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, 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 48-0993128
(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
1,782,022
(Number of shares of common stock outstanding as of October 31, 2000)
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PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OTR EXPRESS, INC.
BALANCE SHEETS
(Unaudited) September 30 December 31
2000 1999
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ASSETS
CURRENT ASSETS
Cash $ 35,070 $ 113,284
Account receivable, less allowance 9,167,661 10,051,486
Inventory 340,219 449,735
Prepaid expenses and other 721,425 564,009
TOTAL CURRENT ASSETS 10,264,375 11,178,514
PROPERTY AND EQUIPMENT, at cost, less
accumulated depreciation 43,797,970 52,397,851
TOTAL ASSETS $54,062,345 $63,576,365
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving line of credit $ 4,505,256 $ -
Accounts payable, trade 2,322,210 2,274,541
Accrued payroll and payroll taxes 1,511,283 1,284,506
Insurance and claims and other 1,476,532 1,472,432
Current portion of long-term debt 11,994,282 13,842,822
TOTAL CURRENT LIABILITIES 21,809,563 18,874,301
LONG-TERM DEBT, less current portion
above 26,599,257 33,889,580
DEFERRED INCOME TAXES - 1,831,900
STOCKHOLDERS' EQUITY 5,653,525 8,980,584
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $54,062,345 $63,576,365
</TABLE>
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<TABLE>
OTR EXPRESS, INC.
STATEMENTS OF OPERATIONS
Third Quarter Ended Nine Months Ended
September 30 September 30
(Unaudited) 2000 1999 2000 1999
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OPERATING REVENUE
Freight revenue $ 16,072,556 $ 17,662,448 $ 52,853,073 $ 52,766,058
Logistics revenue 2,618,432 2,839,378 7,602,276 6,988,153
Total operating revenue 18,690,988 20,501,826 60,455,349 59,754,211
OPERATING EXPENSES
Salaries, wages and
benefits 6,738,766 7,288,672 21,289,895 22,145,884
Purchased transportation 4,047,026 4,421,258 13,816,621 10,884,123
Fuel 2,233,624 1,753,410 6,608,358 4,310,199
Maintenance 1,051,273 1,281,177 3,154,611 3,723,757
Depreciation 2,141,882 2,027,498 6,420,016 5,494,547
Insurance and claims 557,549 396,001 1,825,809 1,468,704
Taxes and licenses 1,651,301 1,775,397 5,366,466 5,580,294
Supplies and other 1,215,994 1,163,602 3,604,338 3,445,917
Write down of assets
held for sale - - 714,769 -
Total operating expenses 19,637,415 20,107,015 62,800,883 57,053,425
Operating income (loss) (946,427) 394,811 (2,345,534) 2,700,786
Interest expense 974,408 922,557 2,877,204 2,644,127
Income (loss) before
income taxes and
cumulative effect of
accounting change (1,920,835) (527,746) (5,222,738) 56,659
Income tax expense
(benefit) (583,936) (200,000) (1,838,665) 22,000
Income (loss) before
cumulative effect
of accounting change (1,336,899) (327,746) (3,384,073) 34,659
Cumulative effect on
prior year of revenue
recognition method,
net of related income
tax effect - - 31,442 -
Net income (loss) $(1,336,899) $ (327,746) $(3,415,515) $ 34,659
Weighted average number
of shares
Basic 1,786,905 1,781,671 1,787,047 1,809,813
Diluted 1,786,905 1,781,991 1,787,220 1,810,266
Earnings (loss) per
share
Basic $ (0.75) $ (0.18) $ (1.91) $ 0.02
Diluted (0.75) (0.18) (1.91) 0.02
</TABLE>
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<TABLE>
OTR EXPRESS, INC.
STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30
(Unaudited) 2000 1999
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OPERATING ACTIVITIES
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,912,604 $ 4,183,406
INVESTING ACTIVITIES
Acquisition of property and equipment (1,583,590) (21,009,148)
Proceeds from disposition of property and
equipment 3,137,923 8,710,886
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES 1,554,333 (12,298,262)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 1,554,529 21,969,823
Repayments of long-term debt (9,085,057) (14,579,798)
Net increase in revolving line of credit 2,986,921 755,293
Other (1,544) (189,918)
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (4,545,151) 7,955,400
NET DECREASE IN CASH (78,214) (159,456)
CASH, BEGINNING OF PERIOD 113,284 521,484
CASH, END OF PERIOD $ 35,070 $ 362,028
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest $ 2,869,640 $ 2,644,127
Cash paid (received) for income taxes (26,036) 22,100
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES
Decrease in guarantee of executive officers'
stock purchase plan loans $ (90,000) $ -
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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 during the second quarter of 2000.
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 nine months ended September 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%.
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The note payable collateralized by the Company's building and property has
a balance due of $1,170,629 and is due and payable on April 12, 2001
and is classified in current portion of long-term debt as of September 30,
2000.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
Pursuant to a Company program, the Company has guaranteed payment of bank
loans incurred by four executives relating to their private purchase of
approximately 69,000 shares of the Company's common stock (in aggregate) in
1998. The Company's guarantee is limited to the extent that the pledged
value of the stock purchase 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.
During the third quarter of 2000, an executive resigned, and the Company
paid to the executive $13,000, which he applied (together with his own
funds) to pay off the $30,000 balance on his stock loan.
The amount of the Company's guarantee as of September 30, 2000 was
approximately $40,000, which represents the loan balance for one executive
still employed by the Company. 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 $926,744, $813,642, $1,264,974 and $1,336,899
being incurred in the fourth quarter of 1999 and first, second and third
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
was in discussions with its four largest equipment lenders to renegotiate
payment terms in order to maintain adequate liquidity in the near term. The
Company also reported that it was working with its revolving line of credit
lender, HSBC Business Credit (USA) Inc. ("HSBC"), to waive or amend certain
financial covenants in which the Company was in default as of June 30, 2000.
The aforementioned equipment lenders agreed to interest only note payments for
sixty to ninety day periods through as late as September 30, 2000, which
improved the Company's cash flow situation. Certain lenders modified terms
of the notes that will result in additional interest costs. HSBC waived the
covenant defaults as of June 30, 2000. Additionally, during the third
quarter, HSBC implemented a $1 million collateral reserve which reduces the
Company's borrowing availability by that amount.
In October 2000, the Company met with its four largest equipment lenders
to renegotiate payment terms on its long-term debt to such lenders of
approximately $36 million in aggregate as of September 30, 2000. The
Company has reached tentative verbal agreements with its four largest
equipment lenders to make reduced principal payments from October 1, 2000
through the first quarter of 2001, which should improve the Company's
cash flow. The agreements are subject to certain terms, conditions and
documentation, and there can be no assurance that a definitive agreement
will be executed. Until a definitive agreement is signed, the Company may
be considered to be in default on these obligations. The Company was in
default on the net worth and leverage ratio covenants on its amended line of
credit agreement with HSBC as of September 30, 2000. HSBC has advised the
Company that they have agreed in principle to waive the covenant defaults and
revise them for the fourth quarter of 2000 and all of 2001, and the Company
expects to execute documents to formalize the waiver in the next one to two
weeks.
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):
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RESULTS OF OPERATIONS
Segment information Third Quarter Ended Nine Months Ended
September 30 September 30
(Unaudited) 2000 1999 2000 1999
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Operating Revenue
Freight revenue $16,072,556 $17,662,448 $52,853,073 $52,766,058
Logistics revenue 2,618,432 2,839,378 7,602,276 6,988,153
Total operating revenue 18,690,988 20,501,826 60,455,349 59,754,211
Operating Expenses
Freight expenses 17,166,681 17,408,143 55,561,135 50,427,959
Logistics expenses 2,470,734 2,698,872 7,239,748 6,625,466
Total operating expenses 19,637,415 20,107,015 62,800,883 57,053,425
Operating Income (Loss)
Freight operating income
(loss) (1,094,125) 254,305 (2,708,062) 2,338,099
Logistics operating
income 147,698 140,506 362,528 362,687
Total operating income
(loss) (946,427) 394,811 (2,345,534) 2,700,786
Interest Expense 974,408 922,557 2,877,204 2,644,127
Net Income (loss) (1,336,899) (327,746) (3,415,515) 34,659
</TABLE>
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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 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.
