-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Lpdw/0zz6voQ0N7RaOqZApAQwjCU/1BuekcOZYFAzHAKRGexwP+n7a1mcUggxfxw jAdtblh9frwr3Z7w2EqERQ== 0000799233-99-000004.txt : 19990330 0000799233-99-000004.hdr.sgml : 19990330 ACCESSION NUMBER: 0000799233-99-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEARTLAND EXPRESS INC CENTRAL INDEX KEY: 0000799233 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 930926999 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-15087 FILM NUMBER: 99575593 BUSINESS ADDRESS: STREET 1: 2777 HEARTLAND DR CITY: CORALVILLE STATE: IA ZIP: 52241 BUSINESS PHONE: 3196452728 MAIL ADDRESS: STREET 2: 2777 HEARTLAND DRIVE CITY: CORALVILLE STATE: LA ZIP: 52241 10-K 1 10-K ANNUAL REPORT FOR HEARTLAND EXPRESS, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) The Company's primary customers include retailers, manufacturers, and third party logistics providers. [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1998 OR [ ] 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 0-15087 HEARTLAND EXPRESS, INC. (Exact name of registrant as specified in its charter) Nevada 93-0926999 (State or Other Jurisdiction of Incorporation) (I.R.S. Employer I.D. No.) 2777 Heartland Drive Coralville, Iowa 52241 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: 319-645-2728 Securities Registered Pursuant to section 12(b) of the Act: None Securities Registered Pursuant to section 12(g) of the Act: $0.01 Par Value Common Stock Indicated 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in the registrant's definitive proxy statement incorporated by reference in Part III of this Form 10-K. [X] The aggregate market value of the shares of the registrant's $0.01 par value common stock held by non-affiliates of the registrant as of March 15, 1999 was $265,247,246 (based upon $16.19 per share being the average of the closing bid and asked price on that date as reported by NASDAQ). In making this calculation the issuer has assumed, without admitting for any purpose, that all executive officers and directors of the registrant, and no other persons, are affiliates. The number of shares outstanding of the Registrant's common stock as March 15, 1999 was 30,000,000. DOCUMENTS INCORPORATED BY REFERENCE: The information set forth under Part III, Items 10, 11, 12, and 13 of this Report is incorporated by reference from the registrant's definitive proxy statement for the 1999 annual meeting of stockholders that will be filed no later than April 30, 1999. 1 Cross Reference Index The following cross reference index indicates that document and location of the information contained herein and incorporated by reference into the Form 10-K. Document and Location Part I Item 1 Business Page 3-5 herein Item 2 Properties Page 5 herein Item 3 Legal Proceedings Page 6 herein Item 4 Submission of Matters to a Vote of Stockholders Page 6 herein Part II Item 5 Market for the Registrant's Common Equity and Related Stockholder Matters Page 6 herein Item 6 Selected Financial Data Page 7 herein Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations Page 8-12 herein Item 8 Financial Statements and Supplementary Data Page 13 and 17-27 herein Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Page 13 herein Part III Item 10 Directors and Executive Officers of the Registrant Pages 2 to 4 of Proxy Statement Item 11 Executive Compensation Pages 4 and 5 of Proxy Statement Item 12 Security Ownership of Certain Beneficial Owners and Management Page 7 of Proxy Statement Item 13 Certain Relationships and Related Transactions Page 4 of Proxy Statement Part IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K Pages 14 and 15 herein This report contains "forward-looking statements" in paragraphs that are marked with an asterisk. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Cautionary Statement Regarding Forward-Looking Statements" for additional information and factors to be considered concerning forward-looking statements. 2 PART I ITEM 1. BUSINESS General Heartland Express, Inc. ("Heartland" or the "Company") is a short-to medium haul truckload carrier based near Iowa City, Iowa. The Company provides nationwide transportation service to major shippers, using late-model equipment and a balanced fleet of company-owned and owner-operator tractors. The Company's primary traffic lanes are between customer locations east of the Rocky Mountains, with selected service to the West. Management believes that the Company's service standards and equipment accessibility have made it a core carrier to many of its major customers. Heartland was founded by Russell A. Gerdin in 1978 and became publicly traded in November 1986. Over the twelve years from 1986 to 1998, Heartland has grown to $263.5 million in revenue from $21.6 million and net income has increased to $33.1 million from $3.0 million. Much of this growth has been attributable to expanding service for existing customers, acquiring new customers, and continued expansion of the Company's operating regions. In addition to internal growth, Heartland has completed four acquisitions since 1987. These acquisitions have enabled Heartland to solidify its position within historical regions, expand its customer base in the East and Northeast United States, and to pursue new customer relationships in new markets. Most recently, in July 1997, Heartland increased its Eastern operations by acquiring A & M Express, Inc. located in Kingsport, Tennessee. A & M Express, Inc. is predominately a dry-van carrier that operates a primarily company-owned fleet. A & M reported gross revenues of approximately $28 million in 1996. A & M Express generates a small portion of its revenues from the flat bed market. The Company is operating A & M Express as a separate subsidiary. However, administrative functions are being performed at Heartland's corporate headquarters. The purchase of A & M was funded by cash and investments. Heartland Express, Inc. is a holding company incorporated in Nevada, which owns, directly or indirectly, all of the stock of Heartland Express Inc. of Iowa, Heartland Equipment, Inc., Munson Transportation, Inc., Munson Transport Service, Inc., Munson Equipment, Inc., and A & M Express, Inc. Operations Heartland's operations department focuses on the successful execution of customer expectations and providing consistent opportunity for the fleet of employee drivers and independent contractors, while maximizing equipment utilization. These objectives require a combined effort of marketing, customer service, transportation planning, and fleet management. The Company's customer service employees are responsible for maintaining the continuity between the customer's needs and Heartland's ability to meet those needs by communicating customer's expectations to the fleet management group. They are charged with development of customer relationships, ensuring service standards, coordinating proper freight-to-capacity balancing, and trailer asset management. Transportation planning employees are responsible for daily tactical decisions pertaining to matching the Company's freight with the appropriate capacity within geographical service areas. They assign orders to drivers based on well-defined criteria, such as driver safety and DOT compliance, customer needs and service requirements, equipment utilization, driver time at home, operational efficiency, and equipment maintenance needs. Fleet management employees are charged with the management and development of their fleets of drivers. Additionally, they maximize the capacity that is available to the organization to meet the service needs of the Company's customers. Their responsibilities include meeting the needs of the drivers within the standards that have been set by the organization and communicating the requirements of the customers to the drivers on each order to ensure successful execution. Serving the short to medium haul market (592-mile average length of haul in 1998) permits the Company to use primarily single, rather than team drivers and dispatch most trailers directly from origin to destination without an intermediate equipment change other than for driver scheduling purposes. 3 Heartland also operates three specialized regional distribution operations for major customers near Atlanta, Georgia; Columbus, Ohio; and Iowa City, Iowa. These short-haul operations concentrate on freight movements generally within a 400-mile radius of the regional terminal, and are designed to meet the needs of significant customers in those regions. These operations are handled by dispatchers at the regional locations, and the Company uses a centralized computer network and regular communication to achieve system-wide load coordination. The Company emphasizes customer satisfaction through on-time performance, dependable late-model equipment, and consistent equipment availability to serve large customers' volume requirements. The Company also maintains a high trailer to tractor ratio, which facilitates the stationing of trailers at customer locations for convenient loading and unloading. This minimizes waiting time, which increases tractor utilization and assists with driver retention. Customers and Marketing The Company targets customers in its operating area that require multiple, time-sensitive shipments, including those employing "just-in-time" manufacturing and inventory management. In seeking these customers, Heartland has positioned itself as a provider of premium service at compensatory rates, rather than competing solely on the basis of price. Freight transported for the most part is non-perishable and predominantly does not require driver handling. Heartland's reputation for quality service, reliable equipment, and equipment availability makes it a core carrier to many of its customers. Heartland seeks