10-Q 1 submission0902.txt PTSI 3RD QUARTER 2002 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 [ _ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______to______ Commission File Number 0-15057 ------- P.A.M. TRANSPORTATION SERVICES, INC. ------------------------------------ (Exact name of registrant as specified in its charter) Delaware 71-0633135 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Highway 412 West, Tontitown, Arkansas 72770 ------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrants telephone number, including area code: (479) 361-9111 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ _ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ _ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Class Outstanding at November 8, 2002 ----- ------------------------------- Common Stock, $.01 Par Value 11,267,207 PART I - FINANCIAL INFORMATION Item 1. Financial Statements
P.A.M. TRANSPORTATION SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) September 30, December 31, 2002 2001 ---- ---- (unaudited) (note) ASSETS Current assets: Cash and cash equivalents $ 24,869 $ 896 Receivables: Trade, net of allowance 36,529 24,327 Other 1,021 744 Operating supplies and inventories 413 255 Deferred income taxes 824 472 Prepaid expenses and deposits 5,297 3,980 Income taxes refundable - 393 --------- --------- Total current assets 68,953 31,067 Property and equipment, at cost 229,381 211,902 Less: accumulated depreciation (81,606) (70,190) --------- --------- Net property and equipment 147,775 141,712 Other assets: Excess of cost over net assets acquired 8,102 8,102 Other 2,650 1,635 --------- --------- Total other assets 10,752 9,737 --------- --------- Total assets $ 227,480 $ 182,516 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 1,080 $ 17,692 Trade accounts payable 18,407 7,800 Income taxes payable 416 - Other current liabilities 11,537 8,722 --------- --------- Total current liabilities 31,440 34,214 Long-term debt, less current portion 20,435 47,023 Deferred income taxes 35,813 28,682 Shareholders' equity: Preferred Stock, $.01 par value: 10,000,000 shares authorized; none issued Common stock, $.01 par value: 40,000,000 shares authorized; issued and outstanding- 11,264,207 at September 30, 2002, 8,611,957 at December 31, 2001 113 86 Additional paid-in capital 75,498 20,461 Accumulated other comprehensive income (loss) (973) (508) Retained earnings 65,154 52,558 --------- --------- Total shareholders' equity 139,792 72,597 --------- --------- Total liabilities and shareholders' equity $ 227,480 $ 182,516 ========= ========= Note: The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to condensed consolidated financial statements.
P.A.M. TRANSPORTATION SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (in thousands, except per share data) Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 ---- ---- ---- ---- Operating revenues $ 65,034 $ 53,662 $ 199,188 $ 169,530 Operating expenses: Salaries, wages and benefits 27,679 24,097 87,666 74,960 Operating supplies 13,438 10,990 38,517 33,317 Rent/purchased transportation 1,911 2,015 7,584 8,434 Depreciation and amortization 6,701 5,139 17,676 14,989 Operating taxes and licenses 3,356 2,940 10,200 8,878 Insurance and claims 2,559 2,407 9,505 7,489 Communications and utilities 444 567 1,704 1,662 Other 1,926 892 3,527 3,634 Loss on sale of equipment 48 145 96 191 --------- --------- --------- --------- 58,062 49,192 176,475 153,554 --------- --------- --------- --------- Operating income 6,972 4,470 22,713 15,976 Other income (expense) Interest expense (377) (1,148) (1,718) (3,455) --------- --------- --------- --------- (377) (1,148) (1,718) (3,455) --------- --------- --------- --------- Income before income taxes 6,595 3,322 20,995 12,521 Income taxes --current 536 35 1,310 895 --deferred 2,102 1,285 7,088 4,100 --------- --------- --------- --------- 2,638 1,320 8,398 4,995 --------- --------- --------- --------- Net income $ 3,957 $ 2,002 $ 12,597 $ 7,526 ========= ========= ========= ========= Net income per common share: Basic $ 0.35 $ 0.23 $ 1.20 $ 0.88 ========= ========= ========= ========= Diluted $ 0.35 $ 0.23 $ 1.20 $ 0.88 ========= ========= ========= ========= Average common shares outstanding-Basic 11,263,392 8,525,334 10,466,381 8,524,546 ========== ========= ========== ========= Average common shares outstanding-Diluted 11,306,778 8,537,286 10,514,705 8,559,263 ========== ========= ========== ========= See notes to condensed consolidated financial statements.
