ended September 30, 1999, the Company financed the
purchase of revenue equipment through the issuance of long-term debt
totaling $20,650,000. This debt bears interest at effective rates between
6.13% and 7.92%. The Company refinanced encumbered revenue equipment and
computer equipment through the issuance of long-term debt totaling
$1,320,000. The debt bears interest at effective rates between 7.65% and
8.60%.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
The Company 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 in 1998. 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. In April 1999, one of the
executives resigned from the Company and the Company repaid the principal
balance of his loan.
The amount of the Company's guarantee as of September 30, 1999 was
approximately $297,000. Stockholders' equity was reduced by this amount and
long-term debt was increased by this amount to record the guarantee.
At September 30, 1999, the Company had purchase and finance commitments
outstanding for additional revenue equipment of approximately $4.2 million.
The Company anticipates receiving proceeds from the sale or trade-in of 50
tractors in association with these commitments.
<PAGE>
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; potential adverse effects of the Year 2000 issue; 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.
RESULTS OF OPERATIONS
Third Quarter Ended Nine Months Ended
September 30 September 30
(Unaudited) 1999 1998 1999 1998
Operating Revenue $20,501,826 $18,557,435 $59,754,211 $53,054,042
Operating Expenses 20,107,015 17,286,401 57,053,425 49,433,477
Interest Expense 922,557 842,752 2,644,127 2,516,001
Net Income (loss) (327,746) 274,282 34,659 693,003
3rd Quarter 1999 v. 1998
Operating Revenue. Operating revenue improved by 10.5% in the third
quarter ended September 30, 1999 compared to 1998. Freight revenue
increased by 1.0% and logistics revenue increased by 183.9%.
Freight revenue improved due to increases in rate per mile and average
number of units in service. The rate per mile increased to $1.075 in the
third quarter of 1999 compared to $1.069 in 1998. A fuel surcharge was
implemented in August 1999. The average number of tractors in service
<PAGE>
increased by 2.7% to 599 in the third quarter of 1999 compared to 583 in
1998. Tractors in service includes 64 owner operators in 1999 and 40 owner
operators in 1998.
Logistics revenue increased due to the addition of the rail logistics
division in Salt Lake City, Utah in October 1998.
Operating Expenses. The operating ratio (total operating expenses as a
percent of operating revenue) increased to 98.1% in the third quarter of
1999 compared to 93.2% in 1998.
Salaries, wages and benefits decreased to 35.6% of revenue in 1999 from
39.2% in 1998 primarily because of the increase in revenue from the
logistics division and the increase in owner operators. 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 the cost of owner operators
and payments to other trucklines and rail carriers for hauling loads
contracted through the Company's logistics division, increased to 21.6% of
revenue in 1999 from 11.0% in 1998. The increase is a result of the 183.9%
increase in logistics revenue and the increase in the number of owner
operators.
Fuel was 8.6% of revenue in 1999 compared to 7.3% in 1998. This is a
result of substantially higher diesel fuel prices nationwide in the third
quarter of 1999 compared to 1998.
Insurance and claims represented 1.9% and 1.8% of revenue in the third
quarter of 1999 and 1998, respectively. 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 9.9% in 1999 from
10.3% in 1998 as a result of the increase in owner operators, the increase
in logistics revenue and the longer holding period for trucks.
Supplies and other expenses decreased to 5.7% of revenue in 1999 from
7.2% in 1998 as a result of a decrease in advertising costs for new
drivers, a reduction in independent agents' sales commissions, the increase
in logistics revenue, and the costs of a planned stock offering in 1998
that was discontinued due to unfavorable market conditions.
<PAGE>
Interest Expense. Interest expense was 4.5% of revenue in 1999 and 1998
as a result of lower interest rates.
Net Income. The Company reported a net loss of $328,000, or $0.18 per
share (basic and diluted), for the third quarter of 1999 compared to net
income of $274,000, or $0.15 per share (basic and diluted), in 1998. The
effective income tax rate was 37.9% in 1999 compared to 36.0% in 1998.
Nine Months Comparison 1999 v. 1998
Operating Revenue. Operating revenue for the nine months ended
September 30, 1999 increased by 12.6% to compared to 1998. Freight revenue
increased by 5.2% and logistics revenue increased by 142.3%.
