10-Q 1 doc1.txt 3RD QTR 2003 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, 2003 [ _ ] 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.) 297 West Henri De Tonti, 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 October 30, 2003 ----- ------------------------------- Common Stock, $.01 Par Value 11,293,707 PART I - FINANCIAL INFORMATION Item 1. Financial Statements
P.A.M. TRANSPORTATION SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data) September 30, December 31, 2003 2002 ---- ---- (unaudited) (note) ASSETS Current assets: Cash and cash equivalents $ 5,534 $ 30,766 Marketable investments, at fair value 4,746 - Receivables: Trade, net of allowance 52,176 34,231 Other 1,455 1,221 Operating supplies and inventories 651 411 Deferred income taxes - 127 Prepaid expenses and deposits 4,996 3,647 Income taxes refundable 1,155 281 --------- --------- Total current assets 70,713 70,684 Property and equipment, at cost 255,959 233,159 Less: accumulated depreciation (91,387) (85,787) --------- --------- Net property and equipment 164,572 147,372 Other assets: Excess of cost over net assets acquired 15,413 8,102 Non compete agreement 1,092 - Other 2,285 2,162 --------- --------- Total other assets 18,790 10,264 --------- --------- Total assets $ 254,075 $ 228,320 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 924 $ 1,017 Trade accounts payable 17,989 15,725 Other current liabilities 12,064 9,601 Deferred income taxes 420 - --------- --------- Total current liabilities 31,397 26,343 Long-term debt, less current portion 24,045 20,175 Non compete agreement 784 - Deferred income taxes 42,914 37,350 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- 11,293,707 at September 30, 2003, 11,282,207 at December 31, 2002 113 113 Additional paid-in capital 76,308 76,193 Accumulated other comprehensive loss (465) (1,005) Retained earnings 78,979 69,151 --------- --------- Total shareholders' equity 154,935 144,452 --------- --------- Total liabilities and shareholders' equity $ 254,075 $ 228,320 ========= ========= Note: The balance sheet at December 31, 2002 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, 2003 2002 2003 2002 ---- ---- ---- ---- Operating revenues $ 74,216 $ 65,034 $ 219,311 $ 199,188 Operating expenses: Salaries, wages and benefits 30,161 27,679 89,368 87,666 Operating supplies 14,287 13,438 41,158 38,517 Rent/purchased transportation 9,276 1,911 25,867 7,584 Depreciation and amortization 6,590 6,701 19,194 17,676 Operating taxes and licenses 3,686 3,356 10,890 10,200 Insurance and claims 3,089 2,559 10,220 9,505 Communications and utilities 624 444 1,861 1,704 Other 1,172 1,926 3,381 3,527 Loss on sale of equipment 14 48 42 96 --------- --------- --------- --------- 68,899 58,062 201,981 176,475 --------- --------- --------- --------- Operating income 5,317 6,972 17,330 22,713 Other income (expense) Interest expense (375) (377) (1,060) (1,718) --------- --------- --------- --------- Income before income taxes 4,942 6,595 16,270 20,995 Income taxes --current 60 536 270 1,310 --deferred 1,917 2,102 6,172 7,088 --------- --------- --------- --------- 1,977 2,638 6,442 8,398 --------- --------- --------- --------- Net income $ 2,965 $ 3,957 $ 9,828 $ 12,597 ========= ========= ========= ========= Net income per common share: Basic $ 0.26 $ 0.35 $ 0.87 $ 1.20 ========= ========= ========= ========= Diluted $ 0.26 $ 0.35 $ 0.87 $ 1.20 ========= ========= ========= ========= Average common shares outstanding-Basic 11,293,147 11,263,392 11,289,927 10,466,381 ========== ========== ========== ========== Average common shares outstanding-Diluted 11,326,610 11,306,778 11,330,528 10,514,705 ========== ========== ========== ========== 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, 2003 2002 ---- ---- OPERATING ACTIVITIES Net income $ 9,828 $ 12,597 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 19,194 17,676 Non compete agreement amortization 42 - Provision for deferred income taxes 6,172 7,088 Loss on retirement of property and equipment 42 93 Changes in operating assets and liabilities: Accounts receivable (18,209) (12,554) Prepaid expenses and other current assets (3,387) (1,926) Accounts payable 2,752 9,817 Other current liabilities 2,113 2,815 --------- --------- Net cash provided by operating activities 18,547 35,606 INVESTING ACTIVITIES Purchases of property and equipment (42,065) (31,185) Acquisition of businesses, net of cash acquired (10,752) - Purchases of marketable securities (3,946) - Proceeds from sales of assets 14,036 7,892 Lease payments received on direct financing leases 31 74 --------- --------- Net cash used in investing activities (42,696) (23,219) FINANCING ACTIVITIES Borrowings under lines of credit 257,783 270,733 Repayments under lines of credit (257,783) (279,809) Borrowings of long-term debt - 1,459 Repayments of long-term debt (1,198) (35,886) Proceeds from issuance of common stock - 54,784 Proceeds from exercise of stock options 115 305 --------- --------- Net cash provided