3rd Quarter 2000 v. 1999
Operating Revenue. Operating revenue decreased by 8.8% in the third
quarter ended September 31, 2000 compared to 1999. Freight revenue
decreased by 9.0% as a result of a planned fleet reduction and logistics
revenue decreased by 7.8%.
<PAGE>
Freight revenue decreased due to a decline in the average number of
units in service. The rate per mile decreased to $1.072 (net of
approximately $0.042 fuel surcharge) in the third quarter of 2000 compared
to $1.075 in 1999. The average number of tractors in service decreased by
16.0% to 503 in the third quarter of 2000 compared to 599 in 1999.
Tractors in service includes 47 owner operators in 2000 and 64 owner
operators in 1999.
Logistics revenue decreased due to a softer freight market in the third
quarter of 2000 compared to 1999. Rail logistics revenue decreased 6.9%
and truck logistics revenue decreased 8.9%.
Operating Expenses. The operating ratio (total operating expenses
as a percent of operating revenue) increased to 105.1% in the third quarter
of 2000 compared to 98.1% in 1999.
Salaries, wages and benefits increased to 36.1% of revenue in 2000 from
35.6% in 1999 primarily because of the decrease in revenue and a decrease
in the average number of owner operators in service in 2000. Owner
operators pay their own expenses, including payroll taxes, fuel, insurance
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 20% fewer office employees in the
third quarter of 2000 compared to 1999.
Purchased transportation, which represents the cost of owner operators,
trailer rental costs and payments to other trucklines and rail carriers for
hauling loads contracted through the Company's logistics division,
increased to 21.7% of revenue in 2000 from 21.6% in 1999. The increase is
primarily a result of increased trailer rental costs in 2000 as a result of
the rental of fifty-three foot trailers to drop additional trailers at
customer locations.
Fuel was 12.0% of revenue in 2000 compared to 8.6% in 1999. This is a
result of substantially higher diesel fuel prices nationwide in the third
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 5.6% of revenue in 2000 compared to 6.2% of revenue in
1999 primarily as a result of lower overall maintenance costs from a newer
fleet of tractors.
Insurance and claims represented 3.0% and 1.9% of revenue in the third
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
<PAGE>
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 11.5% in 2000 from
9.9% in 1999. The increase is due to the loss on disposal of tractors and
trailers of $229,000 in the third quarter of 2000 compared to a gain on
disposals of $28,000 in 1999, which are classified in depreciation expense.
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 September 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 8.8% of revenue in 2000 compared to 8.7% in
1999. The increase is a result of the decline in revenue.
Supplies and other expenses increased to 6.5% of revenue in 2000 from
5.7% in 1999 as a result of the increase in advertising for drivers and the
decrease in revenue.
Interest Expense. Interest expense was 5.2% of revenue in 2000
compared to 4.5% in 1999 due to higher interest rates.
Income Tax Expense (Benefit). Income tax benefit was calculated
at a 30.4% rate in 2000 compared to 37.9% in 1999. Due to continued
operating losses, the Company cannot be assured beyond a reasonable doubt
that it will realize the tax benefit of its net operating loss
carryforwards in the future. Accordingly, the Company has recorded a
valuation allowance for its net deferred tax asset of approximately
$150,000 as of September 30, 2000.
Net Income (Loss). The Company reported a net loss of $1,337,000,
or $0.75 per share (basic and diluted), for the third quarter of 2000
compared to a net loss of $328,000, or $0.18 per share (basic and diluted),
in 1999.
Nine Months Comparison 2000 v. 1999
Operating Revenue. Operating revenue improved by 1.2% in the nine
months ended September 31, 2000 compared to 1999. Freight revenue
increased by 0.2% and logistics revenue increased by 8.8%.
