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 June 30, 2000
[ ] 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 48-099312
(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
1,782,022
(Number of shares of common stock outstanding as of July 31, 2000)
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<TABLE>
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OTR EXPRESS, INC.
BALANCE SHEETS
<CAPTION>
(Unaudited) June 30 December 31
2000 1999
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 525 $ 113,284
Accounts receivable, freight, net 9,684,039 9,899,107
Accounts receivable, other 333,006 152,379
Inventory 418,010 449,735
Prepaid expenses and other 1,015,909 564,009
TOTAL CURRENT ASSETS 11,451,489 11,178,514
PROPERTY AND EQUIPMENT, at cost, less
accumulated depreciation 47,640,016 52,397,851
TOTAL ASSETS $59,091,50 $63,576,365
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, trade $ 2,488,704 $ 2,274,541
Accrued payroll and payroll taxes 1,156,897 1,284,506
Insurance and claims and other 1,512,454 1,472,432
Current portion of long-term debt 11,851,655 13,842,822
TOTAL CURRENT LIABILITIES 17,009,710 18,874,301
LONG-TERM DEBT, less current portion above 34,583,471 33,889,580
DEFERRED INCOME TAXES 557,900 1,831,900
STOCKHOLDERS' EQUITY 6,940,424 8,980,584
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $59,091,505 $63,576,365
</TABLE>
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<TABLE>
OTR EXPRESS, INC.
STATEMENTS OF OPERATIONS
<CAPTION>
Second Quarter Ended Six Months Ended
June 30 June 30
(Unaudited) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
OPERATING REVENUE
Freight revenue $18,264,333 $18,430,506 $36,780,517 $35,103,610
Logistics revenue 2,522,885 2,140,416 4,983,844 4,148,775
Total operating revenue 20,787,218 20,570,922 41,764,361 39,252,385
OPERATING EXPENSES
Salaries, wages and
benefits 7,081,290 7,666,351 14,551,129 14,857,212
Purchased transportation 5,041,342 3,528,601 9,769,595 6,462,865
Fuel 2,140,816 1,484,549 4,374,734 2,556,789
Maintenance 1,080,693 1,245,861 2,103,338 2,442,580
Depreciation 2,144,855 1,838,258 4,278,134 3,467,049
Insurance and claims 685,207 469,527 1,268,260 1,072,703
Taxes and licenses 1,780,497 1,960,331 3,715,165 3,804,897
Supplies and other 1,190,156 1,139,004 2,388,344 2,282,315
Write down of assets
held for sale 714,769 - 714,769 -
Total operating expenses 21,859,625 19,332,482 43,163,468 36,946,410
Operating income (loss) (1,072,407) 1,238,440 (1,399,107) 2,305,975
Interest expense 967,567 886,201 1,902,796 1,721,570
Income (loss) before
income taxes and
cumulative effect of
accounting change (2,039,974) 352,239 (3,301,903) 584,405
Income tax expense
(benefit) (775,000) 134,000 (1,254,729) 222,000
Income (loss) before
cumulative effect of
accounting change (1,264,974) 218,239 (2,047,174) 362,405
Cumulative effect on
prior year of revenue
recognition method, net of
related income tax effect - - 31,442 -
Net income (loss) $(1,264,974) $ 218,239 $(2,078,616) $ 362,405
Weighted average number
of shares
Basic 1,786,905 1,815,187 1,787,119 1,824,117
Diluted 1,786,905 1,815,187 1,786,859 1,824,316
Earnings (loss) per
share
Basic $ (0.71) $ 0.12 $ (1.16) $ 0.20
Diluted (0.71) 0.12 (1.16) 0.20
</TABLE>
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<TABLE>
OTR EXPRESS, INC.