by (used in) financing activities (1,083) 11,586 --------- --------- Net increase (decrease) in cash and cash equivalents (25,232) 23,973 Cash and cash equivalents at beginning of period 30,766 896 --------- --------- Cash and cash equivalents at end of period $ 5,534 $ 24,869 ========= ========= See notes to condensed consolidated financial statements. NONCASH INVESTING AND FINANCING ACTIVITIES: A promissory note in the amount of $4,974,612 was incurred in connection with the acquisition of a business. A non-compete agreement in the amount of $1,000,020, payable in equal monthly installments of $16,667 over a five year period, was entered into in connection with the acquisition of a business. A non-compete agreement in the amount of $300,000, payable in equal monthly installments of $12,500 over a two year period, was entered into in connection with the acquisition of a business.
P.A.M. TRANSPORTATION SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited) (in thousands) ---------------------------------------------------------------------------------------------------------------- ADDITIONAL OTHER ACCUMULATED COMMON PAID-IN COMPREHENSIVE COMPREHENSIVE RETAINED STOCK CAPITAL INCOME INCOME/(LOSS) EARNINGS TOTAL ---------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2002 $ 113 $ 76,193 $ (1,005) $ 69,151 $144,452 Components of comprehensive income: Net earnings $ 9,828 9,828 9,828 Other comprehensive loss - Unrealized gain on hedge, net of tax of $73 109 109 109 Unrealized gain on securities, net of tax of $288 431 431 431 -------- Total comprehensive income $ 10,368 ======== Exercise of stock options- shares issued including tax benefits - 115 115 ---------------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 2003 $ 113 $ 76,308 $ (465) $ 78,979 $154,935 ================================================================================================================ See notes to consolidated financial statements.
P.A.M. TRANSPORTATION SERVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2003 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, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. 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, 2002. NOTE B: DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES ---------------------------------------------------------------- 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 last 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 September 30, 2003, the net after tax deferred hedging loss in accumulated other comprehensive loss was approximately $896,000. 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. Ineffectiveness related to these hedges was not significant. In August 2000 and July 2001, we entered into agreements to obtain price protection and reduce a portion of our exposure to fuel price fluctuations. Under these agreements, we were 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 average monthly price of heating oil on the New York Mercantile Exchange ("NY MX HO") falls below $.58 per gallon, we are 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, we 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, we 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, we 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 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: RECENT ACCOUNTING PRONOUNCEMENTS ----------------------------------------- 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. The adoption of SFAS No. 143 on January 1, 2003 did not have 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. 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 was 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. The adoption of SFAS No. 145 on January 1, 2003 did not have a material impact on the Company's 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 was effective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 on January 1, 2003 did not have a material impact on the Company's financial position or results of operations. In November 2002, The Financial Accounting Standards Board issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. Management has determined that since December 31, 2002, no guarantees have been issued or modified, and therefore, the initial recognition and initial measurement provisions of FIN 45 did not have any material impact on the financial position or results of operations. In March of 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. ("FIN 46"). FIN 46 of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by business enterprises of variable interest entities. This Interpretation applies to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. The effective date of FIN 46 had been July 1, 2003. The Financial Accounting Standards Board postponed the effective date to December 31, 2003. The Company is evaluating the effects of FIN 46 but currently expects it will not have a material impact on the Company's financial position or results of operations. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities ("SFAS 149"), which amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. The new guidance amends SFAS 133 for decisions made: (a) as part of the Derivatives Implementation Group process that effectively required amendments to SFAS 133, (b) in connection with other Board projects dealing with financial instruments, and (c) regarding implementation issues raised in relation to the application of the definition of a derivative. The amendments set forth in SFAS 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. SFAS 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. Adopting the provisions of SFAS 149 did not have a material impact on the Company's financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity ("SFAS 150"), which requires certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity to be classified as liabilities. The provisions of SFAS 150 are effective for financial instruments entered into or modified after May 31, 2003 and to all other instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003. The Company does not have any financial instruments that meet the provisions of SFAS 150; therefore, adopting the provisions of SFAS 150 did not have a material impact on the Company's financial position or results of operations. NOTE E: MARKETABLE SECURITIES ------------------------------ The Company's investments in marketable securities, which are classified as available for sale, had a net unrealized gain in market value of $431,000, net of deferred income taxes, for the nine month period ended September 30, 2003. The investments consist entirely of equity securities with a combined original cost of approximately $3,950,000 and a combined fair market value of approximately $4,750,000 as of September 30, 2003. There were no sales or reclassifications of investment securities during the nine month period ended September 30, 2003. NOTE F: STOCK BASED COMPENSATION --------------------------------- The Company adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation:
Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 ------- ------- ------- ------- (in thousands, except per share data) Net income $ 2,965 $ 3,957 $ 9,828 $12,597 Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (82) (106) (245) (318) ------- ------- ------- ------- Pro forma net income $ 2,883 $ 3,851 $ 9,583 $12,279 ======= ======= ======= ======= Earnings per share: Basic - as reported $ .26 $ .35 $ .87 $ 1.20 Basic - pro forma $ .26 $ .34 $ .85 $ 1.17 Diluted - as reported $ .26 $ .35 $ .87 $ 1.20 Diluted - pro forma $ .25 $ .34 $ .85 $ 1.17
NOTE G: BUSINESS ACQUISITIONS ------------------------------ On January 31, 2003, P.A.M. Transportation Services, Inc. acquired substantially all of the assets of East Coast Transport, Inc. The results of East Coast Transport, 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 $6.6 million was paid in the form of a 7 year installment note in the amount of approximately $5.0 million at an interest rate of 6% and a cash payment of approximately $1.6 million. A non-compete agreement in the amount of $1.0 million and covering a 5 year period was also entered into. Approximately $6.6 million of additional goodwill was recognized as a result of the acquisition. On April 3, 2003, P.A.M. Transportation Services, Inc. acquired substantially all of the assets of McNeill Trucking, Inc. The results of McNeill Trucking, 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 approximately $8.7 million was paid in the form of cash in the amount of approximately $8.6 and the assumption of liabilities aggregating approximately $70,000. A non-compete agreement in the amount of $300,000 and covering a 2 year period was also entered into. Approximately $370,000 of additional goodwill was recognized as a result of the acquisition. 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 may relate to expected future financial and operating results or events, 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; surplus inventories; recessionary economic cycles and downturns in customers' business cycles; increases or rapid fluctuations in fuel prices, interest rates, fuel taxes, tolls, license and registration fees; the resale value of the Company's used equipment and the price of new equipment; increases in compensation for and difficulty in attracting and retaining qualified drivers and owner-operators; increases in insurance premiums and deductible amounts relating to accident, cargo, workers' compensation, health, and other claims; unanticipated increases in the number or amount of claims for which the Company is self insured; inability of the Company to continue to secure acceptable financing arrangements; seasonal factors such as harsh weather conditions that increase operating costs; competition from trucking, rail, and intermodal competitors including reductions in rates resulting from competitive bidding; the ability to identify acceptable acquisition candidates, consummate acquisitions, and