P.A.M. TRANSPORTATION SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands) Nine Months Ended September 30, 2002 2001 ---- ---- OPERATING ACTIVITIES Net income $ 12,597 $ 7,526 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 17,676 14,989 Non compete agreement amortization - 99 Provision for deferred income taxes 7,088 4,100 Loss /(gain) on retirement of property and equipment 93 191 Changes in operating assets and liabilities: Accounts receivable (12,554) (4,804) Prepaid expenses and other current assets (1,926) (847) Accounts payable 9,817 830 Accrued expenses 2,815 1,356 --------- --------- Net cash provided by operating activities 35,606 23,440 INVESTING ACTIVITIES Purchases of property and equipment (31,185) (39,940) Proceeds from sales of assets 7,892 9,230 Lease payments received on direct financing leases 74 133 --------- --------- Net cash used in investing activities (23,219) (30,577) FINANCING ACTIVITIES Borrowings under lines of credit 270,733 211,506 Repayments under lines of credit (279,809) (194,417) Borrowings of long-term debt 1,459 7,112 Repayments of long-term debt (35,886) (16,979) Proceeds from issuance of common stock 54,784 - Proceeds from exercise of stock options 305 784 --------- --------- Net cash provided by financing activities 11,586 8,006 --------- --------- Net increase in cash and cash equivalents 23,973 869 Cash and cash equivalents at beginning of period $ 896 $ 485 --------- --------- Cash and cash equivalents at end of period $ 24,869 $ 1,354 ========= ========= See notes to condensed consolidated financial statements.
P.A.M. TRANSPORTATION SERVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2002 NOTE A: BASIS OF PRESENTATION --------------------------------- The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In management's opinion, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the nine-month period ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. For further information, refer to the consolidated financial statements and the footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2001. NOTE B: DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES ----------------------------------------------------------------- On January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," issued by the Financial Accounting Standards Board in 1998. Statement No. 133, as amended, establishes accounting and reporting standards requiring the recording of each derivative instrument in the balance sheet as either an asset or liability measured at fair value. Changes in the derivative instrument's fair value must be recognized currently in earnings unless specific hedge accounting criteria are met. For hedges which meet the criteria, the derivative instrument's gains and losses, to the extent effective, may be recognized in accumulated other comprehensive income (loss) rather than current earnings. The Company had no transition adjustment as a result of adopting SFAS 133 on January 1, 2001 as the Company's only derivative instruments were entered into after January 1, 2001. Effective February 28, 2001 the Company entered into an interest rate swap agreement on a notional amount of $15,000,000. The pay fixed rate under the swap is 5.08%, while the receive floating rate is "1-month" LIBOR. This interest rate swap agreement terminates on March 2, 2006. Effective May 31, 2001 the Company entered into an interest rate swap agreement on a notional amount of $5,000,000. The pay fixed rate under the swap is 4.83%, while the receive floating rate is "1-month" LIBOR. This interest rate swap agreement terminates on June 2, 2006. The Company designates both of these interest rate swaps as cash flow hedges of its exposure to variability in future cash flows resulting from interest payments indexed to "1-month" LIBOR. Changes in future cash flows from the interest rate swaps will offset changes in interest rate payments on the first $20,000,000 of the Company's current revolving credit facility or future "1-month" LIBOR based borrowings that reset on the second London Business Day prior to the start of the next interest period. The hedge locks the interest rate at 5.08% or 4.83% plus the pricing spread (currently 1.15%) for the notional amounts of $15,000,000 and $5,000,000, respectively. These interest rate swap agreements meet the specific hedge accounting criteria. The effective portion of the cumulative gain or loss has been reported as a component of accumulated other comprehensive loss in shareholders' equity and will be reclassified into current earnings by June 2, 2006, the latest termination date for all current swap agreements. The Company records all derivatives at fair value as assets or liabilities in the condensed consolidated balance sheet, with classification as current or long-term depending on the duration of the instrument. At June 30, 2002, the net deferred hedging loss in accumulated other comprehensive loss was approximately $973,194. The measurement of hedge effectiveness is based upon a comparison of the floating-rate leg of the swap and the hedged floating-rate cash flows on the underlying liability. This method is based upon the premise that only the floating-rate component of the swap provides the cash flow hedge, and any changes in the swap's fair value attributable to the fixed-rate leg is not relevant