STATEMENTS OF CASH FLOWS
<CAPTION>
Six Months Ended
June 30
(Unaudited) 2000 1999
<S> <C> <C>
OPERATING ACTIVITIES
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,329,403 $ 2,939,137
INVESTING ACTIVITIES
Acquisition of property and equipment (1,580,048) (15,153,246)
Proceeds from disposition of property
and equipment 1,396,706 4,695,384
NET CASH USED IN INVESTING ACTIVITIES (183,342) (10,457,862)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 1,554,529 14,882,904
Repayments of long-term debt (7,114,340) (9,207,416)
Net increase in bank note payable 4,302,535 1,746,503
Other (1,544) (189,918)
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (1,258,820) 7,232,073
NET DECREASE IN CASH (112,759) (286,652)
CASH, BEGINNING OF PERIOD 113,284 521,484
CASH, END OF PERIOD $ 525 $ 234,832
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest $ 1,883,661 $ 1,721,570
Cash paid for income taxes - -
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES
Decrease in guarantee of executive
officers' stock purchase plan loans $ (40,000) $ -
</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, 1999.
The Company changed its method of revenue recognition from the pickup
method to the proportionate method effective January 1, 2000. This change
was made since the proportionate method better matches recorded revenue
with partially completed loads in transit at the end of the period.
Estimated revenue in transit at the end of a period is recognized on the
relative transit time. Direct expenses are recognized as incurred using
this method. The charge associated with this accounting change
was $31,442, net of tax, which was recorded in the first quarter of 2000.
The Company reduced the value of approximately 130 trailers, 29 tractors
and a remote fuel facility in Wyoming. These represent assets which are held
for sale, pursuant to Statement of Financial Accounting Standards No. 121,
"Impairment of Long-Lived Assets." The pre-tax charge needed to write these
assets down to net realizable value approximated $715,000. The Company expects
to sell substantially all of these tractors and trailers prior to the end of
the year 2000.
NOTE 2 - LONG-TERM DEBT
During the six months ended June 30, 2000, the Company financed the
purchase of revenue equipment through the issuance of long-term debt
totaling $1,554,529. This debt bears interest at effective rates between
8.17% and 8.50%.
The note payable collateralized by the Company's building and property with
debt totaling $1,183,983 is due and payable as of April 12, 2001 and is
classified in current portion of long-term debt.
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. During 1999, two of the
executives were terminated and the Company repaid the principal balance of
their loans, which totaled $250,000. The Company recorded the repayments
as compensation expense in 1999.
The amount of the Company's guarantee as of June 30, 2000 was approximately
$90,000. Stockholders' equity was reduced by this amount and long-term debt
was increased by this amount to record the guarantee.
NOTE 4 - LIQUIDITY
Higher fuel prices, unseated tractors and increased driver payroll costs
contributed to losses of $327,746, $926,744, $813,642 and $1,264,974 being
incurred in the third and fourth quarters of 1999 and first and second
quarters of 2000, respectively. Additional losses are expected through the
remainder of 2000.
The Company filed a Form 8-K current report with the Securities and Exchange
Commission (SEC) July 13, 2000, in which it reported that it had been in
discussions with its four largest equipment lenders to renegotiate payment
terms in order to maintain adequate liquidity in the near term. The Company
is also working with its line of credit lender, HSBC Business Credit (USA)
Inc. ("HSBC"), to waive or amend certain financial covenants in which the
Company is currently in default. The aforementioned equipment lenders have
agreed in principle to interest only note payments for sixty to ninety day
periods, which the Company expects will improve its cash flow situation.
Certain lenders modified terms of the notes that will result in additional
interest costs. Additionally, the Company's line of credit lender has agreed
to waive the covenant defaults and revise them for the third quarter, and
implemented a $1 million collateral reserve which reduces the Company's
borrowing availability by that amount.