integrate acquired operations; a significant reduction in or termination of the Company's trucking service by a key customer; and other factors, including risk factors, referred to from time to time in filings made by the Company with the Securities and Exchange Commission. The Company undertakes no obligation to update or clarify forward-looking statements, whether as a result of new information, future events or otherwise. CRITICAL ACCOUNTING POLICIES ---------------------------- The Company's management makes estimates and assumptions in preparing the consolidated financial statements that affect reported amounts and disclosures therein. In the opinion of management, the accounting policies that generally have the most significant impact on the financial position and results of operations of the Company include: Accounts Receivable. We continuously monitor collections from our customers, third parties and vendors and maintain a provision for estimated credit losses based upon our historical experience and any specific collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Property, plant and equipment. Management must use its judgment in the selection of estimated useful lives and salvage values for purposes of depreciating tractors and trailers which do not have guaranteed residual values. Estimates of salvage value at the expected date of trade-in or sale are based on the expected market values of equipment at the time of disposal. Other current liabilities - Self Insurance. The Company is self-insured for health and workers' compensation benefits up to certain stop-loss limits. Such costs are accrued based on known claims and an estimate of incurred, but not reported (IBNR) claims. IBNR claims are estimated using historical lag information and other data provided by claims administrators. This estimation process is subjective, and to the extent that future actual results differ from original estimates, adjustments to recorded accruals may be necessary. Revenue Recognition. Revenue is recognized in full upon completion of delivery to the receivers location. For freight in transit at the end of a reporting period, the Company recognizes revenue prorata based on relative transit miles completed as a portion of the estimated total transit miles with estimated expenses recognized upon recognition of the related revenue. Prepaid expenses - Tires. Tires purchased with revenue equipment are capitalized as a cost of the related equipment. Replacement tires are included in prepaid expenses and deposits and are amortized over a 24-month period. Costs related to tire recapping are expensed when incurred. Goodwill. The carrying value of goodwill is tested for impairment at least annually. The impairment testing requires an estimate of the value of the Company as a whole, as the Company has determined it only has one reporting unit as defined in SFAS No. 142. RESULTS OF OPERATIONS --------------------- THREE MONTHS ENDED SEPTEMBER 30, 2003 VS. THREE MONTHS ENDED SEPTEMBER 30, 2002 For the quarter ended September 30, 2003, revenues increased 14.1% to $74.2 million as compared to $65.0 million for the quarter ended September 30, 2002. The increase was due to an increase in revenues generated by the Company as a result of the East Coast Transport, Inc. and McNeill Trucking, Inc. business acquisitions which closed on January 31, 2003 and April 3, 2003, respectively. Salaries, wages and benefits decreased from 42.6% of revenues in the third quarter of 2002 to 40.6% of revenues in the third quarter of 2003. The decrease relates to a decrease in company driver wages as a percentage of revenues due to the reliance on third party drivers for our logistics operations which is reflected as purchased transportation costs. Operating supplies and expenses decreased from 20.7% of revenues in the third quarter of 2002 to 19.3% of revenues in the third quarter of 2003. The decrease as a percentage of revenues was caused by an increase in logistics revenues which have relatively few operating costs in relation to the revenues generated. Rent and purchased transportation increased from 2.9% of revenues in the third quarter of 2002 to 12.5% of revenues in the third quarter of 2003. The increase relates primarily to the East Coast Transport acquisition which purchases transportation services from other transportation companies in order to support our logistics operations and is reflected as purchased transportation costs. Depreciation and amortization decreased from 10.3% of revenues in the third quarter of 2002 to 8.9% of revenues in the third quarter of 2003. The decrease as a percentage of revenues was caused by an increase in logistics revenues which have no associated tractor or trailer depreciation expense. Other expenses decreased from 3.0% of revenues in the third quarter of 2002 to 1.6% of revenues in the third quarter of 2003. The decrease relates to a decrease in amounts charged to bad debt expense. The Company's operating ratio increased to 92.8% for