to the variability of the hedged interest payments on the floating-rate liability. The calculation of ineffectiveness involves a comparison of the present value of the cumulative change in the expected future cash flows on the variable leg of the swap and the present value of the cumulative change in the expected future interest cash flows on the floating-rate liability. In August 2000 and July 2001, the Company entered into agreements to obtain price protection and reduce a portion of the Company's exposure to fuel price fluctuations. Under these agreements, the Company was obligated to purchase minimum amounts of diesel fuel per month, with a price protection component, for the six month periods ended March 31, 2001 and February 28, 2002. The agreements also provide that if during the 48 months commencing April 2001, the price of heating oil on the New York Mercantile Exchange ("NY MX HO") falls below $.58 per gallon, the Company is obligated to pay, for a maximum of twelve different months selected by the contract holder during such 48-month period, the difference between $.58 per gallon and NY MX HO average price, multiplied by 900,000 gallons. Accordingly, in any month in which the holder exercises such right, the Company would be obligated to pay the holder $9,000 for each cent by which $.58 exceeds the average NY MX HO price for that month. For example, the NY MX HO average price during February 2002 was approximately $.54, and if the holder were to exercise its payment right, the Company would be obligated to pay the holder approximately $36,000. In addition, if during any month in the twelve-month period commencing January 2005, the average NY MX HO is below $.58 per gallon, the Company will be obligated to pay the contract holder the difference between $.58 and the average NY MX HO price for such month, multiplied by 1,000,000 gallons. The agreements are stated at their fair value of $750,000 which is included in accrued liabilities in the accompanying Condensed Consolidated Financial Statements. NOTE C: COMMON STOCK OFFERING ------------------------------- During March 2002, the Company received net proceeds of approximately $43.9 million from a public offering of 2,100,000 shares of its common stock. The Company has repaid certain long-term debt obligations and intends to use the remaining proceeds to fund its capital expenditures and to finance general working capital needs. During April 2002, the Company received net proceeds of approximately $10.9 million from the sale of an additional 521,250 shares of its common stock in order to cover broker over-allotments. The Company intends to use the proceeds to fund its capital expenditures and to finance general working capital needs. NOTE D: NEW ACCOUNTING PRONOUNCEMENTS --------------------------------------- In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets," and announced the approval for issuance of SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 141 requires all business combinations completed after June 30, 2001, to be accounted for under the purchase method. This standard also establishes for all business combinations made after June 30, 2001, specific criteria for the recognition of intangible assets separately from goodwill. SFAS No. 141 also requires that the excess of the fair value of acquired assets over cost (negative goodwill) be recognized immediately as an extraordinary gain, rather than deferred and amortized. The Company will account for all future business combinations under SFAS No. 141. SFAS No. 142 addresses the accounting for goodwill and other intangible assets after an acquisition. Goodwill and other intangibles that have indefinite lives will no longer be amortized, but will be subject to annual impairment tests. All other intangible assets will continue to be amortized over their estimated useful lives. An intangible asset with an indefinite useful life should be tested for impairment in accordance with guidance in SFAS No. 142 which applies a fair-value-based test. SFAS No. 142 is required to be applied in fiscal years beginning after December 15, 2001. The Company ceased amortization of all indefinite life intangibles upon adoption of SFAS No. 142 effective January 1, 2002. Approximately $8.1 million in net book value remains recorded for goodwill at September 30, 2002. The adoption of SFAS No. 142 on January 1, 2002 did not have a material impact on the Company's financial position or results of operations. A reconciliation of previously reported net income and earnings per share to the amounts adjusted for the exclusion of goodwill amortization net of related income tax effect follows: GOODWILL AND ADOPTION OF STATEMENT NO. 142 (in thousands, except per share data) Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 ------ ------ ------ ------ Reported net income $ 3,957 $ 2,002 $12,597 $ 7,526 Goodwill amortization, net of tax - 61 - 183 ------ ------ ------ ------ Adjusted net income $ 3,957 $ 2,063 $12,597 $ 7,709 ====== ====== ====== ====== Adjusted net income per common share: Basic $ 0.35 $ 0.24 $ 1.20 $ 0.90 ====== ====== ====== ====== Diluted $ 0.35 $ 0.24 $ 1.20 $ 0.90 ====== ====== ====== ====== SFAS No. 143 provides accounting requirements for retirement obligations associated with tangible long-lived assets, including: (i) the timing of liability recognition; (ii) initial measurement of the liability; (iii) allocation of asset retirement cost to expense; (iv) subsequent measurement of the liability; and (v) financial statement disclosures. SFAS No. 143 requires that an asset retirement cost should be capitalized as part of the cost of the related long-lived asset and subsequently allocated to expense using a systematic and rational method. This standard becomes effective for fiscal years beginning after June 15, 2002. The Company will adopt the Statement effective January 1, 2003. At this time, the Company has not yet determined what impact, if any, the adoption of this Statement will have on either its financial position or results of operations. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and reporting for impairment or disposal of long-lived assets. This Statement supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of", and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for the disposal of a segment of a business. This Statement also amends ARB No. 51, "Consolidated Financial Statements", to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 144 on January 1, 2002 and there was not a material impact on the Company's financial position or results of operations. In May 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections" as of April 2002. SFAS No. 145, rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and SFAS No. 64, "Extinguishments of Debt made to Satisfy Sinking-Fund Requirements". Under the provisions of SFAS No. 145, gains and losses from extinguishment of debt can only be classified as extraordinary items if they meet the criteria in APB Opinion No. 30. The provisions of this Statement related to the rescission of SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002. Earlier application is permitted. This statement also amends SFAS No. 13, "Accounting for Leases", to eliminate an inconsistency between the accounting for sale-leaseback transactions and certain lease modifications that have economic effects that are similar and is effective for transactions occurring after May 15, 2002. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions and are effective for financial statements issued on or after May 15, 2002. At this time, the Company has not yet determined what impact, if any, the adoption of this Statement will have on either its financial position or results of operations. In July of 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 replaces EITF No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan as was required by EITF No. 94-3. Examples of costs covered by SFAS No. 146 include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS No. 146 is to be applied to exit or disposal activities initiated after December 31, 2002. At this time, the Company has not yet determined what impact, if any, the adoption of this Statement will have on either its financial position or results of operations. PART I - FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING INFORMATION ---------------------------- Certain information included in this Quarterly Report on Form 10-Q constitutes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, which are indicated by the use of words such as "expect", "intend", "estimate", "project", "is likely", "plan", "forecast" or similar expressions, may relate to future financial results or plans for future business activities, and are thus prospective. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Potential risks and uncertainties include, but are not limited to, excess capacity in the trucking industry, recessionary economic cycles, downturns in customers' business cycles, increases or rapid fluctuations in fuel prices, interest rates, operating taxes and licenses, registration fees, increases in the price of new revenue equipment, the resale value of used revenue equipment, increases in compensation for and the availability of qualified drivers, increases in insurance premiums and deductible amounts relating to accident, cargo, workers' compensation, health, and other claims, seasonal factors such as adverse weather conditions that increase operating costs, competition from trucking, rail, and intermodal competitors, regulatory requirements that increase costs or decrease efficiency, the ability to identify acceptable acquisition candidates, consummate acquisitions, and integrate acquired operations, as well as other uncertainties detailed in this report and detailed from time to time in other filings by the Company