-----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, SJmFF7x63vWdn2NyU0kB3PlaURP+ZR1Tf51YSIWSucVpeN4hAzONF4JP9cwqDOKJ e/94AMKNCNxkNarLUQlBug== 0000881895-98-000002.txt : 19980326 0000881895-98-000002.hdr.sgml : 19980326 ACCESSION NUMBER: 0000881895-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980325 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: OTR EXPRESS INC/KS CENTRAL INDEX KEY: 0000881895 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 480993128 STATE OF INCORPORATION: KS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19773 FILM NUMBER: 98573087 BUSINESS ADDRESS: STREET 1: 804 N MEADOWBROOK DR STREET 2: PO BOX 2819 CITY: OLATHE STATE: KS ZIP: 66062-0819 BUSINESS PHONE: 9138291616 MAIL ADDRESS: STREET 1: P O BOX 2819 CITY: OLATHE STATE: KS ZIP: 66063 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 For the year ended December 31, 1997 Commission file number 1-19773 OTR EXPRESS, INC. (Exact name of registrant as specified in its charter) Kansas 48-0993128 (State or other jurisdiction of (IRS Employer incorporation of organization) Identification No.) 804 N. Meadowbrook Drive, Olathe, Kansas 66062 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (913) 829-1616 Securities Registered Pursuant to Section 12(g) of the Act: Title of each class Common Stock, $.01 par value 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 the 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. (1) Yes X No (2) 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 definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) The aggregate market value of voting stock held by non-affiliates of the registrant was $12,851,685 as of February 28, 1998. 1,835,955 (Number of shares of common stock outstanding as of February 28, 1998) Part III incorporates certain information by reference from the Registrant's Annual Report to Stockholders for fiscal year ended December 31, 1997 and Part III incorporates certain information by reference from the Registrant's definitive proxy statement dated April 4, 1998. OTR EXPRESS, INC. 1997 Annual Report on Form 10-K Table of Contents Page Part I Item 1. Business 3 Item 2. Properties 9 Item 3. Legal Proceedings 10 Item 4. Submission of Matters to a Vote of Security Holders 10 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 10 Item 6. Selected Financial Data 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 8. Financial Statements and Supplementary Data 11 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 11 Part III Item 10. Directors and Executive Officers of the Registrant 11 Item 11. Executive Compensation 11 Item 12. Security Ownership of Certain Beneficial Owners and Management 11 Item 13. Certain Relationships and Related Transactions 11 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 12 PART I Item 1. Business Overview The discussion set forth below as well as other documents incorporated by reference herein and oral statements made by officers of the Company relating thereto, may contain forward looking statements. Such comments are based upon information currently available to management and management's perception thereof as of the date of this Form 10-K. Actual results of the Company's operations could materially differ from those forward looking statements. Such differences could be caused by a number of factors including, but not limited to, potential adverse affects of regulation; changes in competition and the effects of such changes; increased competition; changes in fuel prices; changes in economic, political or regulatory environments; litigation involving the Company; changes in the availability of a stable labor force; ability of the Company to hire drivers meeting Company standards; changes in management strategies; environmental or tax matters; issues arising from addressing Year 2000 Issues; and risks described from time to time in reports filed by the Company with the Securities and Exchange Commission. Readers should take these factors into account in evaluating any such forward looking statements. The Company OTR Express, Inc., a Kansas corporation organized in 1985 (the "Company" or "OTR") operates as a long-haul, dry van, truckload carrier. The Company transports a diversified mix of general commodities, including paper products, food products, furniture, wire and retail goods for a large base of customers (currently over 1,000) throughout the continental United States. OTR is headquartered in Olathe, Kansas, a suburb of Kansas City, Missouri. Operating Strategy OTR's business philosophy is to provide high quality transportation services at a low cost. The Company has historically achieved this by (1) focusing on technology; (2) operating premium, late model equipment; (3) hiring experienced drivers; and (4) maintaining an efficient cost structure. From its founding in 1985 until 1995, the Company's operating strategy differed from that of most truckload carriers in that OTR serviced a large base of customers with no long-term contracts or commitments. This strategy allowed the Company to obtain the most profitable loads available on a spot basis. To identify the most profitable loads, the Company utilized its internally developed, proprietary Freight Optimization System - a next move probability based freight system. The Freight Optimization System enables the Company to analyze historical data to prioritize customers most likely to have freight that will produce the most profitable combination of rates and destinations. The Freight Optimization System was designed to maximize freight opportunities, maximize revenue per mile and minimize empty miles, but had become dependent to some extent on freight brokers offering opportunities in the spot market. In mid 1995, using the system, the Company received as much as 55% of its freight opportunities from freight brokers who typically pay 10% to 15% less per mile than direct shippers. In 1996, due to changing market conditions, the Company determined that it was necessary to change its operating strategy to market to larger national accounts and away from the lower priced spot freight market and its reliance on freight brokers. The objective of OTR's new operating strategy was to improve revenue per mile, equipment utilization, stability of the customer base and reduce reliance on freight brokers. These larger shippers are capable of offering increased load counts at higher revenue rates. The larger shippers require additional services, including guaranteed equipment availability, drop trailers and fifty-three foot trailers. Additionally, in 1996, the Company began offering Qualcomm satellite communications on every truck and electronic data interchange (EDI) for load status information to serve the Company's larger national accounts. The Company is working to integrate these larger shippers into the Company's existing operating strategy effectively, providing a higher mix of more profitable shipper freight. In this new operating strategy, the Company will be able to utilize its Freight Optimization System which will work in conjunction with the Company's new national accounts program to identify opportunities on non-national account freight and backhaul opportunities on national account freight. In 1997, the Company added a customer service department in order to further enhance the Company's service capabilities and to expand business opportunities with direct shipper customers. OTR began regional short-haul operations in Kansas City and Chicago in 1997 to meet customer demand. Based on management's analysis of the market size, cost of entry and potential long-term profitability, the Company expects to make further investments in the short-haul division. This flexible operating strategy has contributed to the Company's rapid growth during the five year period ending December 31, 1997, with revenue increasing to $63.8 million in 1997 from $22.0 million in 1992 (a compound annual growth rate of 23.7%), and a corresponding increase in its fleet to 526 company-owned tractors from 228 during such period. Customers and Marketing OTR has a large customer base that is diversified in terms of geographic location and types of commodities shipped. The Company markets its services based on dependable, time definite delivery and service. The Company obtains freight in three different manners: directly from shippers ("OTR Shippers"), through Company agents ("Agent Shippers") and from freight brokers. OTR Shippers are marketed directly by internal OTR sales representatives. Agent Shippers are marketed by the Company's outside sales agents. The Company's customer database includes approximately 500 OTR Shippers, 320 Agent Shippers and 230 freight brokers. In 1997, OTR Shippers accounted for 57% of OTR's revenue miles, Agent Shippers accounted for 20% and freight brokers accounted for 23%. In 1996, OTR Shippers accounted for 46% of OTR's revenue miles, Agent Shippers accounted for 14% and freight brokers accounted for 40%. The freight obtained from OTR Shippers and Agent Shippers is generally more profitable than freight obtained from brokers, having freight rates which average 10% to 15% more than brokered freight. To maximize this more profitable revenue base by generating new OTR Shippers, OTR increased the number of its sales representatives and customer service representatives to eighteen at February 28, 1998 from three at December 31, 1994. Historically, sales representatives operated primarily through direct telemarketing efforts. In 1996, the Company began making face to face sales calls to its current customers and prospective customers in conjunction with its national account program. The Company plans to continue expansion of its sales force and customer service representatives. The Company's brokered freight is obtained through a network of freight brokers who contract for freight directly from shippers and re-contract with the Company to transport the freight. A freight broker helps carriers obtain loads in areas where the carrier does not typically have a large number of customers, thereby minimizing the empty miles of the carrier. Freight brokers typically earn a margin based on a percentage of the carrier's freight fee. The Company has developed a network of approximately 230 freight brokers. The Company expects to continue to reduce the percentage of revenue miles from freight brokers in the future. For the year ended December 31, 1997, the Company's 20, 10 and five largest customers accounted for 29.9%, 20.5% and 12.9%, respectively, of the