NOTE 5 - SEGMENT INFORMATION
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies in the company's 1999 Annual
Report to Shareholders. The following table summarizes the Company's
continuing operations by business segment (in thousands):
<TABLE>
RESULTS OF OPERATIONS
Segment information Second Quarter Ended Six Months Ended
<CAPTION> June 30 June 30
(Unaudited) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Operating Revenue
Freight revenue $18,264,333 $18,430,506 $36,780,517 $35,103,610
Logistics revenue 2,522,885 2,140,416 4,983,844 4,148,775
Total operating revenue 20,787,218 20,570,922 41,764,361 39,252,385
Operating Expenses
Freight expenses 19,454,247 17,295,697 38,394,454 33,019,153
Logistics expenses 2,405,378 2,036,785 4,769,014 3,927,257
Total operating expenses 21,859,625 19,332,482 43,163,468 36,946,410
Operating Income (Loss)
Freight operating income
(loss) (1,189,914) 1,134,809 (1,613,937) 2,084,457
Logistics operating
income (loss) 117,507 103,631 214,830 221,518
Total operating income
(loss) (1,072,407) 1,238,440 (1,399,107) 2,305,975
Interest Expense 967,567 886,201 1,902,796 1,721,570
Net Income (loss) (1,264,974) 218,239 (2,078,616) 362,405
</TABLE>
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 that are not purely historical, may contain
forward looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, that are based on current expectations and are subject to risks and
uncertainties. These statements include statements regarding the Company's
expectations, hopes, beliefs and intentions on strategies regarding the
future. 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; changes in fuel prices; changes in economic, political or
regulatory environments; changes in the value of revenue equipment;
litigation involving the Company; changes in the availability of a stable
labor force; ability of the Company to hire drivers meeting Company
standards; availability of affordable financing and refinancing; changes in
management strategies; environmental or tax matters; the ability of the
Company to realize the benefits of its business plan, and risks described
from time to time in reports filed by the Company with the Securities and
Exchange Commission (SEC). Readers should take these factors into account
in evaluating any such forward looking statements. Readers should review
and consider the various disclosures made by the company in this press
release, in reports to stockholders, and periodic reports on Form 8-K, 10-K
and 10-Q filed with the Securities and Exchange Commission. The Company
undertakes no obligation to update publicly or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise.
2nd Quarter 2000 v. 1999
Operating Revenue. Operating revenue improved by 1.1% in the second
quarter ended June 30, 2000 compared to 1999. Freight revenue decreased by
0.9% and logistics revenue increased by 17.9%.
Freight revenue decreased due to a decline in the average number of
units in service. The rate per mile increased to $1.074 (net of
approximately $0.034 fuel surcharge) in the second quarter of 2000 compared
to $1.059 in 1999. A revenue rate increase was implemented in March
2000. The average number of tractors in service decreased by 6.8% to 563
in the second quarter of 2000 compared to 604 in 1999. Tractors in service
includes 68 owner operators in 2000 and 67 owner operators in 1999. In an
effort to increase utilization for company-owned tractors, the Company
eliminated owner-operator fleets of more than one tractor beginning in May
2000, thereby lowering the number of owner operators toward the end of
second quarter.
Logistics revenue increased due to a 25.7% increase in rail logistics
revenue and a 6.8% increase in truck logistics revenue.
Operating Expenses. The operating ratio (total operating expenses
as a percent of operating revenue) increased to 105.2% in the second
quarter of 2000 compared to 94.0% in 1999.
Salaries, wages and benefits decreased to 34.1% of revenue in 2000 from
37.3% in 1999 primarily because of the increase in logistics revenue and a
larger number of average owner operators in service in 2000. The Company
also operated with a higher number of unseated trucks in 2000 as compared
to 1999. 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. Additionally, as a
result of a planned staff reduction, the Company had approximately 4% fewer
office employees in the second quarter of 2000 compared to 1999.
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 24.3% of
revenue in 2000 from 17.2% in 1999. The cost of owner operators increased
69.2% due to the increase in the number of owner operators contracting with
the Company in April and May of 2000 as compared to 1999. Purchased
transportation for the logistics division increased 19.2% due to the
increase in logistics revenue.
Fuel was 10.3% of revenue in 2000 compared to 7.2% in 1999. This is a
result of substantially higher diesel fuel prices nationwide in the second
quarter of 2000 compared to 1999. In order to offset the higher fuel
costs, the Company has implemented a fuel surcharge to its customers, which
is recorded in freight revenue. Additionally, the Company has engaged in a
fuel hedging program in which it buys call options on heating oil in the
approximate percentage of fuel not covered by a fuel surcharge. (See
Market Risk below).