to transport freight that will complement traffic in its existing service areas and remain consistent with the Company's focus on short-to-medium haul and regional distribution markets. Management believes that building additional service in the Company's primary traffic lanes will assist in controlling empty miles and enhancing driver "home time." The Company's 25, 10, and 5 largest customers accounted for 65%, 49%, and 35% of revenue, respectively, in 1998. The Company's primary customers include retailers, manufacturers, and third party logistics providers. The distribution of customers is not significantly different from the previous year. Sears Logistics Services accounted for 14% of revenue in 1998. No other customer accounted for as much as ten percent of revenue. Drivers, Independent Contractors, and Other Personnel Heartland's workforce is an essential ingredient in achieving its business objectives. As of December 31, 1998, Heartland employed 1,213 persons. The Company also contracted with independent contractors to provide and operate tractors. Independent contractors own their own tractors and are responsible for all associated expenses, including financing costs, fuel, maintenance, insurance, and taxes. The Company historically has operated a balanced fleet of company and independent contractor tractors. Management believes that a balanced fleet compliments the Company's recruiting efforts and offers greater flexibility in responding to fluctuations in shipper demand. Management's strategy for both employee and independent contractor drivers is to (1) hire the best; (2) promote retention through financial incentives, positive working conditions, and targeting freight that requires little or no handling; and (3) minimize safety problems through careful screening, mandatory drug testing, continuous training, and financial rewards for accident-free driving. Heartland also seeks to minimize turnover of its employee drivers by providing modern, comfortable equipment and of all drivers by regularly scheduling them to their homes. All drivers are compensated for empty miles as well as loaded miles. This provides an incentive for the Company to minimize empty miles and at the same time does not penalize drivers for inefficiencies of operations that are beyond their control. Heartland is not a party to a collective bargaining agreement. Management believes that the Company has good relationships with its employees and independent contractors. 4 Revenue Equipment Heartland's management believes that operating high-quality, efficient equipment is an important part of providing excellent service to customers. The Company's policy is to operate its tractors while under warranty to minimize repair and maintenance cost and reduce service interruptions caused by breakdowns. In addition, the Company's preventive maintenance program is designed to minimize equipment downtime, facilitate customer service, and enhance trade value when equipment is replaced. Factors considered when purchasing new equipment include fuel economy, price, technology, warranty terms, manufacturer support, driver comfort, and resale value. Competition The truckload industry is highly competitive and includes thousands of carriers, none of which dominates the market. The Company competes primarily with other truckload carriers, and to a lesser extent with railroads, intermodal service, less-than-truckload carriers, and private fleets operated by existing and potential customers. Although intermodal and rail service has improved in recent years, such service has not been a major factor in the Company's short-to-medium haul traffic lanes (592-mile average length of haul). Historically, competition has created downward pressure on the truckload industry's pricing structure. Management believes that competition for the freight targeted by the Company is based primarily upon service and efficiency and to a lesser degree upon freight rates. Regulation The Company is a common and contract motor carrier of general commodities. Historically, the Interstate Commerce Commission (the "ICC") and various state agencies regulated motor carriers' operating rights, accounting systems, mergers and acquisitions, periodic financial reporting, and other matters. In 1995 federal legislation preempted state regulation of prices, routes, and services of motor carriers and eliminated the ICC. Several ICC functions were transferred to the Department of Transportation (the "DOT"). Management does not believe that regulation by the DOT or by the states in their remaining areas of authority will have a material effect on the Company's operations. The Company's employee and independent contractor drivers also must comply with the safety and fitness regulations promulgated by the DOT, including those relating to drug and alcohol testing and hours of service. The Company's operations are subject to various federal, state, and local environmental laws and regulations, implemented principally by the EPA and similar state regulatory agencies, governing the management of hazardous wastes, other discharge of pollutants into the air and surface and underground waters, and the disposal of certain substances. Management believes that its operations are in material compliance with current laws and regulations and does not know of any existing condition that would cause compliance with applicable environmental regulations to have a material effect on the Company's capital expenditures, earnings and competitive position. In the event the Company should fail to comply with applicable regulations, the Company could be subject to substantial fines or penalties and to civil or criminal liability. ITEM 2. PROPERTIES Heartland's headquarters is located adjacent to Interstate 80, near Iowa City, Iowa. The facilities include five acres of land, two office buildings of approximately 25,000 square feet combined and a storage building, all leased from the Company's president and principal stockholder. Company-owned facilities at this location include three tractor and trailer maintenance garages totaling approximately 26,500 square feet, and a safety and service complex adjacent to Heartland's corporate offices. The adjacent facility provides the Company with six acres of additional trailer parking space, a drive-through inspection bay, an automatic truck wash facility, and 6,000 square feet of office space and driver facilities. The Company also owns a motel located adjacent to its corporate offices, which functions as a motel and driver training center. The Company owns regional facilities in Ft. Smith, Arkansas; O'Fallon, Missouri; Forest Park, Georgia; Columbus, Ohio; Jacksonville, Florida; and Kingsport, Tennessee. The Company is leasing facilities in Murfreesboro, Tennessee; Decatur, Illinois; and Rochester, New York. A facility in Dubois, Pennsylvania is being leased to an unrelated third party. The Company closed facilities in Woodville, Ohio and Monmouth, Illinois during 1994 and 1995 and is attempting to dispose of such facilities. The carrying amount of the closed facilities were reduced in years prior to 1996 to reflect fair market value less costs to sell. In March 1998, the Company sold a parcel of land at its O'Fallon, Missouri terminal to an unrelated third party. 5 ITEM 3. LEGAL PROCEEDINGS The Company is a party to routine litigation incidental to its business, primarily involving claims for personal injury and property damage incurred in the transportation of freight. The Company believes that adverse results in these cases, whether individual or in the aggregate, would not have a material effect upon the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS During the fourth quarter of 1998, no matters were submitted to a vote of securities holders. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS Price Range of Common Stock The Company's common stock has been traded on the NASDAQ National Market under the symbol HTLD, since November 5, 1986, the date of the Company's initial public offering. The following table sets forth for the calendar period indicated the range of high and low price quotations for the Company's common stock as reported by NASDAQ from January 1, 1997 to December 31,1998. Period High Low Calendar Year 1998 1st Quarter $29.00 $22.75 2nd Quarter 29.00 19.75 3rd Quarter 20.25 15.50 4th Quarter 20.25 12.38 Calendar Year 1997 1st Quarter $27.38 $18.50 2nd Quarter 26.00 19.00 3rd Quarter 27.75 21.50 4th Quarter 30.88 22.88 The prices reported reflect interdealer quotations without retail mark-ups, mark-downs or commissions, and may not represent actual transactions. As of March 15, 1999 the Company had 270 stockholders of record of its common stock. However, the Company estimates that it has a significantly greater number of stockholders because a substantial number of the Company's shares are held of record by brokers or dealers for their customers in street names. Dividend Policy The Company has never declared and paid a cash dividend. It is the current intention of the Company's Board of Directors to retain earnings to finance the growth of the Company's business. Future payments of cash dividends will depend upon the financial condition, results of operations and capital requirements of the Company, as well as other factors deemed relevant by the Board of Directors. 6 ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data presented below reflect the consolidated financial position and results of operations of Heartland Express, Inc., and its subsidiaries. The selected consolidated financial data are derived from the Company's consolidated financial statements. This data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's consolidated financial statements and notes thereto included elsewhere herein.