Company's operating revenue. The largest customer accounted for 3.0% of the Company's operating revenue for that period. Freight Brokerage Division To better service its customers, OTR has developed a freight brokerage division which brokers loads to other carriers. By brokering loads, the Company is able to increase its profitability while satisfying its customers' shipping needs without utilizing Company owned equipment. Freight brokerage division revenue increased to $3.7 million in 1997 from $3.3 million in 1996. Drivers, Other Employees and Owner-Operator Drivers Recruiting and retaining professional, experienced drivers is critical to the Company's success, and all of the Company's drivers must meet specific guidelines relating primarily to safety record, driving experience and personal evaluation, including drug and alcohol testing. OTR's drivers have an average age of 46.4 years and average 14.2 years of driving experience. Within the Company, drivers are considered "managers" and are given a high level of responsibility to manage the profitability of their equipment. The Company's Driver Incentive Management System allows experienced drivers to earn higher compensation than prevailing industry wages. The Company provides incentive programs for its drivers based on number of miles driven, fuel efficiency, safety record and profitability. OTR considers each tractor and its driver to be a separate profit center, with profit center reports, including the actual revenue and expense of the equipment and fixed expense components for administration, taxes and depreciation, generated monthly. Under the Company's "profit center" program, on a quarterly basis, 7.5% of the Company's after tax net income is distributed to the drivers based on the profitability of their respective profit centers. The program is designed to give OTR's drivers the incentive to improve their individual productivity, minimize costs and thereby increase overall Company profitability. Driver recruitment and retention is essential to the maintenance of high equipment utilization, particularly during periods of rapid fleet growth. OTR's drivers are given recruiting bonuses for the referral of new drivers to the Company. In order to attract and retain highly qualified drivers and to promote safe operations, the Company purchases premium quality tractors and equips the tractors with optimal comfort and safety features, such as on-board satellite communications, high quality interiors, power steering, automatic braking systems, engine brakes and oversized sleepers. In 1997, the Company established the Driver Support department to help retain drivers and to share information and concerns and seek mutually satisfactory solutions. The Driver Support department is currently staffed with three full-time employees. As a result of management's attention to driver retention, the Company's driver turnover rate was 63% in 1997, which management believes to be below the industry average. At December 31, 1997, the Company's ratio of tractors to non-driving employees was 4.50 to one, which management believes is well above industry standards. At February 28, 1998, the Company had 655 employees, of whom 537 were drivers and 118 were management and administrative personnel. At February 28, 1998, the company also had contracts with independent contractors (owner-operators) for the services of 21 tractors that provide both a tractor and a qualified driver. The Company's employees are not represented by a collective bargaining unit. Employees participate in OTR's 401(k) program and in Company-sponsored health, life and dental plans. The Company does not have any employees who are receiving post retirement benefits and does not anticipate offering any post retirement benefits in the future. Management considers relations with its employees to be very good. In 1997, the Company began contracting with owner-operator drivers to haul freight for the Company's customers. The Company recognizes that carefully selected owner-operator drivers complement its company drivers. Owner-operator drivers supply their own tractor and driver, and are responsible for their operating expenses. Because owner-operator drivers provide their own tractors, less capital is required from the Company for growth and they provide the Company with another source of drivers to support its growth. The Company expects to continue to recruit owner-operator drivers, as well as company drivers. Revenue Equipment The Company believes that a key to the successful retention of drivers is the use of standardized, fuel efficient, late-model tractors and trailers. The Company purchases all new tractors, primarily with driver comfort, fuel efficiency, safety and overall economy in mind. To recruit and retain high- quality drivers, all the tractors owned by the Company have deluxe interiors and oversized sleepers. The average age of OTR's tractors and trailers at December 31, 1997 was 2.0 years and 1.5 years, respectively. The Company plans its trade cycle based on engine warranties and routinely replaces its tractors after forty months of use (approximately 400,000 miles). At December 31, 1997 the Company owned 279 Navistar tractors, 114 Peterbilt tractors and 133 Freightliner tractors. The tractors include engines which are fully electronic, manufactured by Detroit Diesel, Caterpillar or Cummins. Trailers in the fleet at year end were manufactured by Pines, Utility, Stoughton and Trailmobile. All of the Company's trailers have a 110 inch inside and are 102 inches wide, the maximum width generally allowed by law. The trailer fleet at December 31, 1997 included 500 fifty-three foot trailers and 265 forty-eight foot trailers. The following table shows the age of Company equipment in service at December 31, 1997. Acquisition Year Tractors Trailers 1997 150 295 1996 67 205 1995 247 130 1994 62 120 1993 - 15 Total 526 765 The Company's preventive maintenance program focuses on early diagnosis of problems and contracting maintenance out to third-party providers. In addition to annual Department of Transportation ("DOT") inspections, tractors are inspected when they pass through the Company's diagnostic facilities at its headquarters. All tractors are under warranty and are generally traded in before their engine warranties expire. The exclusive use of third-party maintenance providers, coupled with the effective utilization of manufacturers' warranties and the Company's trade-in policy, allows the Company to minimize its maintenance costs. Owner-operator tractors are inspected prior to acceptance by the company for compliance with operational and safety requirements of the company and the Department of Transportation. These tractors are then periodically inspected, similar to company-owned tractors, to monitor continued compliance. Fuel Availability and Cost The Company actively manages its fuel costs through a five component fuel management system which incorporates: wholesale purchasing for the Company's unmanned fuel facilities, mileage pay rates based upon fuel economy, the "profit center" incentive driver compensation program, fuel hedging, and equipment specifications. See "_ Drivers and Other Employees." The Company owns five automated fuel facilities, one located at the Company's headquarters in Kansas and one each located on major traffic lanes in Arizona, Ohio, Texas and Wyoming. Each of the four remote unmanned fuel facilities consists of an above-ground fuel tank, pump and a computer modem linking it directly to the Company's computers. In 1997, the Company purchased 27.0% of its fuel in bulk for distribution through its automated fuel facilities. These facilities allow the Company to purchase fuel at wholesale prices. As a way to protect the Company against major fuel price increases, since October 1994 the Company has engaged in a fuel hedging strategy. Pursuant to this program, the Company buys six month call options within $.05 of current market prices, to buy futures contracts for #2 heating oil, in amounts equal to one-half of the Company's anticipated fuel purchases for such period. All of the Company's tractors have fully electronic engines, which typically deliver enhanced fuel economy compared to tractors with mechanically governed engines. Environmental Matters The Company's operations are subject to federal, state and local laws and regulations concerning the environment. There is the possibility of environmental liability as a result of the Company's use of fuels, from the fuel storage tanks installed at its fuel facilities and also from the cargo it may transport. The Company's only underground storage tanks are two fiberglass tanks installed at its headquarters facility. One tank was installed in 1988 and the other in 1995. The tanks have overfill protection hardware, spill containment manhole covers and leak detection equipment. The Company believes that the use of above-ground storage tanks at its remote fuel facilities minimizes both potential liability and the cost of compliance with environmental regulations. The Company occasionally transports environmentally hazardous substances in accordance with hazardous material guidelines. To date, the Company has experienced no material claims for hazardous substance shipments. The Company believes that its environmental practices comply with applicable federal, state and local environmental laws and regulations. 