the third quarter of 2003 from 89.3% for the third quarter of 2002. The decrease in income before income taxes to $4.9 million from $6.6 million, respectively, for the three month period ended September 30, 2003 and 2002 resulted in a decrease in the provision for income taxes from $2.6 million for the third quarter of 2002 to $2.0 million for the third quarter of 2003. Net income decreased to $2.9 million, or 4.0% of revenues, in the third quarter of 2003 from $4.0 million, or 6.1% of revenues in the third quarter of 2002. The decrease in net income resulted in a decrease in diluted net income per share to $.26 in the third quarter of 2003 from $.35 in the third quarter of 2002. NINE MONTHS ENDED SEPTEMBER 30, 2003 VS. NINE MONTHS ENDED SEPTEMBER 30, 2002 For the nine months ended September 30, 2003, revenues increased 10.1% to $219.3 million as compared to $199.2 million for the nine months ended September 30, 2002. The increase was due to an increase in revenues generated by the Company as a result of the East Coast Transport, Inc. and McNeill Trucking, Inc. business acquisitions which closed on January 31, 2003 and April 3, 2003, respectively. Salaries, wages and benefits decreased from 44.0% of revenues in the first nine months of 2002 to 40.8% of revenues in the first nine months of 2003. The decrease relates to a decrease in company driver wages as a percentage of revenues due to the reliance on third party drivers for our logistics operations which is reflected as purchased transportation costs. The decrease in company driver wages was partially offset by increases in workers compensation and health insurance costs. Operating supplies and expenses decreased from 19.4% of revenues in the first nine months of 2002 to 18.8% of revenues in the first nine months of 2003. The decrease as a percentage of revenues was caused by an increase in logistics revenues which have relatively few operating costs in relation to the revenues generated. Rent and purchased transportation increased from 3.8% of revenues in the first nine months of 2002 to 11.8% of revenues in the first nine months of 2003. The increase relates primarily to the East Coast Transport acquisition which purchases transportation services from other transportation companies in order to support our logistics operations which is reflected as purchased transportation costs. The Company's operating ratio increased to 92.1% for the first nine months of 2003 from 88.6% for the first nine months of 2002. The decrease in income before income taxes to $16.3 million from $21.0 million, respectively, for the nine month periods ended September 30, 2003 and 2002 resulted in a decrease in the provision for income taxes from $8.4 million for the first nine months of 2002 to $6.4 million for the first nine months of 2003. Net income decreased to $9.8 million, or 4.5% of revenues, in the first nine months of 2003 from $12.6 million, or 6.3% of revenues in the first nine months of 2002. The decrease in net income, combined with a 7.8% increase in the average number of shares outstanding, resulted in a decrease in diluted net income per share to $.87 in the first nine months of 2003 from $1.20 in the first nine months of 2002. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- During the first nine months of 2003, the Company generated $18.5 million of cash from operating activities. Investing activities used $42.7 million in cash in the first nine months of 2003. Financing activities used $1.1 million in the first nine months of 2003. Marketable investments at September 30, 2003 increased approximately $4.7 million from December 31, 2002. The increase was due to a combination of purchases of equity securities during periods of excess cash and appreciation in investment value during the first nine months of 2003. The Company has developed a strategy to invest in securities from which it expects to receive dividends that qualify for favorable tax treatment, as well as, appreciate in value. The Company anticipates that increases in the market value of the investments combined with dividend payments will exceed interest rates paid on borrowings for the same period. The holding term of the investments depends largely on the general economic environment, the equity markets and borrowing rates. Accounts receivable at September 30, 2003 increased approximately $18.2 million from December 31, 2002. Approximately $5.9 million of the increase is related to the revenues generated by East Coast Transport, Inc. and McNeill Transport, Inc. which were acquired in January 2003 and April 2003, respectively. Also, certain of the Company's largest customers regularly schedule plant shutdowns for various periods during December and the volume of freight we ship is reduced during such scheduled shutdowns. This reduction in freight volume results in a reduction in accounts receivable at the end of each year. Prepaid expenses and deposits at September 30, 2003 increased approximately $1.3 million as compared to