Year Ended December 31, (in thousands, except per share data) 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- Income Statement Data: Operating revenue ............... $ 263,489 $ 262,504 $ 229,011 $ 191,507 $ 224,248 --------- --------- --------- --------- --------- Operating expenses: Salaries, wages, and benefits ... 51,995 49,535 40,261 40,715 56,440 Rent and purchased transportation 100,089 101,169 93,961 64,043 57,799 Operations and maintenance ...... 26,072 27,739 22,158 21,035 35,557 Taxes and licenses .............. 6,150 6,049 5,693 5,246 7,347 Insurance and claims ............ 6,810 10,404 9,976 7,967 11,872 Communications and utilities .... 2,684 2,681 2,158 2,562 2,618 Depreciation .................... 18,108 16,752 13,571 15,066 20,061 Other operating expenses ........ 5,872 5,048 4,534 3,745 5,468 (Gain) on sale of fixed assets .. (332) (59) (189) (27) (149) Merger consummation and integration costs ............. -- -- -- -- 3,494 --------- --------- --------- --------- --------- 217,448 219,318 192,123 160,352 200,507 --------- --------- --------- --------- --------- Operating income .................. 46,041 43,186 36,888 31,155 23,741 Interest income/(expense), net ... 4,896 3,782 2,839 1,524 (1,930) --------- --------- --------- --------- --------- Income before income taxes ........ 50,937 46,968 39,727 32,679 21,811 Federal and state income taxes .... 17,828 16,895 14,697 12,094 11,734 --------- --------- --------- --------- --------- Net income ........................ $ 33,109 $ 30,073 $ 25,030 $ 20,585 $ 10,077 ========= ========= ========= ========= ========= Basic weighted average shares outstanding ....................... 30,000 30,000 30,000 30,036 30,039 ========= ========= ========= ========= ========= Basic earnings per share .......... $ 1.10 $ 1.00 $ 0.83 $ 0.69 $ 0.34 ========= ========= ========= ========= ========= Balance sheet data: Working capital ................... $ 127,989 $ 82,170 $ 69,845 $ 40,780 $ 2,542 Total assets ...................... $ 256,828 $ 225,467 $ 191,504 $ 158,146 $ 136,393 Long term debt .................... $ -- $ -- $ -- $ -- $ 705 Stockholders' equity .............. $ 186,848 $ 153,739 $ 123,666 $ 98,636 $ 78,050
7 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The following table sets forth the percentage relationship of expense items to operating revenue for the periods indicated.
Year Ended December 31, ----------------------- 1998 1997 1996 ------ ------ ------ Operating revenue 100.0% 100.0% 100.0% ------ ------ ------ Operating expenses: Salaries, wages, and benefits 19.7% 18.9% 17.6% Rent and purchased transportation 38.0 38.5 41.0 Operations and maintenance 9.9 10.5 9.7 Taxes and licenses 2.3 2.3 2.5 Insurance and claims 2.6 4.0 4.3 Communications and utilities 1.0 1.0 0.9 Depreciation 6.9 6.4 5.9 Other operating 2.2 1.9 2.0 expenses (Gain) on sale of fixed assets (0.1) -- -- ------ ------ ------ Total operating 82.5% 83.5% 83.9% expenses ------ ------ ------ Operating income 17.5% 16.5% 16.1% Interest income, net 1.9 1.4 1.2 ------ ------ ------ Income before income taxes 19.4% 17.9% 17.3% Federal and state income taxes 6.8 6.4 6.4 ------ ------ ------ Net income 12.6% 11.5% 10.9% ====== ====== ======
Results of Operations Year Ended December 31, 1998 Compared With Year Ended December 31, 1997 Operating revenue increased $1.0 million (0.4%), to $263.5 million in 1998 from $262.5 million in 1997. The Company's growth of operating revenues was curtailed by the industry-wide shortage of experienced employee drivers and independent contractors. Salaries, wages, and benefits increased $2.5 million (5.0%), to $52.0 million in 1998 from $49.5 million in 1997. As a percentage of revenue, salaries, wages, and benefits increased to 19.7% in 1998 from 18.9% in 1997. An increase in the percentage of employee drivers operating the Company's tractor fleet and a corresponding decrease in the percentage of the fleet being provided by independent contractors was the primary cause. This increase in employee driver miles was attributable to internal growth and the effect of a full year of operations of A & M Express which was acquired in July, 1997 and primarily relies on employee drivers. During 1998, employee drivers accounted for 45% and independent contractors 55% of the total fleet miles, compared with 43% and 57%, respectively, in 1997. Rent and purchased transportation decreased $1.1 million (1.1%), to $100.1 million in 1998 from $101.2 million in 1997. As a percentage of revenue, rent and purchased transportation decreased to 38.0% in 1998 from 38.5% in 1997. This reflected the Company's decreased reliance upon independent contractors. In addition, an increased industry demand for independent contractors has negated the Company's previous competitive advantage. Operations and maintenance decreased $1.7 million (6.0%), to $26.1 million in 1998 from $27.7 million in 1997. As a percentage of revenue, operations and maintenance decreased to 9.9% in 1998 from 10.5% in 1997. This decrease is attributable to a decrease in fuel prices and lower repair and maintenance costs due to the replacement of older tractors with newer models. 8 Taxes and licenses increased $0.1 million (1.7%), to $6.1 million in 1998 from $6.0 million 1997, primarily from an increase in fleet size. As a percentage of revenue, taxes and licenses remained constant at 2.3% in 1998 and in 1997. Insurance and claims decreased $3.6 million (34.5%), to $6.8 million in 1998 from $10.4 million in 1997. As a percentage of revenue, insurance and claims decreased to 2.6% in 1998 from 4.0% in 1997. The decrease was primarily attributable to the favorable settlement of claims and the lessor severity of incurred claims. Insurance and claims expense will vary as a percentage of operating revenue from period to period based on the frequency and severity of claims incurred in a given period as well as changes in claims development trends. Communications and utilities remained constant at $2.7 million in 1998 and 1997. As a percentage of revenue, communications and utilities remained constant at 1.0% in 1998 and in 1997. Depreciation increased $1.4 million (8.1%), to $18.1 million in 1998 from $16.8 million in 1997. As a percentage of revenue, depreciation increased to 6.9% in 1998 from 6.4% in 1997. The increase resulted from the growth in the company owned fleet, as a percentage of the total fleet. Other operating expenses increased $0.9 million (16.3%), to $5.9 million in 1998 from $5.0 million in 1997. As a percentage of revenue, other operating expenses increased to 2.2% in 1998 from 1.9% in 1997. Other operating expenses consists of pallet cost, driver recruiting expenses, goodwill, and administrative costs. The primary area of increase was higher costs associated with the recruitment of qualified employee drivers and independent contractors. Primarily as a result of the foregoing, the Company's operating ratio improved to 82.5% in 1998 compared with 83.5% in 1997. Interest income (net) increased $1.1 million (29.5%), to $4.9 million in 1998 from $3.8 million in 1997. As a percentage of revenue, interest income (net) increased to 1.9% in 1998 from 1.4% in 1997. The Company had $143 million in cash, cash equivalents, and investments at December 31, 1998 compared with $96.0 million at December 31, 1997. Interest income earned is primarily exempt from federal taxes and therefore earned at a lower pre-tax rate. The Company's effective tax rate was 35% in 1998 and 36% in 1997. This decrease is primarily attributable to the increase of tax-exempt interest earned. As a result of the foregoing, net income increased $3.0 million (10.1%), to $33.1 million in 1998 (12.6% of revenue) from $30.1 million in 1997 (11.5% of revenue). Year Ended December 31, 1997 Compared With Year Ended December 31, 1996 Operating revenue increased $33.5 million (14.6%), to $262.5 million in 1997 from $229.0 million in 1996, as a result of the Company's acquisition of A & M Express, Inc. and expansion of the customer base and increased volume from existing customers. Salaries, wages, and benefits increased $9.3 million (23.0%), to $49.5 million in 1997 from $40.3 million in 1996. As a percentage of revenue, salaries, wages and benefits increased to 18.9% in 1997 from 17.6% in 1996. An increase in the percentage of employee drivers operating the Company's tractor fleet and a corresponding decrease in the percentage of the fleet being provided by independent contractors was the primary cause. This increase in employee driver miles was attributable to internal growth and the acquisition of A & M Express which primarily relies on employee drivers. During 1997, employee drivers accounted for 43% and independent contractors 57% of the total fleet miles, compared with 40% and 60%, respectively, in 1996. Rent and purchased transportation increased $7.2 million (7.7%), to $101.2 million in 1997 from $94.0 million in 1996. As a percentage of revenue, rent and purchased transportation decreased to 38.5% in 1997 from 41.0% in 1996. This reflected the Company's decreased reliance upon independent contractors. 