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. Competition The truckload industry is extremely competitive and highly fragmented, with numerous regional, inter-regional and national truckload carriers, none of which dominates the market. The Company competes primarily with other long- haul truckload carriers, rail-truck intermodal transportation, railroads and, to a lesser degree, with less-than-truckload ("LTL") carriers. Most of OTR's larger truckload competitors utilize "core carrier" or "lane density" marketing concepts, which emphasize greater individualized service to a smaller number of shippers. Many long haul truck load carriers utilize driver teams which allow them to provide expedited service while complying with DOT regulations concerning driver's duty hours. OTR's drivers consist principally of single drivers. Intermodal transportation and railroads typically have created downward pressure on the truckload industry's pricing structure. The Company competes for freight based primarily on freight rates, service and reliability. Seasonality Seasonality causes variations in the operations of the Company as well as industry-wide operations. Demand for the Company's service is generally the highest during the summer and fall months. Historically, expenses are greater during the winter months when fuel costs are higher and fuel efficiency is lower. Governmental Regulation The Company is a contract and common motor carrier subject to the authority of federal and state agencies. These regulatory authorities have broad powers, but the rates and charges of the Company are not directly regulated by these authorities. OTR, as primarily a contract carrier, negotiates competitive rates directly with its customers as opposed to adhering to scheduled tariffs. The trucking industry is subject to regulatory and legislative changes such as increasingly stringent environmental regulations and limits on weight and size that can affect the economics of the industry by requiring changes in operating practices or influencing the demand for, and the costs of providing, services to shippers. In August 1994, the Federal Aviation Administration Authorization Act of 1994 (the "1994 FAA Act") became law. Effective January 1, 1995, the 1994 FAA Act preempted certain state and local laws regulating the prices, routes or services of motor carriers (other than household carriers). State agencies may continue to impose tax, license, bonding and insurance requirements. The 1994 FAA Act does not limit the authority of a state or other political subdivision to impose safety regulations or highway route limitations or controls based on the size or weight of the motor vehicle, the hazardous nature of cargo being transported by motor vehicles or minimum financial responsibility requirements relating to insurance and self-insurance authorization. The Negotiated Rates Act of 1993 ("NRA"), in tandem with the Trucking Industry Regulatory Reform Act of 1994 ("TIRRA"), further redefined the regulatory structure applicable to interstate transportation of goods. The NRA provided further regulation governing interstate transportation, including prohibitions on off-bill discounting, certain re-regulation of contract shipping arrangements, and, with respect to common carriers, regulation regarding the collection of undercharge claims, and applicable defenses and exceptions to such claims. The TIRRA further deregulated the trucking industry by partially repealing the "filed-rate" doctrine previously applicable to common carriers. Under the TIRRA, while collectively-made bureau rates must still be published in tariffs, individually negotiated rates are not. The Company's drivers must be licensed as "commercial drivers" pursuant to requirements established by the Federal Highway Administration ("FHA") of the DOT. In addition to the knowledge and driving skills tests required to obtain a commercial driver's license (a "CDL"), there are various disqualifying offenses set forth in the FHA rules, which, if committed, could result in suspension or termination of the operator's CDL, as well as potential civil or criminal liabilities. Also, DOT regulations impose mandatory drug testing of drivers and the Company has its own ongoing drug-testing program. DOT alcohol testing rules require certain tests for alcohol levels in drivers and other safety personnel. Motor carrier operations are also subject to safety, equipment and operators' hours of service requirements prescribed by the DOT. The Company last underwent a DOT audit of its driver logs and received a satisfactory rating. The Company currently has a satisfactory rating from the DOT based upon the DOT's most recent audit of the Company. Safety The Company maintains a program for training and supervising personnel to keep safety awareness at its highest level. The emphasis on safety begins in the hiring and training process. A minimum of 1.5 years of over-the-road driving experience is required for new company drivers. OTR also verifies the driving records of all new drivers before they begin employment. Prospective employees are given physical examinations and drug tests, and newly hired drivers are trained in the Company's safety procedures. In general, any driver who violates the Company's safety standards will receive a warning letter, and any driver who has more than two such violations within certain periods of time is subject to termination. The Company continuously monitors driver performance and has final authority regarding employment and retention of drivers. OTR currently has a "satisfactory" safety and fitness rating from the DOT. See "_ Governmental Regulation." Item 2. Properties. The Company owns real estate in Olathe, Kansas, where the Company is headquartered. The property includes a 22,000 square foot office facility and a 9,400 square foot diagnostic and inspection facility. The property also includes approximately 258,000 square feet of parking space and the Kansas fuel facility. Additionally, the Company owns tracts, each approximately one acre in size, in Arizona, Ohio, Texas and Wyoming, on which its remote fuel facilities are located. See "Item 1_ Fuel Availability and Cost." Item 3. Legal Proceedings. The Company is routinely a party to litigation incidental to its business, primarily involving claims for personal injuries and property damage incurred in the transportation of freight. All litigation in which the Company is currently involved is covered by the Company's liability insurance (personal injury, physical damage and cargo) or workers' compensation insurance. The Company believes the ultimate outcome of current litigation will not have a material adverse effect on its financial position or results of operations. The Company maintains liability insurance (including umbrella coverage) in the amount of $10 million per occurrence for personal injury, property damage and cargo. Under the terms of the policy, the Company retains the first $100,000 of losses paid and loss adjusting expense. The Company is self- insured for workers' compensation insurance. The Company is responsible for claims up to $250,000 per occurrence. The Company carries excess insurance to cover losses over $250,000, subject to a maximum coverage of $10 million per occurrence and per year. Item 4. Submission of Matters to a Vote of Security Holders. None. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The information required by this Item is incorporated by reference from the Company's Annual Report to Stockholders for the fiscal year ended December 31, 1997, under the caption "Price Range of Stock." Item 6. Selected Financial Data. The information required by this Item is incorporated by reference from the Company's Annual Report to Stockholders for the fiscal year ended December 31, 1997, under the caption "Financial Highlights." Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information required by this Item is incorporated by reference from the Company's Annual Report to Stockholders for the fiscal year ended December 31, 1997 under the caption "Financial Review." Item 8. Financial Statements and Supplementary Data. Index to Financial Statements The information required by this Item is incorporated by reference from the Company's Annual Report to Stockholders for the fiscal year ended December 31, 1997 under the caption "Financial Statements" and "Quarterly Financial Data." Annual Report Page Report of Independent Public Accountants 13 Balance Sheets 14 Statements of Operations 15 Statements of Stockholders' Equity 16 Statements of Cash Flows 17 Notes to Financial Statements 18 Supplemental Financial Information 26 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 required by this Item is incorporated by reference from the Company's definitive Proxy Statement under the headings "Proposal One: Election of Class C Directors- Nominees," "The Board of Directors-Continuing Directors," "Executive Officers-Information About Other Executive Officers" and "Miscellaneous-Section 16 Reporting" to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Form 10- K. Item 11. Executive Compensation. The information required by this Item is incorporated by reference from the Company's definitive Proxy Statement under the heading "Executive Compensation and Other Information" to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this Item is incorporated by reference from the Company's definitive Proxy Statement under the heading "Stock Ownership of Certain Beneficial Owners and Management" to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Form 10- K. Item 13. Certain Relationships and Related Transactions. None. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) List of Documents filed as part of this Report on Form 10-K. (1) Financial Statements All financial statements of the Registrant as set forth under Item 8 of this Report on Form 10-K. (2) Financial Statement Schedules Page of Schedule Number Description 1997 10-K II Valuation and Qualifying Accounts 16 The report of the Registrant's independent public accountants with respect to the above listed financial statements and financial statement schedules appears on page 15 of this Annual Report on Form 10-K. All other financial statement schedules not listed above have been omitted since the required information is included in the financial statements or the notes thereto, or is not applicable or required. (b) Reports on Form 8-K No reports on Form 8-K were filed for the year ended December 31, 1997. Exhibits Exhibit Page Number or Incorporated Number Description By Reference To 3(a) Articles of Incorporation, as amended Exhibit 3(a) to Annual Report for the year ended Dec 31, 1994 on Form 10-K (SEC File No. 1-19773) 3(b) Restated By-Laws Exhibit 3(b) to Annual Report for the year ended Dec 31, 1995 on Form 10-K (SEC File No. 1-19773) 4 The Registrant, by signing this Report, agrees to furnish the Securities and Exchange Commission, upon its request, a copy of any instrument which defines the rights of holders of long-term debt of the Registrant. 