December 31, 2002. The increase relates to the Company's annual registration fees for tractors and trailers which occurs each January, and to the prepayment of certain annual insurance policies during the first quarter of 2003 which had been paid on a monthly basis during the previous year. Trade accounts payable at September 30, 2003 increased approximately $2.3 million as compared to December 31, 2002. This is a normal fluctuation that occurs as a result of the timing of regularly scheduled check runs and how they fall in relation to the end of a period. The Company's principal subsidiary, P.A.M. Transport, Inc., maintains two lines of credit with separate financial institutions. "Line A" is a $20.0 million line maturing May 31, 2005 bearing interest at LIBOR (on the first day of the month) plus 1.40%, and is secured by accounts receivable. At September 30, 2003, outstanding advances on Line A were approximately $1.5 million, consisting entirely of letters of credit, with availability to borrow $18.5 million. "Line B" is a $30.0 million line maturing on June 30, 2005 bearing interest at LIBOR (on the last London Business Day of the previous month) plus 1.15%, and is secured by equipment. At September 30, 2003, outstanding advances on Line B were approximately $27.0 million, including $7.0 million in letters of credit, with availability to borrow $3.0 million. 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 2003 at a cost of approximately $39.4 million using its existing lines of credit and available cash balances. During the remainder of 2003, the Company plans to replace 419 tractors and 150 trailers, which would result in net capital expenditures of approximately $22.2 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 2003. During January 2003 a seven year promissory note in the amount of $4,974,612 million and payable in equal monthly installments at a fixed interest rate of 6.0% was incurred in connection with the acquisition of East Coast Transport, Inc. 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. 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 our control. Accordingly, the price and availability of diesel fuel, as well as other petroleum products, can be unpredictable. Because our operations are dependent upon diesel fuel, significant increases in diesel fuel costs could materially and adversely affect our results of operations and financial condition. Based upon our 2002 fuel consumption, a 10% increase in the average annual price per gallon of diesel fuel would increase our annual fuel expenses by $3.5 million. In August 2000 and July 2001, we entered into agreements to obtain price protection and reduce a portion of our exposure to fuel price fluctuations. Under these agreements, we were 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 average monthly price of heating oil on the New York Mercantile Exchange ("NY MX HO") falls below $.58 per gallon, we are 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, we 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, we 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, we 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 consolidated financial statements. INTEREST RATE RISK Our 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 our costs under, the lines of credit. In an effort to manage the risks associated with changing interest rates, we 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. Assuming $20.0 million of variable rate debt was outstanding under each of Line A and Line B for a full fiscal year, a hypothetical 100 basis point increase in LIBOR would result in approximately $200,000 of additional interest expense, net of the effect of the swap agreements. For additional information see Note B to the condensed consolidated financial statements. Item 4. Controls and Procedures. --------------------------------- We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by P.A.M. Transportation Services, Inc. in reports that it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. An evaluation was carried out as of September 30, 2003 under the supervision and with the participation of our management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that our disclosure controls and procedures were effective as of September 30, 2003. CEO AND CFO CERTIFICATES Exhibit 31.1 and Exhibit 31.2 to this report on Form 10-Q includes certifications by the CEO and the CFO, respectively. They are required under Section 302 of the Sarbanes-Oxley Act of 2002 (the "Section 302 Certifications"). This Item 4, Controls and Procedures, is referred to in the Section 302 Certifications and should be read in conjunction with the Section 302 Certifications. DISCLOSURE CONTROLS "Disclosure Controls" are procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Disclosure Controls are also designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding disclosure. INTERNAL CONTROLS "Internal Controls" are procedures that are designed to provide reasonable