9 Operations and maintenance increased $5.6 million (25.2%), to $27.7 million in 1997 from $22.2 million in 1996. As a percentage of revenue, operations and maintenance increased to 10.6% in 1997 from 9.7% in 1996. This increase is attributable to the aforementioned increased reliance on employee drivers operating the Company's tractor fleet. Taxes and licenses increased $0.3 million (6.3%), to $6.0 million in 1997 from $5.7 million in 1996. As a percentage of revenue, taxes and licenses decreased to 2.3% in 1997 from 2.5 % in 1996. The cost increase was primarily attributable to the increase in fleet size. The reduction in percentage of revenue can be attributed to improved utilization of equipment. Insurance and claims increased $0.4 million (4.3%), to $10.4 million in 1997 from $10.0 million in 1996. As a percentage of revenue, insurance and claims decreased to 4.0% in 1997 from 4.3% in 1996. Insurance and claims expense will vary as a percentage of operating revenue from period to period based on the frequency and severity of claims incurred in a given period as well as changes in claims development trends. Management believes that the change as a percentage of revenue was insignificant. Communications and utilities increased $0.5 million (24.2%), to $2.7 million in 1997 from $2.2 in 1996. As a percentage of revenue, communications and utilities increased to 1.0% in 1997 from 0.9% in 1996 primarily due to the increase in percentage of the Company's fleet being operated by employee drivers. Depreciation increased $3.2 million (23.4%), to $16.8 million in 1997 from $13.6 million in 1996. As a percentage of revenue, depreciation increased to 6.4% in 1997 from 5.9% in 1996. The increase resulted from the growth in the company owned fleet. Other operating expenses increased $0.5 million (11.3%), to $5.0 million 1997 from $4.5 million in 1996. As a percentage of revenue, other operating expenses decreased to 1.9% in 1997 from 2.0% in 1996. Other operating expenses consists of pallet cost, driver recruiting expenses and administrative costs. Primarily as a result of the foregoing, the Company's operating ratio was 83.5% in 1997 compared with 83.9% in 1996. Interest income (net) increased $1.0 million (34%), to $3.8 million in 1997 from $2.8 million in 1996. As a percentage of revenue, interest income (net) increased to 1.4% in 1997 from 1.2% in 1996. At December 31, 1997, the Company had repaid all debt. The Company had $96.0 million in cash, cash equivalents, and municipal bonds at December 31, 1997. The Company's effective tax rate was 36% in 1997 and 37% in 1996. This decrease is primarily attributable to the increase in tax-exempt interest earned. As a result of the foregoing, net income increased $5.0 million (20.1%), to $30.1 million in 1997 (11.5% of revenue) from $25.0 million in 1996 (10.9% of revenue). Liquidity and Capital Resources The growth of the Company's business requires significant investments in new revenue equipment. Historically the Company has been debt-free, financing revenue equipment through cash flow from operations. The Company also obtains tractor capacity by utilizing independent contractors, who provide a tractor and bear all associated operating and financing expenses. Cash and cash equivalents and investments increased to $143.4 million as of December 31, 1998 from $96.0 million at December 31, 1997. The Company's policy is to purchase only high quality liquid investments. Cash equivalents and investments primarily consists of municipal demand bonds and municipal demand bond funds. Net cash provided by operations was $52.7 million in 1998, $46.8 million in 1997, and $48.3 million in 1996. The primary source of funds in 1998 was net income of $33.1 million increased by non-cash adjustments, including depreciation and amortization of $19.2 million. 10 Net cash provided by (used in) investing and financing activities was $14.5 million in 1998, ($30.1) million in 1997, and ($34.9) million in 1996. Such amounts were used primarily to acquire A & M Express, purchase municipal bonds, purchase revenue equipment, and to pay off long term debt. The Company expects to finance future growth in its company-owned fleet primarily through cash flow from operations and cash equivalents currently on hand.(*) Trade receivables decreased to $21.4 million as of December 31, 1998 from $24.2 million as of December 31, 1997 primarily due to a 11.6% decrease in fourth quarter operating revenue. Cash paid for income taxes decreased to $18.9 million in 1998 from $19.9 million in 1997. Lower income taxes on a cash basis are primarily due to increased interest income exempt from federal taxes. Accounts payable and accrued liabilities decreased to $7.6 million as of December 31, 1998 from $8.9 million as of December 31, 1997 due mostly to a decrease in payables to revenue equipment suppliers. Insurance accruals increased to $35.5 million as of December 31, 1998 from $34.7 million as of December 31, 1997 due to the increase in the Company's fleet miles. The Company's insurance program for liability, physical damage and cargo damage involves self insurance retentions for the first $500,000. Claims in excess of the risk retention are covered by insurance in amounts which management considers adequate. The Company accrues the estimated cost of the uninsured portion of the pending claims. These accruals are estimated based on management's evaluation of the nature and severity of individual claims and estimate of future claims development based on historical claim development trends. If adjustments to previously established accruals are required, such amounts are included in operating expenses. The Company has one customer who accounted for more than 10% of the Company's revenue for the year ended December 31, 1998. As disclosed in footnote two to the financial statements, historically a small number of customers generate a substantial percentage of revenue. In 1998 the Company's largest customer generated approximately 14% of operating revenue. The loss of a major customer could negatively impact the Company. Any negative impact would be mitigated by two factors: (1) the strong overall financial position of the Company (no long term debt at December 31, 1998 and $143.4 million in cash, cash equivalents and investments) and (2) the flexibility inherent in having a substantial percentage of fleet miles being generated by independent contractors who provide their own tractors.