Freight revenue improved due to increases in rate per mile. The rate
per mile increased to $1.069 (net of approximately $0.037 fuel surcharge)
during the period from $1.064 in 1999. A revenue rate
<PAGE>
increase was implemented in March 2000. The average number of tractors in
service decreased by 3.9% to 573 for the first nine months of 2000 compared
to 596 in 1999. The average number of owner operators in service increased
from 59 in 1999 to 84 in 2000.
Logistics revenue increased due to a 23.2% increase in rail logistics
revenue and an 8.7% decrease in truck logistics revenue.
Operating Expenses. The operating ratio (total operating expenses
as a percent of operating revenue) increased to 103.9% for the first nine
months of 2000 compared to 95.5% in 1999.
Salaries, wages and benefits decreased to 35.2% of revenue in 2000 from
37.1% in 1999 primarily because of the increase in logistics revenue.
Purchased transportation, which represents the cost of owner operators,
trailer rentals and payments to other trucklines and rail carriers for
hauling loads contracted through the Company's logistics division,
increased to 22.9% of revenue in 2000 from 18.2% in 1999. The cost of
owner operators increased as a result of the increase in the number of
owner operators in service in 2000. The Company reduced its owner operator
fleet in June of 2000 from 113 owner operators to 68 owner operators.
Logistics division transportation costs increased 11.2% due to the increase
in logistics revenue. Trailer rental costs increased in 2000 as a result of
the rental of fifty-three foot trailers to drop additional trailers at
customer locations.
Fuel was 10.9% of revenue in 2000 compared to 7.2% in 1999. This is a
result of substantially higher diesel fuel prices nationwide in the first
nine months of 2000 compared to 1999.
Maintenance was 5.2% 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 2.5% of revenue for the first
nine months of 2000 and 1999, respectively. The increase is primarily a
result of higher premium costs in 2000. 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 10.6% in 2000 from
9.2% in 1999 primarily because of a loss on disposal of tractors and
trailers of $276,000 for the first nine months of 2000 compared to a gain
of $49,000 in 1999. 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 of
<PAGE>
those tractors were sold in 1999 and as of September 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 9.3% in
1999 primarily due to the higher logistics revenue and the increase in
average owner operators in service.
Supplies and other expenses increased to 6.0% of revenue in 2000 from
5.8% in 1999 as a result of the increase in advertising for drivers and
professional fees.
Write down of assets held for sale was 1.2% of revenue in 2000 . During
the second quarter, the Company reduced the value of 130 trailers, 29
tractors and a remote fuel facility located in Wyoming.
Interest Expense. Interest expense was 4.8% of revenue in 2000
compared to 4.4% in 1999 primarily due to higher interest rates.
Income Tax Expense (Benefit). Income tax benefit was calculated
at a 35.2% rate in 2000 compared to 38.8% in 1999. Due to continued
operating losses, the Company cannot be assured beyond a reasonable doubt
that it will realize the tax benefit of its net operating loss
carryforwards in the future. Accordingly, the Company has recorded a
valuation allowance for its net deferred tax asset of approximately
$150,000 as of September 30, 2000.
Net Income (Loss). The Company reported a net loss of $3,416,000, or $1.91
per share (basic and diluted), for the first nine months of 2000 compared
to net income of $35,000, or $0.02 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.
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 declined to approximately $1,580,000 for the nine
months ended September 30, 2000. The Company made substantially all of
these purchases in the first quarter of 2000. The Company originally
contracted to purchase this revenue equipment in 1999. The Company
received approximately $3,138,000 in proceeds from the disposition of
revenue equipment. The Company has no outstanding purchase commitments for
replacement tractors. The Company's other capital expenditures are
generally financed through internally generated funds and secured
borrowings.