Maintenance was 5.2% of revenue in 2000 compared to 6.1% of revenue in
1999 primarily as a result of lower overall maintenance costs from a newer
fleet of tractors and the increase in owner operators (who pay their own
tractor maintenance costs).
Insurance and claims represented 3.3% and 2.3% of revenue in the second
quarter of 2000 and 1999, respectively. The increase is a result of higher
insurance premiums and higher accidents and claims levels. 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 increased to 10.3% in 2000 from
8.9% in 1999. In 1999, the Company had several tractors that were held
longer than normal which were depreciated to their salvage value.
Substantially all of those tractors were sold in 1999 and as of June 30,
2000 the Company does not have any tractors that depreciate to a
salvage value. The Company also removed the salvage value on its
approximately 250 forty-eight foot trailers effective January 1, 2000 and
is now depreciating them over their remaining estimated useful lives
without a salvage value, thereby increasing depreciation expense in 2000.
Licenses and permits was 8.6% of revenue in 2000 compared to 9.5% in
1999. The decrease is a result of higher revenue per mile and the increase
in owner operators and logistics revenue.
Supplies and other expenses increased to 5.7% of revenue in 2000 from
5.5% in 1999 as a result of the increase in advertising for drivers.
Write down of assets held for sale was 3.4% of revenue in 2000.
The Company reduced the value of 130 trailers, 29 tractors and a remote
fuel facility located in Wyoming.
Interest Expense. Interest expense was 4.7% of revenue in 2000
compared to 4.3% in 1999 due to higher interest rates.
Net Income. The Company reported a net loss of $1,265,000, or $0.71
per share (basic and diluted), for the second quarter of 2000 compared to
net income of $218,000, or $0.12 per share (basic and diluted), in 1999.
Six Months Comparison 2000 v. 1999
Operating Revenue. Operating revenue improved by 6.4% in the six
months ended June 30, 2000 compared to 1999. Freight revenue increased by
4.8% and logistics revenue increased by 20.1%.
Freight revenue improved due to increases in rate per mile and average
number of units in service. The rate per mile increased to $1.073 (net of
approximately $0.030 fuel surcharge) during the period from $1.059 in 1999.
A revenue rate increase was implemented in March 2000. The average
number of tractors in service increased by 1.5% to 600 for the first six
months of 2000 compared to 591 in 1999.
Logistics revenue increased due to a 45.8% increase in rail logistics
revenue and an 8.6% decrease in truck logistics revenue.
Operating Expenses. The operating ratio (total operating expenses
as a percent of operating revenue) increased to 103.4% for the first six
months of 2000 compared to 94.1% in 1999.
Salaries, wages and benefits decreased to 34.8% of revenue in 2000 from
37.9% in 1999 primarily because of the increase in logistics revenue and
the increase in owner operators. 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 23.4% of
revenue in 2000 from 16.5% in 1999. The cost of owner operators increased
as a result of the addition of owner operators to the fleet in the first
six months of 2000. The Company reduced its owner operator fleet in June
of 2000 from 113 owner operators to 68 owner operators. Purchased
transportation for the logistics division increased 22.6% due to the
increase in logistics revenue.
Fuel was 10.5% of revenue in 2000 compared to 6.5% in 1999. This is a
result of substantially higher diesel fuel prices nationwide in the first
six months of 2000 compared to 1999.
Maintenance was 5.0% of revenue in 2000 compared to 6.2% of revenue in
1999 primarily as a result of higher logistics revenue, the increase in
owner operators and a newer fleet of tractors.
Insurance and claims represented 3.0% and 2.7% of revenue for the first
six months of 2000 and 1999, 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 increased to 10.2% in 2000 from
8.8% in 1999 primarily because the Company had several tractors that were
held longer than normal and still in service in 1999 that were depreciated to
their salvage value. Substantially all those tractors were sold in 1999
and as of June 30, 2000 the Company does not have any tractors that are
depreciated to a salvage value.