Freight revenue improved due to an increase in the rate per mile and
average number of units in service. The rate per mile increased to $1.064
during the period from $1.055 in 1998. The average number of tractors in
service was 596 for the first nine months of 1999 compared to 571 in 1998.
The average number of tractors in service in 1999 includes 64 owner
operator drivers compared to 40 in 1998. Average miles per truck per week
was 2,149 in 1999 and 1998. The Company's empty mile percent decreased to
8.8% from 9.2% in 1998.
Logistics revenue increased primarily due to the addition of the rail
logistics division in Salt Lake City, Utah in October 1998.
Operating Expenses. The operating ratio increased to 95.5% for the
first nine months of 1999 compared to 93.2% in 1998.
Salaries, wages and benefits decreased to 37.1% of revenue in 1999 from
38.5% in 1998 primarily as a result of the increase in logistics revenue
and owner operators in 1999.
Purchased transportation, which represents payments to other trucklines
for hauling loads contracted through the Company's logistics division, and
the cost of owner operator drivers, increased to 18.2% of revenue in 1999
from 10.0% in 1998. The increase is a result of the addition of owner
operators to the fleet and the increase in logistics revenue.
Fuel was 7.2% of revenue in 1999 compared to 8.3% in 1998. This is a
result of lower diesel fuel prices nationwide for the first six months of
1999, higher revenue rates per mile and the addition of owner operator
drivers.
Insurance and claims represented 2.5% and 2.7% of operating revenue for
the first nine months of 1999 and 1998, respectively. 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.
<PAGE>
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 9.2% in 1999 from
10.8% in 1998 as a result of the addition of owner operator drivers, the
increase in logistics revenue and the longer holding period for tractors.
Supplies and other expenses decreased to 5.8% of revenue in 1999 from
6.7% in 1998 as a result of a decrease in advertising costs for new drivers
and a decrease in commissions paid to independent sales agents, the costs
of a planned stock offering in 1998 that was canceled due to unfavorable
market conditions, the increase in logistics revenue and the increase in
owner operators.
Interest Expense. Interest expense decreased to 4.4% of revenue in 1999
from 4.7% in 1998 as a result of lower interest rates, the addition of
owner operators and the increase in logistics revenue.
Net Income. The Company reported net income of $35,000, or $0.02 per
share, for the first nine months of 1999 compared to a net income of
$693,000, or $0.38 per share, in 1998. The effective income tax rate was
38.8% in 1999 compared to 37.3% in 1998.
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 $20,650,000 for the nine months ended September 30, 1999.
The Company received $8,711,000 in proceeds from the disposition of revenue
equipment. The Company has outstanding purchase commitments for 52
replacement tractors at a cost of $4.2 million. The Company has finance
commitments for all of the expansion tractors and replacement tractors at
rates that will be fixed at time of origination. 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, 1999
was $7.1 million. Primarily due to the Company's equity position and the
potential for
<PAGE>
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.
The Company has a revolving line of credit with its primary lending
bank which bears interest at a variable rate, based upon the prime rate or
LIBOR, at the Company's election, and is secured by accounts receivable of
the Company. Effective June 30, 1999, the Company's line of credit was
increased from $8.0 million to $10.0 million and the maturity date was
changed from June 9, 2000 to August 1, 2001. 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 worth, leverage ratios, debt service coverage and other
factors. The Company was in compliance with all required covenants at
September 30, 1999. The Company had borrowings of $4.3 million under this
line at September 30, 1999. A total of $846,000 of the available credit
line was committed for letters of credit issued by the financial
institution. Additionally, approximately $297,000 of the available line of
credit was committed for the Company's Guaranty of Executive Officer Stock
Loans as more fully described in Note 3 to the financial statements.
In management's opinion, the Company has adequate liquidity for the
foreseeable future based upon funds expected to be generated from
operations, the Company's equity position, the potential for refinancing
assets owned by the Company and the Company's ability to obtain secured
equipment financing.