4(a) Specimen Common Stock Certificate Exhibit 4(a) to Amendment No. 1 to Registration Statement on Form S-18(SEC File No. 33-44422FW) 10(a) 1991 Incentive Stock Option Plan Exhibit 10(a) to Registration of OTR Express, Inc. Statement on Form S-18 (SEC File No. 33-44422FW) 10(c) Mortgage note dated January 10, Exhibit 10(xx) to Annual Report 1995 between Registrant and Toni J. for the year ended Dec 31, 1994 Waggoner and Robert E. Waggoner, on Form 10-K (SEC File as Trustees No. 1-19773) 10(f) OTR Express, Inc. 1996 Stock Exhibit 10(bbb) to Annual Option Plan Report for the year ended Dec 31, 1995 on Form 10-K (SEC File No. 1-19773) 10(g) OTR Express, Inc. 1996 Directors' Exhibit 10(ccc) to Annual Stock Option Plan Report for the year ended Dec 31, 1995 on Form 10-K (SEC File No. 1-19773) 10(l) Loan and Security Agreement dated Exhibit 10(ddd) to Quarterly June 11, 1997 between Registrant Report for the period ended and HSBC June 30, 1997 on Form 10-Q (SEC File No. 1-19773) 10(m) Form of Carrier/Shipper Page 17 of sequentially Transportation Contract numbered pages 10(n) Contract to Purchase Tractors in Page 19 of sequentially 1998 between Registrant and numbered pages Kansas City Peterbilt 10(o) Contract to Purchase Trailers in Page 20 of sequentially 1998 between Registrant and numbered pages Pines Trailer Corp. 11 Statement re: Computation of Page 21 of sequentially Earnings per Share numbered pages 13(a) Annual Report to Stockholders Exhibit 13(a) to Annual Report for the year ended December 31, for the year ended December 1996 31, 1996 on Form 10-K/A (SEC File No. 1-19773) 13(b) Annual Report to Stockholders for Page 22 of sequentially the year ended December 31, 1997 numbered pages 23 Consent of Arthur Andersen LLP Page 54 of sequentially (filed herewith) numbered pages SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the regisrtation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OTR EXPRESS, INC. /s/ WILLIAM P. WARD William P. Ward Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ WILLIAM P. WARD Chairman of the Board March 17, 1998 William P. Ward /s/ GARY J. KLUSMAN President, Principal Executive March 17, 1998 Gary J. Klusman Officer and Director /s/ JANICE K. WARD Vice President and Director March 17, 1998 Janice K. Ward /s/ STEVEN W. RUBEN Vice President Finance March 17, 1998 Steven W. Ruben Principal Financial Officer and Principal Accounting Officer /s/ CHRISTINE D. SCHOWENGERDT Treasurer March 17, 1998 Christine D. Schowengerdt /s/ JAMES P. ANTHONY Director March 17, 1998 James P. Anthony /s/ DEAN W. GRAVES Director March 17, 1998 Dean W. Graves /s/ RALPH E. MACNAUGHTON Director March 17, 1998 Ralph E. MacNaughton /s/ TERRY G. CHRISTENBERRY Director March 17, 1998 Terry G. Christenberry /s/ CHARLES M. FOUDREE Director March 17, 1998 Charles M. Foudree /s/ FRANK J. BECKER Director March 17, 1998 Frank J. Becker REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES To the Board of Directors and Stockholders of OTR Express, Inc.: We have audited in accordance with generally accepted auditing standards, the financial statements included in OTR Express, Inc.'s annual report to stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 5, 1998. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. Schedule II is the responsibility of the company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements, and, in our opinion, fairly states in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Arthur Andersen LLP Kansas City, Missouri February 5, 1998 Schedule II SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Balance at Additions Balance at Beginning Charged to End of Year Expense Deductions of Year Allowance for doubtful accounts 1995 39,996 21,840 4,904 56,932 1996 56,932 38,070 37,986 57,016 1997 57,016 115,522 71,415 101,123
CORPORATE INFORMATION Corporate Offices Common Stock Listing OTR Express, Inc. OTR Express, Inc. common stock 804 N. Meadowbrook Drive is traded on NASDAQ National Olathe, Kansas 66062 Market System under the symbol: (913) 829-1616 OTRX Mailing address: PO Box 2819 Olathe, Kansas 66063-0819 EX-10 2 CARRIER/SHIPPER TRANSPORTATION CONTRACT rev 12/14/95 THIS CONTRACT, made this day of by and between ___________ (Shipper) and OTR Express, Inc. (Carrier) for the transportation of specified goods in accordance with the following conditions: WITNESSETH: WHEREAS, Carrier is a motor vehicle contract carrier in interstate commerce, holding Interstate Commerce Commission operating authority in Docket MC-181996; and WHEREAS, Shipper desires to engage the services of Carrier for the transportation of Shipper's goods in interstate commerce between points within Carrier's ICC authorized licenses; NOW, THEREFORE, in consideration of the following mutual covenants, the Shipper and Carrier agree as follows: 1. BILATERAL COMMITMENT: Shipper shall tender to Carrier and Carrier shall transport a series of shipments between points designated by Shipper. Carrier shall advise Shipper if it is unable to supply transportation service within the time requested by Shipper in which case Shipper may arrange other transportation. Carrier shall use its best efforts to transport shipments tendered by Shipper in a timely fashion. 2. DISTINCT NEEDS: Carrier shall provide service to meet the unique, distinct needs of the Shipper which shall include but not be limited to team service, driver loading/unloading, overnight delivery, stops in transit, drop trailers, detention, weekend/holiday shipments and dedication of equipment. 3. COMMON CARRIER RATES: Rates offered by Carrier under its common authority in individual or bureau tariffs do not apply to shipments tendered to Carrier by Shipper under this agreement. 4. RATES AND CHARGES: Shipper shall pay Carrier for the transportation services described herein at the rates and subject to the rules set forth in Appendix A or agreements/modifications later written between the parties which shall be deemed as additional appendices to this contract. 5. INDEMNIFICATION: Carrier shall furnish tractors and trailers to transport the goods tendered hereunder and to assume all costs and liabilities incident to the transportation of such goods and shall indemnify and hold the Shipper harmless from any costs and liabilities except those caused solely by acts of the Shipper, its employees or agents. 6. C.O.D. SHIPMENTS: In the absence of advance notification by Shipper and written acceptance by Carrier, no C.O.D. shipments will be tendered by Shipper. 7. INSURANCE: Carrier shall maintain public liability insurance with a single limit of not less than $1,000,000. Carrier shall maintain cargo insurance against Carrier's liabilities for loss or damage to goods shipped pursuant to this Contract with a limit of $500,000 per truckload which shall be carrier's maximum liability. For those shipments valued in excess of $500,000 Carrier shall not be liable to pay for a greater proportion of liability for loss or damage than $500,000 bears to 100% of the value of the goods. Carrier's insurance shall be primary insurance irrespective of any other insurance carried by Shipper in effect at the time of loss. 8. CLAIMS: All loss and damage claims and any salvage arising therefrom shall be handled and processed in accordance with the regulations of ICC as published in the Code of Federal Regulations (49 C.F.R. 1005). 9. COLLECTION FEE: If Shipper's account should necessitate outside collection action, Carrier reserves the right to add collection costs, finance charges, court costs and/or legal fees to the invoice amounts. 10. DURATION: This Contract shall continue for a period of (1) year and shall be renewed automatically for durations of an additional year but either party shall have the right to cancel this Contract upon 30 days prior notice to the other party. 11. PAYMENT TERMS: Net/30 Days from date of invoice. IN WITNESS WHEREOF, the parties hereto have executed this Contract in duplicate the date above first written. OTR Express, Inc (Carrier) (Shipper) By____________________________ By__________________________ Title_________________________ Title_______________________ EX-10 3 VEHICLE PURCHASE AGREEMENT November 6, 1997 KANSAS CITY PETERBILT OTR Express, Inc. P O Box 2819 Olathe, Ks. 66062 (913) 829-1616 BASE PRICE OF UNIT (61) 378 Peterbilt tractors w/63" H/R Sleepers Ultra Cabs and Cat Engines Prices Include: = Dual S/S 13" Air Cleaners, Double Bunk in sleeper T.V. Shelf, and antenna, F.E.T. (57) Units w/ Metallic Paint at $ 78,630.00 / Unit $4,481,910.00 (04) Units w/o Metallic Paint at $ 78,488.00 / Unit 313,952.00 Trade Ins: 35 Navistar and Freight Liner Trucks $37,000.00 each Base Price Plus Options Used Vehicle Trade-in Information of Described Vehicle $4,795,862.00 Balance Owed to Net Trade-In Allowance $1,295,000.00 Trade Difference Address Service Contract F.E.T. Used Trade-In Allowance Sub Total State and Local Taxes or ICC Balance Owned On Trade-In License, License Transfer Total Price of Vehicle Net Allowance On Used trade-In Partial Payment (Deposit) $1,295,000.00 Unpaid Balance Due On Delivery $3,500,862.00 This contract is not binding upon the dealer until signed by unauthorized representative. Buyer many cancel this contract and receive full refund anytime before receipt of a copy of this contract signed by an authorized dealer representative by giving written notice of cancellation to the dealer. Purchaser agrees that this Order includes all of the terms and conditions on both the face and reverse side hereof, that this Order cancels and supersedes any prior agreement and as of the date hereof comprises the complete and exclusive statement of the terms of the agreement relating to the subject matters covered hereby. Purchaser understands that liability insurance coverage which would protect him/her under the Kansas Automobile Injury Reparations Act is not included in this purchase of the herein described motor vehicle. Purchaser has received a copy of this statement. The seller of this vehicle (has) (has not) performed a title search for the motor vehicle being sold for purposes of determining the accuracy of the mileage shown on the odometer or for any other purpose. Purchaser acknowledges the receipt of this disclosure. /s/ Marc Hirschmann OTRX V.P. Purchasing 11/6/97 /s/ Leon Geis Purchaser's Signature Salesperson's Signature EX-10 4 PINES TRAILER CORP A Division of Great Dane Limited Partnership 2555 South Blue Island Ave Chicago IL 60608 773-254-5533 QUOTATION AND ORDER FORM - NEW SUBJECT TO THE TERMS AND CONDITIONS ON BOTH SIDE HEREOF NOV. 18, 1997 The following quotation is submitted covering trailer as specified. We reserve the right to correct any OTR Express, Inc. Error in price or specifications. Unless otherwise 804 N Meadowbrook Dr. specified all quotations are for acceptance within Olathe, Ks. 66063 10 days and are subject to change without notice. Attn: Marc Hirschmann (913) 829-1616 Quantity 150 Model BRSCV Length 53' Height 13' 6" Ext. Post X Int. Post FRP Type Rear Door Swing Straight Floor Inside Height 110' Locks 2 per panel Hinges 5 Wedge No. Inside Ht. Front Rear Rear Opening Ht.110" Width 98" Width 