(*) Based on the Company's strong financial position (current ratio of 3.4 and no debt), management foresees no significant barriers to obtaining sufficient financing, if necessary, to continue with growth plans. (*) Inflation and Fuel Cost Most of the Company's operating expenses are inflation-sensitive, with inflation generally producing increased costs of operations. During the past three years, the most significant effects of inflation have been on revenue equipment prices and the compensation paid to the drivers. Innovations in equipment technology and comfort have resulted in higher tractor prices, and there has been an industry-wide increase in wages paid to attract and retain qualified drivers. The Company historically has limited the effects of inflation through increases in freight rates and certain cost control efforts. In addition to inflation, fluctuations in fuel prices can affect profitability. Most of the Company's contracts with customers contain fuel surcharge provisions. Although the Company historically has been able to pass through most long-term increases in fuel prices and taxes to customers in the form of surcharges and higher rates, shorter-term increases are not fully recovered. (*) Seasonality The nature of the Company's primary traffic (appliances, automotive parts, paper products, retail goods, and packaged foodstuffs) causes it to be distributed with relative uniformity throughout the year. However, earnings have historically been affected adversely during the fourth quarter as a result of reduced shipments by customers during the winter holiday season. In addition, the Company's operating expenses historically have been higher during the winter months due to increased operating costs in colder weather and higher fuel consumption due to increased engine idling. (*) Forward - looking statements 11 Year 2000 The Company has completed a comprehensive inventory and assessment of its risk associated with the Year 2000 problem. The position of the Company is to ensure successful operation of business processes without interruption before, during, and after December 31, 1999. A formal Year 2000 team was established in 1998 to identify exposures, develop a compliance plan, correct problems, test results and monitor progress on a monthly basis, and develop a contingency plan in the event of any system failures. All internal systems (both information technology "IT" and non-IT) have been assessed for risk, including operational software, operational platforms, desktop systems, telephony equipment, data communications, systems assurance, and facility management systems. Critical business processes have been assessed for risk, such as customer service, voice telecommunications, order entry, transportation capacity planning, logistical balance planning, driver load assignment, driver satellite communications, rating and invoicing, payment remittance, financial transactions, and electronic data interchange (EDI) communications for load tendering, shipment status, and freight invoicing. The Company's operational platform and enterprise software were upgraded in 1998 and are Year 2000 compliant. The Company will be testing systems by simulating the transition to the Year 2000. This testing should be completed prior to June 30, 1999. In 1998 the Company spent approximately $775,000 on Year 2000 compliance. Future estimated compliance costs are not expected to be material to the Company's consolidated financial position, results of operations, or cash flows. As part of the Company's comprehensive review, it is continuing to verify the year 2000 readiness of third parties (vendors and customers) with whom the Company has material business relationships. These relationships include providers of such services as telecommunications, natural gas and electricity, diesel fuel, satellite communications, and financial transactions. Formal communications have been initiated with significant customers and suppliers. These customers and suppliers indicate that they expect to achieve compliance and do not expect any business interruptions. In addition, engine manufacturers have confirmed the year 2000 readiness of our company-owned tractor fleet. At present the Company is not able to determine with certainty the effect on the Company's results of operations, liquidity, and financial condition in the event the Company's material suppliers and customers are not Year 2000 compliant. There can be no assurance that the Company will properly identify all Year 2000 issues or that certain external customers or suppliers will not experience disruption of IT functions or actual services provided. The Company will continue to monitor the progress of its material suppliers and customers. Contingency plans are being developed to address Year 2000 issues that may arise in the event of system failures or loss of material suppliers or customers. Forward - Looking Information Certain matters discussed in this annual report and marked with an asterisk are "forward-looking statements" intended to qualify for the safe harbors from liability established by Private Securities Litigation Reform Act of 1995. Such statements address future plans, objectives, expectations and events or conditions concerning various matters such as capital expenditures, litigation, liquidity and capital resources, and accounting matters. Actual results in each case could differ materially from those currently anticipated in such statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company purchases only high quality liquid investments. All investments as of December 31, 1998 have an original maturity of three months or less. The Company holds all investments to maturity and therefore, is exposed to minimal market risk related to its cash equivalents and municipal bonds. The Company has no debt outstanding as of December 31, 1998 and therefore, has no market risk related to debt. The Company does not engage in fuel hedging with financial instruments and therefore, has no market risk related to fuel price movements. The Company does use purchase contracts for bulk fuel purchases. 12 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's audited financial statements, including its consolidated balance sheets and consolidated statements of operations, cash flows, and stockholders' equity, and notes related thereto, are contained at pages 17 to 27 of this report. Selected quarterly data is contained at page 26. Such information is incorporated by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information respecting executive officers, directors, and director nominee, set forth under the caption "Election of Directors-Information Concerning Executive Officers and Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" on pages 2 through 4 and 6 of the registrant's proxy statement relating to its 1999 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission in accordance with Rule 14a-6 promulgated under the Securities Exchange Act of 1934 (the "Proxy Statement"), is incorporated by reference. With the exception of the foregoing information and other information specifically incorporated by reference into this Form 10-K report, the Proxy Statement is not being filed as a part hereof. ITEM 11. EXECUTIVE COMPENSATION The information respecting executive compensation set forth under the caption "Executive Compensation" on pages 4 and 5 of the Proxy Statement is incorporated herein by reference; provided, however, that the "Board of Directors' Report on Executive Compensation" is not incorporated by reference here. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information respecting security ownership of certain beneficial owners and management included under the caption "Principal Stockholders and Stockholdings of Management" on page 7 of the Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information respecting certain relationships and transactions of management set forth under the captions "Board of Directors Interlocks and Insider Participation / Certain Transactions and Relationships" on page 4 of the Proxy Statement is incorporated herein by reference. 13 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements and Schedules The Company's audited financial statements are set forth on the following pages of this report: Page Reports of Independent Public Accountants ............................... 17 Consolidated Balance Sheets ............................................. 18 Consolidated Statements of Operations ................................... 19 Consolidated Statements of Stockholders' Equity ......................... 20 Consolidated Statements of Cash Flows ................................... 21 Notes to Consolidated Financial Statements .............................. 