Year 2000 Issue
The Company has completed a comprehensive inventory and assessment of
its Year 2000 issues and its internal systems (both 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. Computer
hardware consists almost exclusively of Apple Macintosh computers which are
Year 2000 compliant according to Apple Computer, Inc. Non-Macintosh
computer hardware has been replaced. 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 was not expected to be material, the Year 2000 issue will not
pose significant operational problems for the Company. The Company
expensed less than $10,000 in costs relating to the Year 2000 issue in the
nine months ended September 30, 1999. The Company completed an
organization-wide test on its proprietary software, involving employees
from all areas of the Company, during which the systems were tested with
year 2000 dates. There were no significant issues discovered during the
test and
<PAGE>
minor issues identified have been addressed by the Company's
management information systems (MIS) department.
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. The Company has material
vendor relationships with financial institutions and telecommunications
companies. These vendors indicate that they expect to achieve compliance
and do not anticipate business interruptions as the century changes. The
Company is developing contingency plans to address Year 2000 issues that
may arise with these key vendors. At present the Company is not able to
determine with certainty the effect on the Company's results 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
Market Risk
The Company is exposed to various market risks, including the effects of
interest rates and fuel prices. The Company utilizes primarily fixed rate
financial instruments with varying maturities. The Company's long-term
financing is all at fixed rates. The Company's working capital line of
credit is at a variable rate.
The Company uses call options as hedges on heating oil in order to
manage a portion of its exposure to variable diesel prices. These
agreements provide some protection from rising fuel prices. The Company's
exposure to loss on the call options is limited to the premium cost of the
contract. Based on historical information, the Company believes the
correlation between the market prices of diesel fuel and heating oil is
highly effective. The Company's heating oil option contracts are not
material to the Company's financial position and represent no significant
market exposure. The Company maintained fuel inventories for use in normal
operations at September 30, 1999 and represented no significant market
exposure.
There was no material change in the Company's exposure to market risk in
the nine months ended September 30, 1999 as compared to December 31, 1998.
For further information, refer to Management's Discussion and Analysis of
Operations and Financial Condition included in the Annual Report on Form
10-K for the year ended December 31, 1998.
<PAGE>
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
The annual meeting of shareholders of the registrant was held on May 6,
1999. In addition to the election of three Class B directors to serve
three-year terms, the stockholders ratified the appointment of Arthur
Andersen LLP as independent auditors for the Company.
Stockholders representing at least 1,417,773 shares or 77% were present in
person or by proxy at the Annual Meeting. A tabulation with respect to
each nominee and appointment of Arthur Andersen LLP as independent auditors
for 1999 is as follows:
Votes
Votes Votes Against or
Cast For Withheld
Terry G. Christenberry 1,417,773 1,411,793 5,980
Dean W. Graves 1,417,773 1,411,793 5,980
Gary J. Klusman 1,417,773 1,411,773 6,000
Appointment of Arthur Andersen LLP
as independent auditors 1,417,773 1,416,743 1,030
ITEM 5 - Other Information
The Company announced October 19,1999 that William P. Ward, Chairman of the
Board and founder of the company, will assume the additional positions of
President and Chief Executive Officer, effective immediately. Mr. Ward
held the position of CEO from 1985 to 1998. Mr. Ward replaces Gary J.
Klusman, who had been President and CEO since February 1998. Mr. Klusman
has left the company and resigned from the board of directors.
ITEM 6 - Exhibits and Reports on Form 8-K...................*
*No information submitted under this caption.
The Company did not file any exhibits or reports on Form 8-K during the
nine months ended September 30, 1999.
<PAGE>
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 15, 1999 /s/ William P. Ward
By: William P. Ward
Chairman of the Board,
President and Principal
Executive Officer
Date:November 15, 1999 /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-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 362,028
<SECURITIES> 0
<RECEIVABLES> 10,244,710
<ALLOWANCES> 100,048
<INVENTORY> 521,891
<CURRENT-ASSETS> 11,844,473
<PP&E> 71,808,463
<DEPRECIATION> 15,795,480
<TOTAL-ASSETS> 67,857,456
<CURRENT-LIABILITIES> 18,937,840
<BONDS> 0
<COMMON> 18,527
0
0
<OTHER-SE> 9,717,424
<TOTAL-LIABILITY-AND-EQUITY> 67,857,456
<SALES> 59,754,211
<TOTAL-REVENUES> 59,754,211
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 57,039,926
<LOSS-PROVISION> 13,499
<INTEREST-EXPENSE> 2,644,127
<INCOME-PRETAX> 56,659
<INCOME-TAX> 22,000
<INCOME-CONTINUING> 34,659
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,659
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