102 5/16" Inside 100" at plywood Lights Pines standard DOT Legal King Pin Lock 36" Upper Coupler Ht 47 1/2" Wiring Pines sealed system Upper Coupler Depth 3 3/8" Butted X Electrical Connector Front Std. Landing Gear Make Binkley 51,000 Shoes Cushion Paint L/G Undercarriage Std. Landing Gear Location from K/P 96" Body Trim Pines Gray Tandem X Single Axle Slider X Fixed Location Side & nose Panels White Springs Capacity Undercoating Std. Other Info Neway NS-190-48-16LAX Air-Ride Threshold Plate 12' steel, routed flush Type of Axle Rockwell TQ4670 with Q Plus Scuffliner Ht10 1/4"Mat. Corr. Galv.Steel Bearings Standard Pintle Hook Type Slack Adjusters Haldex automatic Height Location Brake Type Cam Size 16 1/2 x 7 Insulation Type Brake Drums Type Centrifuse drums Thickness sides Nose Roof Hubs Inboard Outboard x Type Stud piloted SELLING PRICE CALCULATIONS Disc Wheels Type Steel Size 8 1/4 x 24.5 F.O.B. Kewanee, IL. Grease Seals Oil Seals X Type Stemco Guardian Price Per Trailer $19,362.00 Other Info Freight $525.00 to Olathe (not included) Tire Make Bridgestones R194 Number of trailers 150 Tire Size 285/75R 24.5 Total Price $2,904,300.00 Roof Bows Aluminum anti-snag Federal Excise Tax Incl. X Side Sheet Mat. .050 Alum. Gauge Side Post Logistic narrow galv. Steel Extra Side Post No. 16" centers Location Full length Front Corner Matl. Aluminum Type 10" Crossmembers 4" Steel-Beams 12" x Other Terms Net 15 days Floor 1 3/8" laminated hardwood Screws Per Board 3 Floor Ht. Rear Lining Sides 1/4" plywood Lining Nose 1/2" plywood Ceiling ADDITIONAL INFORMATION AND OPTIONS Additional items included : 4" hole spacing for slider, Anchorlok Life seal 30 spring chambers, Wabco 2s/1m anti-lock brakes, white disc wheels with 5 handholes, .075 Kemlite roof, 12" steel interior bilkhead behind plywood, Grote7" round with arrow center turn signal, customer supplied mudflaps slider mount, Aluminum manifest box, Curbside tire carrier, Engler hubodometer rsf, 2 louver vents, dock bumpers, 8 placard frames, weight 13,700 =/- 3% Production 50 March, 50 April, 25 each June, July Options for 75 more trailer in 1998 Accepted by Purchaser OTR Express /s/ Marc Hirschmann V.P Purchasing & Maint. EX-11 5 OTR Express, Inc. Exhibit 11. Statement Re: Computation of Earnings Per Share Basic earnings per share is calculated by dividing net income by the average weighted number of shares of common stock outstanding during the period. Diluted earnings per share is calculated by dividing net income by the average weighted number of shares of common stock and common stock equivalents outstanding during the period. Common stock equivalents include the outstanding stock options. EX-13 6 OTR EXPRESS, INC. (Pictured on cover OTR tractor omitted) 1997 ANNUAL REPORT (Pictured on cover OTR logo omitted) OTR's revised operating strategy, stronger freight demand and lower fuel costs produced an 86 percent increase in operating income in 1997. OTR's investment in service capability and its national account marketing program have enabled the company to begin serving large national shippers. OTR now offers QualComm OmniTRACS satellite communications on every truck, electronic data interchange (EDI) for transmitting load status to customers, and 53-foot air-ride trailers for premium capacity and safety. OTR's operating strategy and technological leadership have enabled it to increase revenues at an annual compound growth rate of 24 percent during the past five years. Table of Contents Highlights 1 Letter from the Chairman 3 Letter from the President 4 New Operating Strategy and Technology 6 Customer Service and Marketing 7 Driver Incentive Management System 8 Financial Review 9 Financial Statements 13 Directors and Officers 25 Quarterly Financial Data 26 Stockholder Information 28 (Graphs-five year histories of various operating statistics omitted) Financial Highlights CAPTION> (In thousands except per share data) 1997 1996 1995 1994 1993 Income Statement Data Operating revenue $63,797 $55,261 $49,211 $42,760 $30,646 Operating income 4,091 2,195 2,029 3,648 2,452 Net income (loss) 509 (368) (157) 1,278 744 Outstanding shares 1,840 1,836 1,830 1,825 1,817 Earnings (loss) per share $ 0.28 $ (0.20) $ (0.09) $ 0.70 $ 0.41 Operating ratio (1) 93.6% 96.0% 95.9% 91.5% 92.0% Balance Sheet Data Current assets $ 9,223 $ 7,681 $ 6,799 $ 6,109 $ 4,413 Current liabilities 18,140 19,152 17,187 10,781 7,402 Total assets 56,034 50,576 48,883 36,720 28,508 Short-term debt 14,260 15,751 13,968 7,913 5,606 Long-term debt, less current portion 26,688 21,019 20,844 14,595 11,995 Stockholders' equity 9,346 8,805 9,156 9,301 7,973 (1) Operating expenses as a percentage of operating revenue Operational Highlights 1997 1996 1995 1994 1993 Total miles (in thousands) 58,253 52,330 47,197 40,279 30,644 Average number of tractors 525 506 450 345 262 Revenue per loaded mile $ 1.121 $ 1.066 $ 1.031 $ 1.041 $ 1.013 Revenue per mile $ 1.036 $ 0.996 $ 0.963 $ 0.983 $ 0.957 Miles per week per truck 2,135 1,984 2,015 2,247 2,249 Empty miles percentage 7.6% 6.6% 6.6% 5.6% 5.6% Miles per load 1,332 1,464 1,506 1,576 1,552 Number of employees - end of period 642 559 575 464 365 Licensed tractors - end of period 526 503 503 394 301 Owner operators - end of period 10 - - - - Total tractors - end of period 536 503 503 394 301 Licensed trailers - end of period 765 608 567 449 329 Average equipment age (years) Tractors - end of period 1.97 1.82 1.23 1.50 1.34 Trailers - end of period 1.53 1.88 3.05 2.92 2.81 Fuel purchases at wholesale (% of total ) 27.0% 32.1% 31.9% 36.4% 32.3% Average fuel cost per gallon $ 1.12 $ 1.17 $ 1.07 $ 1.04 $ 1.04 To Our Stockholders: 1997 was a year in which our restructuring program produced very positive results, both financially and organizationally. In 1995, we began implementing a revised operating strategy to return OTR to the levels of profitability we enjoyed during the first ten years of the company's life. We have now implemented about 50 percent of the new plan and established important financial and operational benchmarks to help guide us through the next five years. These initiatives, coupled with the hard work of our associates, have returned OTR to profitability and laid the groundwork for our long-term growth and success. I am pleased to report that, effective February 1, 1998, Gary Klusman was promoted to president and chief executive officer. Gary has been our chief operating officer for nearly three years and has been largely responsible for developing and implementing our restructuring and five year plan. I have worked closely with Gary for the past six years since he joined OTR as chief financial officer and I am excited about the diversified experience he brings to his new position. Gary's financial background, along with his systems development, planning and operating experience make him an excellent choice to lead OTR into the next millennium. The compensation committee of our board of directors has developed a program for executive management to acquire a larger ownership stake in the company. The executives' compensation will largely be incentive-based so that their primary focus is increasing shareholder value. Each of the executives will have a substantial ownership position in the company. In addition to management and operational changes, we are also making changes at the board level. The board will restructure itself under a new corporate governance plan. One key aspect of our governance plan includes our emphasis on long term independence of board members. As shareholders, it is important that you are represented by a board that is independent of management. We also plan to conduct more committee meetings and fewer board meetings. The new plan calls for each board member to chair a committee of the board, to specialize in policy issues essential to that committee, and to report to the Board on his or her area of specialization. As chairman of the board, I will be a member of each board committee and will continue to work closely with management as the primary liaison to the board. As a result of these changes, we hope to provide our stockholders with more effective oversight of our company's management while not intruding on management prerogatives. We expect to continue OTR's rapid growth in the years ahead. As such, it is imperative that the board and management have a framework for reporting and decision making that is effective for both groups. During the past two years, we have undergone many changes; and we continue to change every day. We could not be successful implementing these changes without the most talented group of professionals in the trucking industry. I would like to take this opportunity to thank our dedicated employees and driver/managers for their responsiveness to the challenges we have presented to them. I also would like to thank you, our shareholders, for your confidence in our board and management team. We all have reason to be very excited about the future. Very truly yours, /s/ William P. Ward William P. Ward Chairman of the Board To Our Stockholders: 1997 was indeed an exciting year for OTR Express. Our return to profitability was highlighted by especially strong results in the third and fourth quarters. More importantly, we continued to make significant progress in our ability to serve larger, national account customers who represent the future of OTR. Continuing the initiatives that began in late 1995, we greatly enhanced our reputation as a premium service truckload carrier in 1997. We improved our technology advantages in the customer service area and raised our level of on- time delivery to an outstanding 96.9 percent of total loads (in an industry where 94.0 percent is considered excellent). As a result of these initatives, we began hauling freight for such well- known customers as Michael's Stores, Anheuser-Busch, Rheem Manufacturing and J.C. Penney. Additionally, we increased the percentage of direct shipper freight to 77 percent from 61 percent in 1996, reducing our reliance on the less consistent and lower paying broker freight. 