Licenses and permits was 8.9% of revenue in 2000 compared to 9.7% in
1999 primarily due to the higher logistics revenue and the increase in
average owner operators in service.
Supplies and other expenses decreased to 5.7% of revenue in 2000 from
5.8% in 1999 as a result of the increase in logistics revenue.
Write down of assets held for sale was 3.4% of revenue in 2000 .
The Company reduced the value of 130 trailers, 29 tractors and a remote
fuel facility located in Wyoming.
Interest Expense. Interest expense was 4.6% of revenue in 2000
compared to 4.4% in 1999 primarily due to higher interest rates.
Net Income. The Company reported a net loss of $2,079,000, or $1.16
per share (basic and diluted), for the first six months of 2000 compared to
net income of $362,000, or $0.20 per share (basic and diluted), in 1999.
The Company changed its method of revenue recognition from the pickup
method to the proportionate method. This change resulted in the cumulative
effect adjustment of $0.02 per share. The effective income tax rate was
38.0% in 2000 and 1999.
LIQUIDITY AND CAPITAL RESOURCES
The growth of the Company's business has historically required
significant investments in new revenue equipment, which has been acquired
primarily through secured borrowings. Capital expenditures for revenue
equipment purchases totaled approximately $1,580,000 for the six months
ended June 30, 2000. The Company received approximately $1,397,000 in
proceeds from the disposition of revenue equipment. The Company has no
outstanding purchase commitments for replacement tractors. The Company's
other capital expenditures would 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 is management's
belief that these factors have historically been 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 June 30, 2000 was
$5.6 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.
The Company has a revolving line of credit, as amended, of $10.0
million with HSBC, which bears interest at a variable rate, based upon the
prime rate or LIBOR, at the Company's election, expires August 1, 2001 and
is collateralized by accounts receivable of the Company. The agreement, as
amended, allows for maximum advances of 85% of eligible accounts receivable
less than 60 days past invoice date. The agreement, as amended, contains
certain covenants relating to tangible net worth, leverage ratios, debt
service coverage and other factors. The Company was in default on the net
worth and leverage ratio covenants in the amended credit agreement at the
end of the second quarter. HSBC waived default on the covenants on which
the Company was in default as of June 30, 2000. Effective August 1, 2000,
HSBC amended the amended line of credit agreement (Exhibit 10(c)) to
include a $1,000,000 reserve against accounts receivable. The $1,000,000
will be subtracted from the Company's receivables borrowing base, as
defined, when calculating the amount of borrowing capacity. Additionally,
HSBC revised the minimum tangible net worth and leverage ratios for the
third and fourth quarters. The Company had borrowings of $5.9 million
under this amended line of credit at June 30, 2000. The Company had
approximately $1.6 million of additional borrowing availability at June 30,
2000, after deducting letters of credit and officers' stock loan
commitments. A total of $981,000 of the available amended credit line was
committed for letters of credit issued by the financial institution.
Additionally, approximately $90,000 of the available amended 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.
The Company filed a Report on Form 8-K on July 13, 2000 in which the
Company reported that it was in discussions with its four largest equipment
lenders to renegotiate payment terms on its long-term debt to such lenders
of approximately $37 million in aggregate. Based upon current information
and internal forecasts reflecting challenging economic and industry
conditions of high fuel costs, increased interest rates and a depressed
used truck resale market, management of the Company is concerned about
having sufficient availability on the Company's existing $10 million line
of credit for future operations. The equipment lenders subsequently agreed
to interest-only note payments for periods from sixty to ninety days
beginning July 1, 2000, which will improve the Company's cash flow.
Certain lenders modified terms of the notes that will result in additional
interest costs. These equipment loans are collateralized by the truck
equipment purchased with the loan funds.
The Company is uncertain that it will have sufficient cash availability
to meet its obligations in the normal course of business through the first
quarter of 2001 unless it negotiates further modifications with its equipment
lenders.