with the Securities and Exchange Commission. The Company undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events (whether anticipated or not anticipated), or otherwise. THREE MONTHS ENDED SEPTEMBER 30, 2002 VS. THREE MONTHS ENDED SEPTEMBER 30, 2001 -------------------------------------------------------------------------------- For the quarter ended September 30, 2002, revenues increased 21.2% to $65.0 million as compared to $53.7 million for the quarter ended September 30, 2001. The increase was due to improved utilization of existing revenue equipment and an increase in the average number of tractors from 1,554 in the third quarter of 2001 to 1,755 in the third quarter of 2002. Improved utilization of existing revenue equipment resulted in a 6.5% increase in average revenue generated per tractor each work day from $580 in the third quarter of 2001 to $618 in the third quarter of 2002. Salaries, wages and benefits decreased from 44.9% of revenues in the third quarter of 2001 to 42.6% of revenues in the third quarter of 2002. The decrease relates to a decrease in the amount reserved for employee health claims incurred but not reported. Rent and purchased transportation decreased from 3.8% of revenues in the third quarter of 2001 to 2.9% of revenues in the third quarter of 2002. The decrease relates primarily to a decrease in amounts paid to other transportation companies in the form of brokerage fees. Depreciation and amortization increased from 9.6% of revenues in the third quarter of 2001 to 10.3% of revenues in the third quarter of 2002. The increase was primarily due to the combined effect of a higher purchase price for new equipment and lower guaranteed residual values offered by the manufacturer. Insurance and claims decreased from 4.5% of revenues in the third quarter of 2001 to 3.9% of revenues in the third quarter of 2002. The decrease relates to a reduction in amounts held as reserves for additional auto liability insurance premiums payable based upon the final audit by the insurance company. Other expenses increased from 1.7% of revenues in the third quarter of 2001 to 3.0% of revenues in the third quarter of 2002. The increase was primarily related to the write-off of a $660,055 accounts receivable payment which is currently the subject of legal action claiming preferential payment immediately preceding a customers bankruptcy filing. The Company's operating ratio decreased to 89.3% for the third quarter of 2002 from 91.7% for the third quarter of 2001, as a result of the factors described above. The increase in income before income taxes to $6.6 million from $3.3 million, respectively, for the three month period ended September 30, 2002 and 2001 combined with an increase in the Company's effective tax rate from 39.7% in the third quarter of 2001 to 40.0% in the third quarter of 2002, resulted in an increase in the provision for income taxes from $1.3 million for the third quarter of 2001 to $2.6 million for the third quarter of 2002. Net income increased to $4.0 million, or 6.1% of revenues, in the third quarter of 2002 from $2.0 million, or 3.7% of revenues in the third quarter of 2001, representing an increase in diluted net income per share to $.35 in the third quarter of 2002 from $.23 in the third quarter of 2001. NINE MONTHS ENDED SEPTEMBER 30, 2002 VS. NINE MONTHS ENDED SEPTEMBER 30, 2001 -------------------------------------------------------------------------------- For the nine months ended September 30, 2002, revenues increased 17.5% to $199.2 million as compared to $169.5 million for the nine months ended September 30, 2001. The increase was due to improved utilization of existing revenue equipment and an increase in the average number of tractors from 1,540 for the first nine months of 2001 to 1,734 in the first nine months of 2002. Improved utilization of existing revenue equipment resulted in a 4.1% increase in average revenue generated per tractor each work day from $593 in the first nine months of 2001 to $617 in the first nine months 2002. Operating supplies and expenses decreased from 19.7% of revenues in the first nine months of 2001 to 19.3% of revenues in the first nine months of 2002. The decrease relates primarily to a decrease in amounts paid to third party driver training schools. Rent and purchased transportation decreased from 5.0% of revenues in the first nine months of 2001 to 3.8% of revenues in the first nine months of 2002. The decrease relates primarily to a decrease in amounts paid to other transportation companies in the form of brokerage fees. Insurance and claims increased from 4.4% of revenues in the first nine months of 2001 to 4.8% of revenues in the first nine months of 2002. The increase relates to increased premiums associated with the annual renewal of insurance policies. The Company's operating ratio decreased to 88.6% for the first nine months of 2001 from 90.6% for the first nine months of 2001, as