1997 Results Our continued success in implementing these initiatives, combined with improving market demand for freight services and decreasing fuel prices, resulted in significantly improved operating results in 1997. Revenues increased by 15 percent to $63.8 million from $55.3 million in 1996. The increase was primarily driven by higher revenue rates and equipment utilization. The average number of trucks in service increased only 4 percent over 1996. Operating income improved by 86 percent to $4.1 million in 1997 from $2.2 million in 1996. OTR reported an operating margin of 6.4 percent of revenues compared to 4.0 percent in 1996. Net earnings for the year were $509,000, or $0.28 per share (basic and diluted) compared to a loss of $368,000, or $0.20 per share (basic and diluted) in 1996. OTR's revenue and profitability improvements in 1997 were directly related to the development of strong direct shipper relationships that drove the revenue per mile up to $1.036 in 1997 from $0.996 in the prior year. Wages as a percent of revenue decreased to 40.0 percent in 1997 from 40.5 percent in 1996, even while the market for qualified drivers remained highly competitive. The company also benefited from lower fuel costs in the second half of 1997 with a yearly blended cost of $1.12 per gallon compared to $1.17 in 1996. Implementation of Revised Operating Strategy OTR's new operating strategy was initiated in late 1995 with four distinct phases in the implementation process: I. Develop customer service capabilities II. Develop direct shipper base to 90 percent of total miles III. Modify shipper data base for new strategy IV. Capitalize on market advantagesthrough expansion We have successfully implemented Phases I and II of the revised operating strategy with the positive results reflected in the last six months of 1997. The service capabilities have been developed to meet the needs of virtually any shipper. In December 1997, the shipper percentage exceeded our goal of 90% of total miles. We expect to implement Phase III beginning in 1998 and continue our efforts to improve revenue rates and utilization. Phase IV expansion should begin in 1998 with the planned addition of 50 company trucks, 50 owner operators and 250 expansion drop trailers to help customers meet just-in-time inventory needs. Our owner operator program, which began in late 1997, has been very successful with 25 owner operators on board at February 28, 1998. Outlook for 1998 This is an exciting time to be a transportation company that excels in the areas of technology and customer service. We have the ability and intent to take advantage of our strengths in both of these areas. OTR has always been a cost-conscious company, maintaining a low cost per mile due to our experienced fleet of drivers, dedicated staff and high level of computer automation. We have significant potential to increase our revenue rates by adding new transportation services, modifying our customer data base and optimizing profitability on loads offered to us by customers. Our continued improvement in operating margins in 1998 and beyond largely depends on our ability to increase revenue rates. We want to thank you for your support as a stockholder of OTR Express. Our goal is to maximize stockholder value in the long-term within risk criteria specified by the board of directors. Every one of our 640 associates at OTR is committed to making your investment in OTR a profitable one. Sincerely, /s/ Gary J. Klusman Gary J. Klusman President and Chief Executive Officer OTR's New Operating Strategy OTR Express has modified its operating strategy to target larger, national account shippers. OTR utilizes its leading edge technology to be an industry leader in customer service and on time reliability. In late 1995, OTR modified its operating strategy that had guided the company since our founding in 1985. The objective of OTR's new strategy is to attain substantial improvements in the following areas: Revenue per mile Equipment utilization Stability of the customer base Reduce reliance on freight brokers In order to accomplish those key objectives, we separated the plan into four distinct phases to be implemented: I. Develop customer service capabilities Install satellite on-board communications on all units Implement electronic data interchange (EDI) with customers Offer guaranteed equipment and rates Convert to 53-foot air ride trailers Expand drop trailer fleet Provide dedicated customer service representatives II. Develop direct shipper base to 90 percent of total miles Reduce freight brokers to 10 percent of total miles Target large, national shippers with higher volume of freight who demand higher service requirements III. Modify shipper data base for new strategy Recruit customers into the data base who are oriented towards higher levels of service and will pay for that higher level of service Recruit shippers who feed OTR trucks into national account origination areas IV. Capitalize on market advantages through expansion Expand internally with company trucks or owner operators Develop acquisition strategy to leverage OTR technology and operational advantages Through 1997, OTR has substantially implemented Phases I and II of the plan and will continue to focus on rate and utilization improvement. OTR will continue to focus on Phases III and IV by strengthening the customer base and expanding the fleet to meet customers' service expectations. OTR Technology Since its inception, OTR has invested considerably in leading edge technology so that the company can maintain its customer service leadership. We invest heavily in technology so that we can continue to operate efficiently and maximize service to our customers. A few of our significant technological investments include: Qualcomm OmniTRACS System Each OTR truck is equipped with a Qualcomm OmniTRACS on-board satellite communications system that provides on-demand, immediate contact with drivers and global positioning reports for truck location, anywhere in the nation. The company receives hourly position reports on all trucks. This service is critical for customers with just-in-time inventory management programs. Electronic Data Interchange (EDI) Using set protocols, OTR provides daily or on-demand transfer of load status information to our customers by computer. Freight Optimization System OTR continues to utilize its proprietary Freight Optimization System as an important part of its dispatching system. The Freight Optimization System utilizes the company's computer network and a software system developed internally. This unique system is designed to enable OTR to maximize rates and minimize empty miles. The Freight Optimization System consists of the following four continuous systems: o Rate Analysis o Customer Priority Ranking o Fleet Replanning o Equipment Dispersal Management The Freight Optimization System will continue to benefit the company by working in conjunction with the new national accounts program to identify opportunities on non-national account freight and backhaul opportunities on national account freight. Customer Service and Marketing During the past two years, OTR's marketing strategy has adapted to changing market conditions, primarily as a result of our goal to achieve higher levels of shipper freight. Today, we are focused on marketing OTR to larger national accounts capable of offering increased load counts at higher revenue rates. In addition to the advanced technology that OTR possesses, we offer customers the following additional services: o Guaranteed equipment availability and rates, a commitment to a higher level of customer service. o Total transportation solutions, including an expanded brokerage department to cover loads and warehousing. o Drop trailers to meet customers' just-in-time inventory needs. The company expects to add an additional 250 drop trailers in 1998 and further expand its trailer to tractor ratio. o Dedicated customer service department charged with serving the freight needs of our larger national account shippers. The customer service department provides customers with a contact within OTR who can respond to all customer needs. Short-haul division In 1997, in order to meet the needs of our growing customer base, we added a regional short-haul division at the Olathe terminal facility. In November 1997, the company established an additional short-haul division in Chicago. The short-haul division allows OTR to complement its national fleet with a regional fleet. The short-haul division generates higher revenue rates as a result of the length of haul. Approximately 6 percent of OTR's fleet is made up of short-haul trucks. As a result of the success of the short-haul division, OTR will consider expanding to other cities based on the potential market size, profit potential and customer demand. On-time reliability OTR continues to offer customers on-time reliability in a manner that few can match: o Our drivers are an average of 46 years of age and have more than 14 years driving experience. o We provide high-quality, low mileage, reliable equipment to minimize downtime. o We have a superior service record- with a historical on-time delivery percentage of greater than 96 percent. Driver Incentive Management System An article in the industry publication Transport Topics characterized driving for OTR as "A thinking man's job." Driver/managers are given a high level of responsibility to manage the profitability of their equipment. OTR provides financial incentives to its equipment managers to analyze each decision based on the impact on net income. This system results in higher revenues and utilization with reduced fuel costs, maintenance, accidents, insurance premiums and road expenses. Management has recognized from the start the importance of quality, experienced equipment managers. The company is committed to paying managers a premium wage and providing them with equipment they are proud to drive. This approach has produced a group of managers averaging 46 years of age and 14 years of experience. The company's Driver Incentive Management System rewards equipment managers with mileage pay and profit center distributions based on their profitability for OTR based on the profitability of their equipment. All manager pay programs provide incentive for managers to keep expenses low and equipment running efficiently. Mileage pay at OTR is based on fuel efficiency achieved by a manager. Above-average fuel economy is rewarded with premium pay per mile. Managers have a large incentive to run equipment at efficient speeds, reduce out of route miles, idle less and maintain the equipment in peak operating condition. Profit Center Distributions OTR maintains each truck as a separate profit center. Profit center reports include the actual revenues and expenses of the equipment and fixed expense components for administration, taxes and depreciation. Managers receive quarterly profit center distributions based on their profits and the profit of the company.