22-27 (a) 2 Financial Statement Schedule Page Valuation and Qualifying Accounts and Reserves .......................... 27 (a) 3 Exhibits required by Item 601 of Regulation S-K are listed below. (b) Reports on Form 8-K The Company did not file a Form 8-K during the last quarter of 1998 (c) Exhibits 14 Exhibit No. Document Page of Method of Filing 3.1 Articles of Incorportion Incorporated by reference to the Company's registration statement on Form S-1, Registration No. 33-8165,effective November 5,1986 3.2 Bylaws Incorporated by reference to the Company's registration statement on Form S-1, Registration No. 33-8165,effective November 5,1986 3.3 Certificate of Amendment to Incorporated by reference to the Articles of Incorporation Company's Form 10-QA, for the quarter ended June 30, 1997, dated March 26, 1998. 4.1 Articles of Incorporation Incorporated by reference to the Company's registration statement on Form S-1, Registration No. 33-8165, effective November 5, 1986. 4.2 Bylaws Incorporated by reference to the Company's registration statement on Form S-1, Registration No. 33-8165, effective November 5, 1986. 4.3 Certificate of Amendment Incorporated by reference to the to Articles of Incorporation Company's Form 10-QA, for the quarter ended June 30, 1997, dated March 26, 1998. 9.1 Voting Trust Agreement dated Incorporated by reference to the June 6, 1997 between Larry Company's Form 10-K for the year as trustee under the Gerdin ended December 31, 1997. Educational Trusts and Commission file no. 0-15087. Larry Crouse voting trustee. 10.1 Business Property Lease between Incorporated by reference to the Russell A. Gerdin as Lessor and Company's Form 10-K for the year the Company as Lessee, regarding ended December 31, 1996. the Company's headquarters at Commission file no.0-15087. 2777 Heartland Drive, Coralville, Iowa 52241 10.2 Form of Independent Contractor Incorporated by reference to the Operating Agreement between the Company's Form 10-K for the year Company and its independent ended December 31, 1993. contractor providers of tractors Commission file no. 0-15087. 10.3 Description of Key Management Incorporated by reference to the Deferred Incentive Compensation Company's Form 10-K for the year Arrangement ended December 31, 1993. Commission file no. 0-15087. 21 Subsidiaries of the Registrant Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1997. Commission file no. 0-15087. 27 Financial Data Schedule Filed herewith. 15 SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused the report to be signed on its behalf by the undersigned thereunto duly authorized. HEARTLAND EXPRESS, INC. Date: March 26, 1999 By: /s/ Russell A. Gerdin -------------- ---------------------- Russell A. Gerdin President and Secretary Pursuant to the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. Signature Title Date /s/ Russell A. Gerdin Chairman, President and Chief Russell A. Gerdin Executive Officer (Principal Executive Officer), Secretary March 26, 1999 /s/ John P. Cosaert Vice President of Finance John P. Cosaert (Principal Financial Officer and Principal Accounting Officer) and Treasurer March 26, 1999 /s/ Richard O. Jacobson Director Richard O.Jacobson March 26, 1999 /s/ Michael J. Gerdin Director Michael J.Gerdin March 26, 1999 /s/ Benjamin J. Allen Director Benjamin J.Allen March 26, 1999 16 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Heartland Express, Inc.: We have audited the accompanying consolidated balance sheets of Heartland Express, Inc. (a Nevada corporation) and Subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements and schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Heartland Express, Inc. and Subsidiaries, as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Kansas City, Missouri January 22, 1999 17 HEARTLAND EXPRESS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, ASSETS 1998 1997 ------------ ------------ ------------ CURRENT ASSETS Cash and cash equivalents .................... $143,434,594 $ 76,240,422 Trade receivable, less allowance: 1998 $402,812; 1997 $491,971 ................. 21,391,206 24,247,307 Prepaid tires and tubes ...................... 1,039,405 1,617,464 Investments .................................. -- 19,769,765 Deferred income taxes ........................ 16,082,000 15,841,000 Other current assets ......................... 306,142 280,243 ------------ ------------ Total current assets ....................... 182,253,347 137,996,201 ------------ ------------ PROPERTY AND EQUIPMENT Land and land improvements ................... 3,830,779 3,936,843 Buildings .................................... 9,214,397 9,215,477 Furniture and fixtures ....................... 2,535,343 1,982,818 Shop and service equipment ................... 1,444,764 1,351,440 Revenue equipment ............................ 112,162,731 118,819,981 ------------ ------------ 129,188,014 135,306,559 Less accumulated depreciation and amortization 60,618,544 54,336,481 ------------ ------------ Property and equipment, net .................. 68,569,470 80,970,078 ------------ ------------ OTHER ASSETS ................................... 6,005,191 6,500,395 ------------ ------------ $256,828,008 $225,466,674 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities ..... $ 7,615,143 $ 8,857,820 Compensation and benefits .................... 4,431,905 4,992,714 Income taxes payable ......................... 3,578,501 4,224,150 Insurance accruals ........................... 35,503,314 34,671,707 Other accruals ............................... 3,135,232 3,080,223 ------------ ------------ Total current liabilities .................. 54,264,095 55,826,614 ------------ ------------ DEFERRED INCOME TAXES .......................... 15,716,000 15,901,000 COMMITMENTS AND CONTINGENCIES (Note 9) STOCKHOLDERS' EQUITY Capital Stock Preferred, par value $.01; authorized 5,000,000 shares; none issued ................ -- -- Common par value $.01; authorized 395,000,000 shares; issued and outstanding 30,000,000 shares ............................ 300,000 300,000 Additional paid-in capital ................... 6,608,170 6,608,170 Retained earnings ............................ 179,939,743 146,830,890 ------------ ------------ 186,847,913 153,739,060 ------------ ------------ $256,828,008 $225,466,674 ============ ============ The accompanying notes are an integral part of these financial statements
18 HEARTLAND EXPRESS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, ------------- 1998 1997 1996 ------------- ------------- ------------- Operating revenue ............ $ 263,489,156 $ 262,504,156 $ 229,011,108 ------------- ------------- ------------- Operating expenses: Salaries, wages, and benefits 51,994,959 49,534,386 40,260,524 Rent and purchased transportation .............. 100,089,165 101,169,061 93,961,180 Operations and maintenance .. 26,072,323 27,739,355 22,158,279 Taxes and licenses .......... 6,150,407 6,049,155 5,692,592 Insurance and claims ........ 6,809,819 10,404,326 9,975,716 Communications and utilities 2,684,310 2,681,489 2,158,489 Depreciation ................ 18,107,708 16,751,384 13,571,284 Other operating expenses .... 5,871,671 5,047,624 4,534,472 Gain on sale of fixed assets (332,255) (58,903) (189,041) ------------- ------------- ------------- 217,448,107 219,317,877 192,123,495 ------------- ------------- ------------- Operating income ............ 46,041,049 43,186,279 36,887,613 Interest income .............. 4,895,651 3,846,157 2,871,089 Interest expense ............. -- (64,571) (30,943) ------------- ------------- ------------- Income before income taxes 50,936,700 46,967,865 39,727,759 Federal and state income taxes 17,827,847 16,894,972 14,697,268 ------------- ------------- ------------- Net income ................ $ 33,108,853 $ 30,072,893 $ 25,030,491 ============= ============= ============= Basic earnings per share ...... $ 1.10 $ 1.00 $ 0.83 ============= ============= ============= Basic weighted average shares outstanding .................. 30,000,000 30,000,000 30,000,000 ============= ============= ============= The accompanying notes are an integral part of these financial statements.