a result of the factors described above. The increase in income before income taxes to $21.0 million from $12.5 million, respectively, for the nine month period ended September 30, 2002 and 2001 combined with an increase in the Company's effective tax rate from 39.9% in the first nine months of 2001 to 40.0% in the first nine months of 2002, resulted in an increase in the provision for income taxes from $5.0 million for the first nine months of 2001 to $8.4 million for the first nine months of 2002. Net income increased to $12.6 million, or 6.3% of revenues, in the first nine months of 2002 from $7.5 million, or 4.4% of revenues in the first nine months of 2001, representing an increase in diluted net income per share to $1.20 in the first nine months of 2002 from $.88 in the first nine months of 2001. LIQUIDITY AND CAPITAL RESOURCES ---------------------------------- During the first nine months of 2002, the Company generated $35.6 million in cash from operating activities. Investing activities used $23.2 million in cash in the first nine months of 2002. Financing activities generated $11.6 million in the first nine months of 2002, primarily from the issuance of common stock. Accounts receivable at September 30, 2002 increased approximately $12.2 million from December 31, 2001. The increase relates primarily to new trade terms between the Company and its largest customer which have the effect of extending the collection of the receivable to the next accounting period. During March and April 2002, the Company received net proceeds of approximately $54.8 million from a public offering of 2,621,250 shares of its common stock. The Company has repaid certain long-term debt obligations and intends to use the remaining proceeds to fund its capital expenditures and to finance general working capital needs. For additional information see Note C to the condensed consolidated financial statements. The Company's principal subsidiary, P.A.M. Transport, Inc., maintains two $20.0 million lines of credit (Line A and Line B) with separate financial institutions. Amounts outstanding under Line A bear interest at LIBOR (on the first day of the month) plus 1.40%, are secured by accounts receivable and mature on May 31, 2003. At September 30, 2002, the entire outstanding balance of $3.2 million on Line A was comprised of letters of credit, with availability to borrow $16.8 million. Amounts outstanding under Line B bear interest at LIBOR (on the last day of the previous month) plus 1.15%, are secured by revenue equipment and mature on November 30, 2003. At September 30, 2002, Line B was fully utilized with $20.0 million outstanding. In addition to cash flows from operations, the Company uses its existing lines of credit on an interim basis to finance capital expenditures and repay long-term debt. Longer-term transactions, such as installment notes (generally three to five year terms at fixed rates), are typically entered into for the purchase of revenue equipment; however, the Company purchased additional revenue equipment during the first nine months of 2002 at a cost of approximately $4.6 million using its existing lines of credit. During the remainder of 2002, the Company plans to replace 130 tractors and 80 trailers, and plans to add 100 additional trailers, which would result in net capital expenditures of approximately $9.1 million. Management expects that the Company's existing working capital and its available lines of credit will be sufficient to meet the Company's present capital commitments, to repay indebtedness coming due in the current year, and to fund its operating needs during the remainder of fiscal 2002. During February 2001 and May 2001 the Company entered into separate interest rate swap agreements on notional amounts of $15,000,000 and $5,000,000, respectively. The pay fixed rate under the swaps are 5.08% and 4.83%, respectively, while the receive floating rate is "1-month" LIBOR. The $15,000,000 swap agreement terminates on March 2, 2006 while the $5,000,000 swap agreement terminates on June 2, 2006. For additional information with respect to the interest rate swap agreements, see Note B to the condensed consolidated financial statements. ACQUISITION OF TRANSCEND LOGISTICS, INC. ---------------------------------------- On August 28, 2002, P.A.M. Transportation Services, Inc. acquired 100 percent of the outstanding common stock of Transcend Logistics, Inc. The results of Transcend Logistics, Inc. have been included in the consolidated financial statements since that date. In accordance with SFAS No. 141, "Business Combinations", the acquisition was accounted for under the purchase method of accounting. The aggregate purchase price of $219,920 will be paid in the form of 10,000 shares of common stock to be issued by P.A.M. Transportation Services, Inc. The value of the 10,000 shares was determined based on an average market price of P.A.M. Transportation Services, Inc.'s