Selected Financial Data
(In thousands except per share data) 1997 1996 1995 1994 1993 INCOME STATEMENT Operating revenue $63,797 $55,261 $49,211 $42,760 $30,646 Operating expenses Salaries, wages and benefits 25,549 22,395 19,837 15,912 10,779 Purchased transportation 3,757 2,930 2,402 2,094 825 Fuel 7,632 7,011 5,511 4,546 3,777 Maintenance 3,654 3,310 3,005 2,648 1,896 Depreciation 7,401 6,723 6,517 5,243 4,276 Insurance and claims 1,882 1,639 1,594 1,738 1,624 Taxes and licenses 6,124 6,048 5,541 4,684 3,508 Supplies and other 3,708 3,010 2,775 2,247 1,509 Total operating expenses 59,707 53,066 47,182 39,112 28,194 Operating income 4,090 2,195 2,029 3,648 2,452 Interest expense 3,269 2,789 2,283 1,449 1,143 Income (loss) before income taxes 821 (594) (254) 2,199 1,309 Income tax expense (benefit) 312 (226) (97) 921 497 Income (loss) before change in acct principle 509 (368) (157) 1,278 812 Cumulative effect of change in acct principle - - - - (68) Net income (loss) $ 509 $ (368) $ (157) $ 1,278 $ 744 Outstanding shares Basic 1,840 1,836 1,830 1,825 1,817 Diluted 1,840 1,836 1,830 1,825 1,817 EPS - basic and diluted $ 0.28 $ (0.20) $ (0.09) $ 0.70 $ 0.41 PERCENT OF REVENUE Operating revenue 100.0% 100.0% 100.0% 100.0% 100.0% Operating expenses Salaries, wages and benefits 40.0 40.5 40.3 37.2 35.2 Purchased transportation 5.9 5.3 4.9 4.9 2.7 Fuel 12.0 12.7 11.2 10.6 12.3 Maintenance 5.8 6.0 6.1 6.2 6.2 Depreciation 11.6 12.2 13.2 12.3 14.0 Insurance and claims 2.9 3.0 3.3 4.1 5.3 Taxes and licenses 9.6 10.9 11.3 11.0 11.4 Supplies and other 5.8 5.4 5.6 5.2 4.9 Total operating expenses 93.6 96.0 95.9 91.5 92.0 Operating income 6.4 4.0 4.1 8.5 8.0 Interest expense 5.1 5.1 4.6 3.4 3.7 Income (loss) before income taxes 1.3 (1.1) (0.5) 5.1 4.3 Income tax expense (benefit) 0.5 (0.4) (0.2) 2.1 1.7 Income (loss) before change in acct principle 0.8 (0.7) (0.3) 3.0 2.6 Cumulative effect of change in acct principle - - - - (0.2) Net income (loss) 0.8 (0.7) (0.3) 3.0 2.4
Financial Review 1997 Compared to 1996 Operating Revenue. Operating revenue increased by 15.4% to $63.8 million in 1997 from $55.3 million in 1996 primarily as a result of an increase in revenue rate per mile and utilization. Revenue per mile increased by 4.0% to $1.036 from $0.996. Miles per week per unit increased 7.6% to 2,135 from 1,984. Revenue per truck per week increased 12% to $2,212 in 1997 from $1,975 in 1996. The average number of tractors in service increased by 4.0% from 506 to 525 for the year. Revenue from brokerage of freight to other carriers increased 12.8% in 1997 to $3.7 million from $3.3 million in 1996. Operating Expenses. Operating income improved to 6.4% of revenue from 4.0% in 1996. Salaries, wages and benefits decreased to 40.0% of revenue in 1997 compared to 40.5% in 1996 as a result of the increased revenue rates per mile. There were no increases in wage rates for drivers in 1996 or 1997. Purchased transportation, which represents payments to other trucklines for hauling loads contracted through the company's brokerage division and the cost of owner operators, was 5.9% of revenue in 1997 compared to 5.3% in 1996. The increase is a result of the addition of owner operators to the fleet beginning in September 1997 and a 12.8% increase in brokerage volume. Fuel decreased to 12.0% of revenue from 12.7% in 1996. The decrease is due to an increase in revenue rate per mile and lower fuel costs in 1997 versus 1996. The company's average fuel cost per gallon was $1.12 in 1997 compared to $1.17 in 1996. During the second half of 1997 fuel costs declined as a result of higher fuel inventories and increased oil production. The cost in 1996 is net of $220,000 of gain on fuel hedging contracts which were in the money as a result of higher fuel prices. Depreciation as a percent of revenue decreased to 11.6% in 1997 from 12.2% in 1996 as a result of higher revenue per truck in 1997. Insurance and claims decreased to 2.9% of revenue in 1997 from 3.0% in 1996. Effective January 1, 1997, the company's liability insurance carrier reduced its premium rate, lowering premiums by $37,000 in 1997. Taxes and licenses decreased to 9.6% of revenue in 1997 from 10.9% in 1996 as a result of higher revenue rates per mile in 1997. Supplies and other expenses increased to 5.8% of revenue from 5.4% in 1996. The company installed on-board communications on its entire fleet in August 1996. In 1997, the company incurred a full year of on-board communications costs versus five months of costs in 1996. Additionally, advertising costs for new drivers increased in 1997. Interest Expense. Interest expense was 5.1% of revenue in both 1996 and 1997. In both 1996 and 1997, 81% of the company's capital was interest bearing. Net Income (Loss). Net income for 1997 was $509,000 or $0.28 per share compared to a net loss of $368,000 or $0.20 per share in 1996. 1996 Compared to 1995 Operating Revenue. Operating revenue increased by 12.3% to $55.3 million in 1996 from $49.2 million in 1995. The average number of tractors in service increased by 12% from 450 to 506 for the year . The company continued to allocate additional resources to the brokerage operation in 1996, resulting in a 25.3% increase in revenue from freight brokered by the company to other carriers to $3.3 million in 1996 from $2.6 million in 1995. Operating Expenses. Operating income was 4.0% of revenue in 1996 compared to 4.1% in 1995. Salaries, wages and benefits increased to 40.5% of revenue in 1996 compared to 40.3% in 1995. The company increased wage rates for drivers twice in 1995 to attract and retain highly qualified and experienced drivers in a very competitive market. There were no increases in wage rates for drivers in 1996. Purchased transportation was 5.3% of revenue compared to 4.9% in 1995 as a result of the 25% increase in brokerage revenue. Fuel increased to 12.7% of revenue from 11.2% in 1995. The increase is primarily due to an increase in the average fuel cost per gallon ($1.17 in 1996 vs. $1.07 in 1995). The cost in 1996 is net of $220,000 of gain on fuel hedging contracts. Depreciation as a percent of revenue was 12.2% in 1996 compared to 13.2% in 1995. The decrease is primarily a result of an extended holding period for tractors. In 1996, the company began depreciating its tractors straight line over 40 months to an estimated salvage value versus 36 months to an estimated salvage value in 1995 to better match revenues with expenses. Insurance and claims decreased to 3.0% of revenue in 1996 from 3.3% in 1995. Effective January 1, 1996, the company's liability insurance carrier reduced its premium rate, reducing premiums by $115,000 in 1996 versus 1995. In addition, the company had a more favorable loss experience per mile in 1996. Supplies and other expenses decreased to 5.4% of revenue from 5.6% in 1995. In 1995, the company took a one-time charge of $171,000 to write off the cost of a stock offering which was withdrawn in June 1995 due to market conditions. Interest Expense. Interest expense increased to 5.1% of revenue in 1996 from 4.6% in 1995 as a result of higher debt levels. In 1996, 81% of the company's capital was interest bearing compared to 79% in 1995. Net Income (Loss). The net loss for 1996 was $368,000 or $0.20 per share compared to a net loss of $157,000 or $0.09 per share in 1995. Seasonality Seasonality causes variations in the operations of the company as well as industry-wide operations. Demand for the company's service is generally the highest during the summer and fall months. Historically, expenses are greater during the winter months when fuel costs are higher and fuel efficiency is lower. Inflation The effect of inflation on the company has not been significant during the last three years. An extended period of inflation could be expected to have an impact on the company's earnings by causing interest rates, fuel and other operating costs to increase. Unless freight rates could be increased on a timely basis, operating results could be adversely affected. Liquidity and Capital Resources The growth of the company's business has required significant investments in new revenue equipment acquired primarily through secured borrowings. Net capital expenditures, principally for revenue equipment, were $18.0 million, $7.6 million and $11.3 million for the years ended December 31, 1995, 1996 and 1997, respectively. Included in the 1996 figure is $1.6 million for on-board satellite communications equipment. The company plans to expand its company- owned fleet by 50 tractors in 1998. At February 28, 1998, the company had arrangements for 61 tractors (26 new units and 35 replacement units) at a cost of $4.9 million, as well as 150 new trailers at a cost of $2.9 million. The company's capital expenditures will be financed through internally generated funds and secured borrowings. Historically, the company has obtained loans for its revenue equipment which are of shorter duration (three to five years for trailers, four and a half years for tractors) than the economic useful lives of the equipment. While such loans have current maturities that tend to create working capital deficits that could adversely affect cash flows, management believes these factors are mitigated by the more attractive interest rates and terms available on these shorter maturities. This financing practice has been a significant cause of the working capital deficit which has existed since the company's inception. The company intends to continue to obtain loans with shorter maturities than the useful lives of its revenue equipment. This method of financing can be expected to continue to produce working capital deficits in the future. The company's working capital deficit at December 31, 1997 was $8.9 million. Primarily due to the company's equity position and the potential for refinancing of both unencumbered and encumbered assets, working capital deficits historically have not been a barrier to the company's ability to borrow funds for operations and expansion. The company has a credit line of $8.0 million with its primary lending bank that bears interest at the prime lending rate. Borrowings under this line were $3.5 million at December 31, 1997 and $1.5 million of the available credit line was committed for letters of credit issued by the bank. The current line expires June 9, 2000 and is secured by accounts receivable. The company has received commitments for up to $8 million of new revenue equipment financing that will be at fixed interest rates. In the opinion of management, the company has adequate liquidity for the foreseeable future based upon funds expected to be generated from operations, the company's equity position, the potential for refinancing of assets owned by the company and the company's ability to obtain secured equipment financing. Year 2000 Issue The company has assessed and continues to assess the impact of the Year 2000 Issue on its reporting systems and operations. The Year 2000 Issue exists because many computer systems and applications currently use two-digit date fields to designate a year. As the century date occurs, two-digit date sensitive systems will recognize the year 2000 as 1900 or not at all. The company has assessed the impact of the Year 2000 Issue on its computer systems and is in the process of remediating the affected hardware and software. The company plans to complete the required modifications by March 31, 1999 and has not incurred any costs relating to the Year 2000 Issue. The company does not believe that the cost of either modification of existing software or conversion to new software will be significant or that the Year 2000 Issue will pose significant operational problems for its computer systems. Other This annual report contains forward-looking statements that are based on current expectations and are subject to risks and uncertainties. Such comments are based upon information available to management and management's perception thereof as of the date of this annual report. Actual results could differ materially from those forward looking statements. Such differences could be caused by a number of factors including, but not limited to, potential adverse effects of regulation; changes in competition and the effects of such changes; increased competition; changes in fuel prices; changes in economic, political or regulatory environments; litigation involving the company; changes in the availability of a stable labor force; ability of the company to hire drivers meeting company standards; changes in management strategies; environmental or tax matters and risks described from time to time in reports filed by the company with the Securities and Exchange Commission. Readers should take these factors into account in evaluating any such forward-looking statements. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of OTR Express, Inc.: We have audited the accompanying balance sheets of OTR Express, Inc. (a Kansas corporation) as of December 31, 1997 and 1996, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly, in all material respects, the financial position of OTR Express, Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Kansas City, Missouri February 5, 1998 Balance Sheets OTR Express, Inc.