assurance that (1) our transactions are properly authorized, recorded and reported and (2) our assets are safeguarded against unauthorized or improper use, so that our financial statements may be prepared in accordance with generally accepted accounting principles. LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS Our management, including the CEO and CFO, do not expect that our Disclosure Controls and/or our Internal Controls will prevent or detect all error or fraud. A system of controls is able to provide only reasonable, not complete, assurance that the control objectives are being met, no matter how extensive those control systems may be. Also, control systems must be established within the opposing forces of risk and resources, (i.e., the benefits of a control system must be considered relative to its costs). Because of these inherent limitations that exist in all control systems, no evaluation of Disclosure Controls and/or Internal Controls can provide absolute assurance that all errors or fraud, if any, have been detected. The inherent limitations in control systems include various human and system factors that may include errors in judgment or interpretation regarding events or circumstances or inadvertent error. Additionally, controls can be circumvented by the acts of a single person, by collusion on the part of two or more people or by management override of the control. Over time, controls can also become ineffective as conditions, circumstances, policies, technologies, level of compliance and people change. Because of such inherent limitations, in any cost-effective control system over financial information, misstatements may occur due to error or fraud and may not be detected. SCOPE OF EVALUATION OF DISCLOSURE CONTROLS The evaluation of our Disclosure Controls performed by our CEO and CFO included obtaining an understanding of the design and objective of the controls, the implementation of those controls and the results of the controls on this report on Form 10-Q. We have established a Disclosure Committee whose duty is to perform procedures to evaluate the Disclosure Controls and provide the CEO and CFO with the results of their evaluation as part of the information considered by the CEO and CFO in their evaluation of Disclosure Controls. In the course of the evaluation of Disclosure Controls, we reviewed the controls that are in place to record, process, summarize and report, on a timely basis, matters that require disclosure in our reports filed under the Securities Exchange Act of 1934. We also considered the adequacy of the items disclosed in this report on Form 10-Q. CONCLUSIONS Based upon the evaluation of Disclosure Controls described above, our CEO and CFO have concluded that, subject to the limitations described above, our Disclosure Controls are effective to ensure that material information relating to P.A.M. Transportation Services, Inc. and its consolidated subsidiaries is made known to management, including the CEO and CFO, so that required disclosures have been included in this report on Form 10-Q. 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 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. In addition to the specific legal action mentioned above, the nature of our business routinely results in litigation, primarily involving claims for personal injuries and property damage incurred in the transportation of freight. We believe that all such routine litigation is adequately covered by insurance and that adverse results in one or more of those cases would not have a material adverse effect on our financial condition. Item 6. Exhibits and Reports on Form 8-K. ------------------------------------------ (a) Exhibits required by Item 601 of Regulations S-K: 11.1 - Statement Re: Computation of Diluted Earnings Per Share 31.1 - Rule 13a-14(a) Certification of Principal Executive Officer 31.2 - Rule 13a-14(a) Certification of Principal Financial Officer 32.1 - Section 1350 Certification of Chief Executive Officer 32.2 - Section 1350 Certification of Chief Financial Officer (b) Reports on Form 8-K: A Current Report on Form 8-K was furnished on July 25, 2003 regarding a press release issued to announce the Company's second quarter 2003 results. No other reports on Form 8-K were filed or furnished during the third quarter ending September 30, 2003. 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: October 30, 2003 By: /s/ Robert W. Weaver --------------------------------- Robert W. Weaver President and Chief Executive Officer (principal executive officer) Dated: October 30, 2003 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 -------- --------------------------------------------------------- 11.1 Statement Re: Computation of Diluted Earnings Per Share 31.1 Rule 13a-14(a) Certification of Principal Executive Officer 31.2 Rule 13a-14(a) Certification of Principal Financial Officer 32.1 Section 1350 Certification of Chief Executive Officer 32.2 Section 1350 Certification of Chief Financial Officer