<PAGE>
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 September 30, 2000
was $11.5 million. The Company's revolving line of credit, as amended, is
classified as a current liability as of September 30, 2000 because it is
due and payable on August 1, 2001. As of December 31, 1999, the balance of
the amended revolving line of credit was approximately $1.6 million and was
classified as long-term debt. 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's continuing operating losses and a weaker used
truck market are currently making it difficult for the Company 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. Effective August 1, 2000, HSBC amended
the amended line of credit agreement (Exhibit 10(c) Form 10Q For the
Quarter ended June 30, 2000) to include a $1,000,000 reserve against
accounts receivable. The $1,000,000 is subtracted from the Company's
receivables borrowing base, as defined, when calculating the amount of
borrowing capacity. The Company was in default on the net worth and
leverage ratio covenants in the amended credit agreement at the end of the
third quarter. HSBC agreed in principle to waive default on the covenants
as of September 30, 2000. Additionally, HSBC agreed in principle to revise
the minimum tangible net worth and leverage ratios for the third and fourth
quarters of 2000 and for all of 2001. The Company had borrowings of $4.5
million under this amended line of credit at September 30, 2000. The Company
had approximately $970,000 of additional borrowing availability at September
30, 2000, after deducting letters of credit, officers' stock loan commitments
and the $1.0 million collateral reserve discussed above. A total of $1.2
million of the available amended credit line was committed for letters of
credit issued by the financial institution. Additionally, approximately
$40,000 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 third quarter 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-
<PAGE>
term debt to such lenders of approximately $37 million in aggregate as of
June 30, 2000. The equipment lenders subsequently agreed to interest-only
note payments for periods from sixty to ninety days beginning July 1, 2000,
which improved 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.
In October 2000, the Company met with its four largest equipment lenders
to renegotiate payment terms on its long-term debt to such lenders of
approximately $36 million in aggregate as of September 30, 2000. The Company
is concerned about having sufficient availability on the Company's existing $10
million line of credit for future operations. The Company has reached
tentative verbal agreements with its four largest equipment lenders to make
reduced principal payments from October 1, 2000 through the first quarter of
2001, which should improve the Company's cash flow. The agreements are
subject to certain terms, conditions and documentation, and there can be no
assurance that a definitive agreement will be executed. Until a definitive
agreement is signed, the Company may be considered to be in default on these
obligations. The Company was in default on the net worth and leverage ratio
covenants on its amended line of credit with HSBC as of September 30, 2000.
HSBC has advised the Company that they have agreed in principle to waive the
covenant defaults and revise them for the fourth quarter of 2000 and all of
2001, and the Company expects to execute documents to formalize the waiver in
the next one to two weeks.
Based upon current information and internal forecasts reflecting
challenging economic and industry conditions of high fuel costs, a slower
freight market, difficulty in hiring drivers meeting the Company's standards
and a depressed truck resale market, there can be no assurance that the
Company will have sufficient cash available on its $10.0 million amended line
of credit to meet its obligations in the normal course of business.
The Company has been advised by its independent public accountants that,
if contingencies regarding the Company's liquidity have 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
<PAGE>
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, 2000 which 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, 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 third quarter. HSBC
has agreed in principle to waive default on these covenants as of September
30, 2000. The Company expects to formalize the waiver in writing in the next
one to two weeks.
The Company made arrangements with certain lenders to make interest-only
note payments for periods from sixty to ninety days beginning July 1, 2000.
In October 2000, the Company received verbal agreement from these lenders
to modify its payment terms through the first quarter of 2001, subject to
certain terms, conditions and documentation. Until a definitive agreement
is signed, the Company may be considered to be in default on these
obligations. The total amount of principal payments which are being skipped
(July 1, 2000 - September 30, 2000) is approximately $2.9 million. See
"Item 2-Management's Discussion And Analysis Of Operations And Financial
Condition-Liquidity And Capital Resources."
ITEM 4 - Submission of Matters to a Vote of Security Holders.........*
ITEM 5 - Other Information...........................................*
ITEM 6 - Exhibits and Reports on Form 8-K
The Company did file exhibits or reports on Form 8-K during the nine
months ended September 30, 2000.
*No information submitted under this caption.
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 14, 2000 /s/ William P. Ward
By: William P. Ward
Chairman of the Board,
President and Principal
Executive Officer
Date: November 14, 2000 /s/ Steven W. Ruben
By: Steven W. Ruben
Principal Financial Officer
and Principal Accounting Officer