The Company has been advised by its independent public accountants that,
if this contingency has not been resolved prior to the completion of their
audit of the Company's financial statements for the year ending December
31, 2000, their auditors' report on those financial statements will contain
the qualification that these matters raise substantial doubt about the
Company's ability to continue as a going concern.
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 amended 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 June 30, 2000 which represented no significant market
exposure.
There was no material change in the Company's exposure to market risk in
the six months ended June 30, 2000 as compared to December 31, 1999. 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, 1999.
Other
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (FAS) No 133, Accounting for
Derivative Instruments and Hedging Activities. In June 1999, the FASB issued
Statement No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133. FAS
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. FAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
FAS 133, as amended, is effective for fiscal years beginning after June
15, 2000. A company may also implement FAS 133 as of the beginning of any
fiscal quarter after issuance (that is, fiscal quarters beginning June 16,
1998, and thereafter). FAS 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid
contracts. With respect to hybrid instruments, a company may elect to apply
FAS 133, as amended, to (1) all hybrid contracts, (2) only those hybrid
instruments that were issued, acquired, or substantively modified after
December 31, 1997, or (3) only those hybrid instruments that were issued,
acquired, or substantively modified after December 31, 1998. The Company
plans to adopt the requirements of FAS 133 in accordance with the terms set
forth in the statement. The Company has not yet determined the
impact of adoption of statement No. 133. However, FAS 133 could increase
volatility in earnings and other comprehensive income or involve certain
changes in our business practices.
PART II OTHER INFORMATION
ITEM 1 - Legal Proceedings................................................*
ITEM 2 - Changes in Securities and Use of Proceeds........................*
ITEM 3 - Defaults Upon Senior Securities
The Company has a revolving line of credit agreement, as amended, which
contains certain covenants relating to net worth, leverage ratios, debt
service coverage and other factors. The Company was in default on the net
worth and leverage ratio covenants at the end of the second quarter. These
covenants were waived by the lending bank as of June 30, 2000.
The Company has made arrangements with certain lenders to make interest-only
note payments for periods from sixty to ninety days beginning July 1, 2000.
See "Item 2-Management's Discussion And Analysis Of Operations And
Financial Condition-Liquidity And Capital Resource"
ITEM 4 - Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the registrant was held May 4, 2000.
In addition to the election of two 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 1,495,979 shares or 83% 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 2000 is as follows:
Votes
Votes Votes Against or
Cast For Withheld
Ralph E. MacNaughton 1,495,979 1,368,889 127,090
William P. Ward 1,495,979 1,376,342 119,637
Appointment of Arthur Andersen LLP as
Independent auditors 1,459,979 1,459,233 36,746
ITEM 5 - Other Information..............................................*
ITEM 6 - Exhibits and Reports on Form 8-K
Exhibit 10(a) - Amended OTR Express, Inc. 1996 Stock Option Plan
Exhibit 10(b) - Amended and Restated OTR Express, Inc. 1996 Directors'
Stock Option Plan
Exhibit 10(c) - Amended Loan and Security Agreement dated August 4, 2000
between Registrant and HSBC
Exhibit 10(d) - Loan modification agreement dated July 7, 2000 between
registrant and Associates Commercial Corporation
Exhibit 10(e) - Loan modification agreement dated June 30, 2000 between
registrant and Paccar Financial
Exhibit 10(f) - Loan modification agreement dated July 25, 2000 between
registrant and Mercedes-Benz Credit Corporation
Exhibit 10(g) - Loan modification agreement dated July 25, 2000 between
registrant and Navistar Financial
*No information submitted under this caption.
The Company did file exhibits or reports on Form 8-K during the six months
ended June 30, 2000.
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: August 14, 2000 /s/ William P. Ward
By: William P. Ward
Chairman of the Board,
President and Principal
Executive Officer
Date: August 14, 2000 /s/ Steven W. Ruben
By: Steven W. Ruben
Principal Financial Officer
and Principal Accounting
Officer