common shares over the two day period before and after the terms of the acquisition were settled. The following table summarizes the estimated fair values of the assets and liabilities assumed at the date of acquisition. P.A.M. Transportation services, Inc. is in the process of obtaining valuations of certain assets; thus, the allocation of the purchase price is subject to refinement. At August 28, 2002 ------------------ Property and Equipment $ 523,093 Notes Payable (303,173) ---------- Net assets acquired $ 219,920 ========== NEW ACCOUNTING PRONOUNCEMENTS ----------------------------- See Note D to the condensed consolidated financial statements for a description of the most recent accounting pronouncements and their impact, if any, on the Company. Item 3. Quantitative and Qualitative Disclosure about Market Risk. ---------------------------------------------------------------------------- The Company's primary market risk exposures include commodity price risk (the price paid to obtain diesel fuel for our tractors) and interest rate risk. The potential adverse impact of these risks and the general strategies the Company employs to manage such risks are discussed below. The following sensitivity analyses do not consider the effects that an adverse change may have on the overall economy nor do they consider additional actions the Company may take to mitigate our exposure to such changes. Actual results of changes in prices or rates may differ materially from the hypothetical results described below. Commodity Price Risk Prices and availability of all petroleum products are subject to political, economic and market factors that are generally outside of the Company's control. Accordingly, the price and availability of diesel fuel, as well as other petroleum products, can be unpredictable. Because the Company's operations are dependent upon diesel fuel, significant increases in diesel fuel costs could materially and adversely affect the Company's results of operations and financial condition. Based upon the Company's 2001 fuel consumption, a 10% increase in the average annual price per gallon of diesel fuel would increase the Company's annual fuel expenses by $3.2 million. In August 2000 and July 2001, the Company entered into agreements to obtain price protection and reduce a portion of the Company's exposure to fuel price fluctuations. Under these agreements, the Company was obligated to purchase minimum amounts of diesel fuel per month, with a price protection component, for the six month periods ended March 31, 2001 and February 28, 2002. The agreements also provide that if during the 48 months commencing April 2001, the price of heating oil on the New York Mercantile Exchange ("NY MX HO") falls below $.58 per gallon, the Company is obligated to pay, for a maximum of twelve different months selected by the contract holder during such 48-month period, the difference between $.58 per gallon and NY MX HO average price, multiplied by 900,000 gallons. Accordingly, in any month in which the holder exercises such right, the Company would be obligated to pay the holder $9,000 for each cent by which $.58 exceeds the average NY MX HO price for that month. For example, the NY MX HO average price during February 2002 was approximately $.54, and if the holder were to exercise its payment right, the Company would be obligated to pay the holder approximately $36,000. In addition, if during any month in the twelve-month period commencing January 2005, the average NY MX HO is below $.58 per gallon, the Company will be obligated to pay the contract holder the difference between $.58 and the average NY MX HO price for such month, multiplied by 1,000,000 gallons. Management's current valuation of the fuel purchases indicates there was no material impact upon adoption of SFAS No. 133 on our results of operations and financial position, and we have valued these items at fair value in the accompanying September 30, 2002, Condensed Consolidated Financial Statements. Interest Rate Risk The Company's two $20.0 million lines of credit each bear interest at a floating rate equal to LIBOR plus a fixed percentage. Accordingly, changes in LIBOR, which are effected by changes in interest rates generally, will affect the interest rate on, and therefore the Company's costs under, the lines of credit. In an effort to manage the risks associated with changing interest rates, the Company entered into interest rate swap agreements effective February 28, 2001 and May 31, 2001, on notional amounts of $15,000,000 and $5,000,000, respectively. The "pay fixed rates" under the $15,000,000 and $5,000,000 swap agreements are 5.08% and 4.83%, respectively. The "receive floating rate" for both swap agreements is "1-month" LIBOR. These interest rate swap agreements terminate on March 2, 2006 and June 2, 2006, respectively. Item 4. Controls and Procedures. ------------------------------------ Within the 90 days prior to the date of this report, the Company carried out an evaluation under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC Filings. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. PART II. OTHER INFORMATION ------------------------------ Item 1. Legal Proceedings --------------------------- On October 10, 2002, a suit was filed against one of the Company's subsidiaries and is entitled "The Official Committee of Unsecured Creditors of Bill's Dollar Stores, Inc. v. Allen Freight Services Co.,." The suit, which has been filed in the United States Bankruptcy Court for the District of Delaware, alleges preferential transfers of $660,055.14 were made to the defendant, Allen Freight Services Co., within the 90 day period preceding the bankruptcy petition date of Bill's Dollar Stores, Inc. The suit is currently in pretrial proceedings and the potential damages of $660,055.14 are reflected in the Company's consolidated financial statements. Item 2. Changes in Securities and Use of Proceeds --------------------------------------------------- On August 28, 2002, P.A.M. Transportation Services, Inc. sold 10,000 shares of its common stock to the sole shareholder of Transcend Logistics, Inc. in exchange for 100 percent of the common stock of Transcend Logistics, Inc. The aggregate purchase price of $219,920 was determined based on an average market price of P.A.M. Transportation Services, Inc.'s common shares over the two day period before and after the terms of the acquisition were agreed. The transaction was not registered under the Securities Act of 1933 as amended, in reliance on Section 4(2) of that Act. Item 6. Exhibits and Reports on Form 8-K -------------------------------------------------- (a) Exhibits required by Item 601 of Regulations S-K: 3.1 - Certificate of Incorporation of the Company, as amended. (Incorporated by reference to Exhibit 3.1 to the Company's report on Form 10-Q for the period ending March 31, 2002) 3.2 - Bylaws of the Company, as amended. (Incorporated by reference to Exhibit 3.2 to the Company's report on Form 10-Q for the period ending March 31, 2002) 11.1 - Statement Re: Computation of Diluted Earnings Per Share. 99.1 - Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 - Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K: We filed the following reports on Form 8-K during the quarter for which this report is filed: (1) A Current Report on Form 8-K was filed on August 1, 2002 regarding a press release issued to announce the Company's second quarter 2002 results; and (2) A Current Report on Form 8-K was filed on July 12, 2002 regarding a change in registrants certifying accountant. 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. P.A.M. TRANSPORTATION SERVICES, INC. Dated: November 11, 2002 By: /s/ Robert W. Weaver --------------------------------- Robert W. Weaver President and Chief Executive Officer (principal executive officer) Dated: November 11, 2002 By: /s/ Larry J. Goddard --------------------------------- Larry J. Goddard Vice President-Finance, Chief Financial Officer, Secretary and Treasurer (principal accounting and financial officer) CERTIFICATIONS I, ROBER W. WEAVER, certify that: (1) I have reviewed this quarterly report on Form 10-Q of P.A.M. TRANSPORTATION SERVICES, INC., a Delaware corporation (the "registrant"); (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; (4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; (5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and (6) The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 11, 2002 By: /s/ Robert W. Weaver --------------------------------- Robert W. Weaver President and Chief Executive Officer (principal executive officer) I, LARRY J. GODDARD, certify that: (1) I have reviewed this quarterly report on Form 10-Q of P.A.M. TRANSPORTATION SERVICES, INC., a Delaware corporation (the "registrant"); (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; (4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; (5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and (6) The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 11, 2002 By: /s/ Larry J. Goddard --------------------------------- Larry J. Goddard Vice President-Finance, Chief Financial Officer, Secretary and Treasurer (principal accounting and financial officer) P.A.M. TRANSPORTATION SERVICES, INC. INDEX TO EXHIBITS TO FORM 10-Q Exhibit Number Exhibit Description -------- --------------------------------------------------------- 3.1 Certificate of Incorporation of the Company, as amended. (Incorporated by reference to Exhibit 3.1 to the Company's report on Form 10-Q for the period ending March 31, 2002) 3.2 Bylaws of the Company, as amended. (Incorporated by reference to Exhibit 3.2 to the Company's report on Form 10-Q for the period ending March 31, 2002) 11.1 Statement Re: Computation of Diluted Earnings Per Share 99.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002