19 HEARTLAND EXPRESS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Capital Additional Stock, Paid-In Retained Common Capital Earnings Total ------------ ------------ ------------ ------------ Balance, December 31, 1995 ...... $ 3,000,000 $ 3,908,170 $ 91,727,506 $ 98,635,676 Net Income ...................... -- -- 25,030,491 25,030,491 ------------ ------------ ------------ ------------ Balance, December 31, 1996 ...... 3,000,000 3,908,170 116,757,997 123,666,167 Reduction in par value .......... (2,700,000) 2,700,000 -- -- Net income ...................... -- -- 30,072,893 30,072,893 ------------ ------------ ------------ ------------ Balance, December 31, 1997 ...... 300,000 6,608,170 146,830,890 153,739,060 Net income ...................... -- -- 33,108,853 33,108,853 ------------ ------------ ------------ ------------ Balance, December 31, 1998 ...... 300,000 6,608,170 $179,939,743 $186,847,913 ============ ============ ============ ============ The accompanying notes are an integral part of these financial statements.
20 HEARTLAND EXPRESS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------- 1998 1997 1996 ------------- ------------- ------------- OPERATING ACTIVITIES Net income ........................... $ 33,108,853 $ 30,072,893 $ 25,030,491 Adjustments to reconcile to net cash provided by operating activities: Depreciation and amortization ....... 19,227,213 17,488,602 13,956,088 Deferred income taxes ............... (426,000) (3,149,000) (2,807,000) Gain on sale of fixed assets ........ (272,893) (58,903) (189,041) Changes in certain working capital items: Trade receivable .................. 2,856,101 (4,623,019) 2,338,411 Other current assets .............. (769,666) 446,071 (14,758) Prepaids .......................... 502,214 1,031,682 2,605,830 Accounts payable and accrued expenses.................. (844,817) 5,413,840 5,159,151 Accrued income taxes .............. (645,649) 138,279 2,235,057 ------------- ------------- ------------- Net cash provided by operating activities............................ 52,735,356 46,760,445 48,314,229 ------------- ------------- ------------- INVESTING ACTIVITIES Proceeds from sale of property and equipment......................... 483,668 271,721 393,513 Capital additions .................... (5,511,705) (22,384,516) (7,491,563) Net maturities (purchases) of municipal bonds ...................... 19,769,765 11,691,494 (26,941,798) Other ................................ (282,912) (1,150,055) (137,619) ------------- ------------- ------------- Net cash provided (used in) by investing activities ................. 14,458,816 (11,571,356) (34,177,467) ------------- ------------- ------------- FINANCING ACTIVITIES Principal payments on long-term notes ................................ -- (18,542,135) (705,437) ------------- ------------- ------------- Net cash used in financing activities -- (18,542,135) (705,437) ------------- ------------- ------------- Net increase in cash and cash equivalents .......................... 67,194,172 16,646,954 13,431,325 CASH AND CASH EQUIVALENTS Beginning of year .................... 76,240,422 59,593,468 46,162,143 ------------- ------------- ------------- End of year .......................... $ 143,434,594 $ 76,240,422 $ 59,593,468 ============= ============= ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest ............................ $ -- $ 64,571 $ 30,943 Income taxes ........................ $ 18,899,496 $ 19,905,693 $ 15,269,211 Noncash investing activities: Book value of revenue equipment traded $ 9,658,636 $ 3,062,392 $ 5,585,217 The accompanying notes are an integral part of these financial statements.
21 HEARTLAND EXPRESS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Nature of business and Significant Accounting Policies Nature of Business: Heartland Express, Inc., (the "Company") is a short-to-medium-haul, irregular route, truckload carrier of general commodities. The Company's primary traffic lanes are between customer locations east of the Rocky Mountains, with selected service to the West. The Company operates the business as one reportable segment. Significant Accounting Policies: Principles of Consolidation: The accompanying consolidated financial statements include the parent company, Heartland Express, Inc., and its subsidiaries, all of which are wholly owned. All material intercompany items and transactions have been eliminated in consolidation. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents: Cash equivalents are short-term, highly liquid investments with original maturities of three months of less. Cash equivalents consist of municipal demand bonds and notes, funds and trusts investing in those notes and auction preferred stocks. Investments: Substantially all investments represent municipal bonds or municipal bond funds with a maturity of one year or less. These investments are held to maturity and stated at amortized cost. Investment income received is generally exempt from federal income taxes. Revenue and Expense Recognition: Operating revenues are recognized on the date the freight is delivered and expenses are recognized as incurred. Property and Equipment: Property and equipment are stated at cost. Generally, at the time of trade-in, the cost of new equipment is recorded at an amount equal to the net book value of the traded equipment plus cash paid. Depreciation is computed by the straight-line method for all assets other than tractors, which are depreciated by the 125% declining balance method. Trailers are depreciated to a 30% salvage value except for trailers purchased after January 1, 1996 which have no salvage value. Lives of the assets are as follows: 22 HEARTLAND EXPRESS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Land improvements and building 3-30 Furniture and fixtures 2-3 Shop and service equipment 3-5 Revenue equipment 5-7 Assets to be disposed of are measured at the lower of carrying amount or fair market value, as estimated by management, less costs to sell. Tires and Tubes: The cost of tires and tubes on new revenue equipment is carried as a prepayment and amortized over the estimated tire life of two years. Replacement tires (including recapped tires) are expensed when purchased. Earnings Per Share: The Company reports earnings per share in accordance with Statement of Financial Accounting Standard No. 128, (SFAS 128) "Earnings per share." Basic earnings per share is based upon the weighted average common shares outstanding during each year. Diluted earnings per share is based upon the weighted average common and common equivalent shares outstanding during each year. Heartland has no common stock equivalents. Reclassifications: Certain reclassifications have been made to the prior year consolidated financial statements to conform with the current year presentation. Note 2. Concentrations of Credit Risk and Major Customers The Company's major customers represent the consumer goods, appliances, food products and automotive industries. Credit is usually granted to customers on an unsecured basis. The Company's five largest customers accounted for 35%, 39%, and 44% of revenues for the years ended December 31, 1998, 1997, and 1996, respectively. Operating revenue from one customer exceeded 10% of total gross revenues in 1998, 1997 or 1996. Annual revenues for this customer were $37.0 million, $39.0 million, and $35.0 million for the years ended December 31, 1998, 1997, and 1996, respectively. 23 HEARTLAND EXPRESS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3. Acquisition On July 14, 1997, the Company acquired the outstanding stock of A & M Express, Inc., (A & M) a Kingsport, Tennessee based truckload carrier. A & M, a dry van carrier, operated primarily in the eastern half of the United States. The acquisition was accounted for by the purchase method of accounting. The results of A & M's operations are reflected beginning with the effective date of the acquisition (July 1, 1997). In 1997, The company repaid approximately $18.5 million in debt which was assumed in connection with the acquisition. The acquisition of A & M did not have a material impact on the results of operations for the years ending December 31, 1998 and 1997. Note 4. Income Taxes Deferred income taxes are determined based upon the differences between the financial reporting and tax basis of the Company's assets and liabilities. Deferred taxes are provided at the enacted tax rates to be in effect when the differences reverse. Deferred tax assets and liabilities as of December 31 are as follows:
1998 1997 ------------ ------------ Deferred income tax liabilities, related to property and equipment .............. $ 15,716,000 $ 15,901,000 ============ ============ Deferred income tax assets: Allowance for doubtful accounts ............. $ 153,000 $ 153,000 Accrued expenses............................. 2,270,000 2,428,000 Insurance accruals........................... 13,186,000 12,740,000 Other........................................ 473,000 520,000 ------------ ------------ Deferred income tax assets .................. $ 16,082,000 $ 15,841,000 ============ ============
The income tax provision is as follows:
1998 1997 1996 ------------ ------------ ------------ Current income taxes: Federal ...................... $ 16,983,674 $ 18,697,215 $ 16,523,897 State......................... 1,270,173 1,346,757 980,371 ------------ ------------ ------------ $ 18,253,847 $ 20,043,972 $ 17,504,268 ------------ ------------ ------------ Deferred income taxes: Federal ...................... $ (408,960) $ (3,023,040) $ (2,689,106) State......................... (17,040) (125,960) (117,894) ------------ ------------ ------------ $ (426,000) $ (3,149,000) $ (2,807,000) ------------ ------------ ------------ Total ........................ $ 17,827,847 $ 16,894,972 $ 14,697,268 ============ ============ ============
24 HEARTLAND EXPRESS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The income tax provision differs from the amount determined by applying the U.S.federal tax rate as follows:
1998 1997 1996 ------------ ------------ ------------ Federal tax at statutory rate (35%) ........... $ 17,827,845 $ 16,438,753 $ 13,904,716 State taxes, net of federal benefit ........................ 826,000 875,000 648,000 Non-taxable interest income (1,398,000) (1,105,000) (797,000) Other .......................... 572,002 686,219 941,552 ------------ ------------ ------------ $ 17,827,847 $ 16,894,972 $ 14,697,268 ============ ============ ============
Note 5. Related Party Transactions The Company leases two office buildings and a storage building from its president under a lease which provided for monthly rentals of $23,500 plus the payment of all property taxes, insurance and maintenance. The lease expires May 31, 2000 and contains a five year renewal option. The total minimum rental commitment under the building lease is as follows: Year ending December 31: 1999 282,000 2000 117,500 ---------- $ 399,500 ========== Rent expense paid to the Company's president totaled $282,000 for the years ended December 31, 1998, 1997, and 1996. The Company also maintains cash accounts with a bank owned by the Company's president. Note 6. Accident and Workers' Compensation Claims Accident and workers' compensation claims include the estimated settlements, settlement expenses and an allowance for claims incurred but not yet reported for property damage, personal injury and public liability losses from vehicle accidents and cargo losses as well as workers' compensation claims for amounts not covered by insurance. Accrued claims are determined based on estimates of the ultimate cost of settling reported and unreported claims, including expected settlement expenses. Such estimates are based on management's evaluation of the nature and severity of individual claims and an estimate of future claims development based on historical claims development trends. Since the reported liability is an estimate, the ultimate liability may be more or less than reported. If adjustments to previously established accruals are required, such amounts are included in operating expenses. 25 HEARTLAND EXPRESS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company acts as a self-insurer for liability up to $500,000 for any single occurrence involving cargo, personal injury or property damage. Liability in excess of this amount is assumed by an insurance underwriter. A & M Express, however, had a $5,000 self-insurance retention. The Company acts as a self-insurer for workers' compensation liability up to a maximum liability of $300,000 per claim. Liability in excess of this amount is assumed by an insurance underwriter. The State of Iowa has required the Company to deposit $700,000 into a trust fund as part of the self-insurance program. This deposit has been classified with other long-term assets on the balance sheet. In addition, the Company has provided its insurance carriers with letters of credit and deposits of approximately $6.3 million in connection with its liability and workers' compensation insurance arrangements. Note 7. Stockholders' Equity On February 18, 1997, the Company amended its articles of incorporation to increase authorized capital to four hundred million (400,000,000) shares of capital stock (395,000,000 shares of common stock and 5,000,000 shares of preferred stock) and reduced the par value from $0.10 to $0.01 per share. On September 12, 1996 the Company's Board of Directors approved a 1.5 for 1.0 split of the Company's common stock effected in the form of a 50% stock dividend for stockholders of record as of September 23, 1996. A total of 10,000,000 common shares were issued. All share and per share amounts, and capital accounts, have been restated to retroactively reflect the stock split. Note 8. Profit Sharing Plan and Retirement Plan The Company has a profit sharing plan with 401(k) plan features whereby the Company may make contributions to the plan at its discretion. Individual employees may make voluntary contributions to the plan. Company contributions totaled $491,000, $541,000, and $529,000 for the years ended December 31, 1998, 1997 and 1996, respectively. 26 HEARTLAND EXPRESS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS Note 9. Commitments and Contingencies Various claims and legal actions are pending against the Company. In management's opinion, the resolution of these matters will not materially impact the Company's financial condition or results of operations The Company has entered into fuel purchase contracts through March 2000. The contracts represent approximately 25% of annual fuel usage. The aggregate commitment under the contracts is $1,324,527 as of December 31, 1998. The Company has entered into an equipment purchase agreement to acquire new tractors. As of December 31, 1998 the Company was committed to purchase tractors at an aggregate purchase price of $24.4 million. Note 10. Quarterly Financial Information (Unaudited)
First Second Third Fourth ------- ------- ------- ------- (In Thousands, Except Per Share Data) Year ended December 31, 1998 Operating revenue .................... $66,840 $69,223 $65,015 $62,411 Operating income ..................... 10,954 11,976 11,675 11,436 Income before income taxes ........... 12,009 13,104 12,973 12,851 Net income ........................... 7,806 8,518 8,430 8,355 Basic earnings per share ............. 0.26 0.28 0.28 0.28 Year end December 31, 1997 Operating revenue .................... $59,887 $65,381 $70,180 $67,056 Operating income ..................... 9,642 11,196 12,084 10,264 Income before income taxes ........... 10,521 12,269 12,928 11,250 Net income ........................... 6,628 7,729 8,403 7,313 Basic earnings per share ............. 0.22 0.26 0.28 0.24
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A Column B Column C Column D Column E ---------- ---------- ----------------------- ---------- --------- Charges To ----------------------- Balance At Cost Balance Beginning And Other At End Description of Period Expense Accounts Deductions of Period - -------------------------- ---------- --------- ------------ ---------- --------- Allowance for doubtful accounts: Year ended December 31, 1998 $491,971 $ 37,078 $ -- $126,237 $402,812 Year ended December 31, 1997 $402,812 $ 79,526 $ 250,000 * $240,367 $491,971 Year ended December 31, 1996 $402,812 $ 33,710 $ -- $ 33,710 $402,812 (*) Acquired A & M reserves
27 EX-27 2 FDS --
5 0000799233 Heartland Express, Inc. 1000 12-MOS DEC-31-1998 JAN-1-1998 DEC-31-1998 143,435 0 21,391 403 0 182,253 129,188 60,619 256,828 54,264 0 0 0 300 186,548 256,828 263,489 263,489 0 217,448 0 0 0 50,937 17,828 33,109 0 0 0 33,109 1.00 1.00
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