At December 31 1997 1996 ASSETS CURRENT ASSETS Cash $ 318,760 $ 43,107 Accounts receivable, less allowance of $101,123 and $57,016 7,736,360 6,436,920 Fuel inventory 155,762 162,826 Prepaid expenses and other 1,012,517 1,038,207 TOTAL CURRENT ASSETS 9,223,399 7,681,060 PROPERTY AND EQUIPMENT, at cost, less accumulated depreciation 46,810,777 42,894,525 TOTAL ASSETS $56,034,176 $50,575,585 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Bank note payable $ - $ 1,389,000 Accounts payable, trade 1,603,654 1,396,760 Accrued payroll and taxes 861,857 823,811 Other accrued expenses 1,414,721 1,180,900 Current portion of long-term debt 14,259,700 14,361,651 TOTAL CURRENT LIABILITIES 18,139,932 19,152,122 LONG-TERM DEBT 26,688,357 21,019,354 DEFERRED INCOME TAXES 1,859,803 1,599,014 COMMITMENTS AND CONTINGENCIES (Note 9) STOCKHOLDERS' EQUITY Common stock, $.01 par value, 5,000,000 shares authorized, 1,849,209 and 1,842,209 issued 18,492 18,422 Additional paid-in capital 6,581,214 6,540,124 Retained earnings 2,792,762 2,283,284 Treasury stock, 8,693 and 6,690 shares (46,384) (36,735) TOTAL STOCKHOLDERS' EQUITY 9,346,084 8,805,095 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $56,034,176 $50,575,585 The notes to financial statements are an integral part of these statements.
Statements of Operations OTR Express, Inc.
For the Years Ended December 31 1997 1996 1995 Operating revenue Freight revenue $60,127,246 $52,008,754 $46,615,804 Brokerage revenue 3,669,346 3,251,842 2,595,318 Total operating revenue 63,796,592 55,260,596 49,211,122 Operating expenses Salaries, wages and benefits 25,548,804 22,394,911 19,837,132 Purchased transportation 3,756,648 2,930,271 2,401,605 Fuel 7,631,908 7,011,074 5,511,198 Maintenance 3,654,294 3,310,101 3,005,321 Depreciation 7,400,583 6,722,717 6,516,919 Insurance and claims 1,881,278 1,639,039 1,593,642 Taxes and licenses 6,124,075 6,047,748 5,541,240 Supplies and other 3,708,124 3,010,050 2,774,623 Total operating expenses 59,705,714 53,065,911 47,181,680 Operating income 4,090,878 2,194,685 2,029,442 Interest expense 3,269,138 2,788,749 2,283,107 Income (loss) before income taxes 821,740 (594,064) (253,665) Income tax expense (benefit) 312,262 (225,744) (96,393) Net income (loss) $ 509,478 $ (368,320) $ (157,272) Weighted average number of shares Basic 1,840,091 1,835,650 1,830,246 Diluted 1,841,805 1,835,650 1,830,246 Earnings (loss) per share Basic $ 0.28 $ (0.20) $ (0.09) Diluted $ 0.28 $ (0.20) $ (0.09) The notes to financial statements are an integral part of these statements.
Statements of Stockholders' Equity OTR Express, Inc.
Common Additional Retained Treasury Total Stock Paid-In Earnings Stock Stockholders' Capital Equity Balance, December 31, 1994 $18,282 $6,484,264 $2,808,876 $(10,490) $9,300,932 Allocation of common stock held by ESOP 70 31,430 - - 31,500 Repurchase of common stock - - - (19,246) (19,246) Net loss - - (157,272) - (157,272) Balance, December 31, 1995 18,352 6,515,694 2,651,604 (29,736) 9,155,914 Allocation of common stock held by ESOP 70 24,430 - - 24,500 Repurchase of common stock - - - (6,999) (6,999) Net loss - - (368,320) - (368,320) Balance, December 31, 1996 18,422 6,540,124 2,283,284 (36,735) 8,805,095 Allocation of common stock held by ESOP 70 41,090 - - 41,160 Repurchase of common stock - - - (9,649) (9,649) Net income - - 509,478 - 509,478 Balance, December 31, 1997 $18,492 $6,581,214 $2,792,762 $(46,384) $9,346,084 The notes to financial statements are an integral part of these statements.
Statements of Cash Flows OTR Express, Inc.
For the Years Ended December 31 1997 1996 1995 OPERATING ACTIVITIES Net income (loss) $ 509,478 $ (368,320) $ (157,272) Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation 7,400,583 6,722,717 6,516,919 Deferred income taxes 312,262 (225,744) (96,393) ESOP expenses and other 41,160 24,500 31,500 Changes in certain working capital items Accounts receivable (1,299,440) (428,528) (489,820) Other assets (18,718) (223,078) (145,111) Accounts payable and accrued expenses 478,761 182,600 99,866 Net cash provided by operating activities 7,424,086 5,684,147 5,759,689 INVESTING ACTIVITIES Acquisition of property and equipment (17,631,434) (11,335,083) (23,409,750) Disposition of property and equipment 6,314,599 3,707,187 5,380,077 Net cash used in investing activities (11,316,835) (7,627,896) (18,029,673) FINANCING ACTIVITIES Proceeds from issuance of long term debt 21,250,515 20,370,872 21,846,185 Repayments of long-term debt (19,164,775) (17,279,563) (11,331,461) Net increase (decrease) in bank notes payable 2,092,312 (1,133,555) 1,790,000 Other (9,650) (6,999) (19,246) Net cash provided by financing activities 4,168,402 1,950,755 12,285,478 Net increase in cash 275,653 7,006 15,494 Cash, beginning of year 43,107 36,101 20,607 Cash, end of year $ 318,760 $ 43,107 $ 36,101 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest $ 3,265,120 $ 2,794,254 $ 2,271,420 Cash paid (refunded) for income taxes, net 41,474 (128,986) 250,637 The notes to financial statements are an integral part of these statements.
NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations OTR Express, Inc. ("the company") is a dry van, truckload carrier headquartered in Olathe, Kansas. The company transports general commodities through the continental United States. Pervasiveness 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. Revenue Recognition Operating revenue is recognized upon receipt of freight. Related transportation expenses, including driver wages, purchased transportation, fuel and fuel taxes, are accrued when the revenue is recognized. Management believes the difference between the company's method of revenue recognition, which is acceptable for generally accepted accounting principles, and the proportional recognition method, which is preferred, is not material to financial position or the results of operations. Cash Flows For the statements of cash flows, cash consists of cash on hand and demand deposits with financial institutions. Concentration of Credit The company's primary market includes medium and large sized full truckload shippers in the United States. Loads encompass all types of products for dry vans, excluding perishables. Credit is usually granted on an unsecured basis and no significant concentration of credit currently exists. Fuel Hedging The company purchases six month call options on No. 2 heating oil to manage exposure to fluctuations in diesel fuel prices. The company's exposure to loss is limited to the premium cost of the contract. The options are carried at cost. Gains and losses are deferred and recognized as adjustments to fuel expense when the underlying hedged transactions (fuel purchases) occur. At December 31, 1997, option fair values totaled $10,000, deferred losses totaled $35,000 and notional amounts totaled $1,797,000. At December 31, 1996, option fair values totaled $127,000, deferred gains totaled $55,000 and notional amounts totaled $2,794,000. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Property, Equipment and Depreciation Property and equipment are stated at cost. When equipment is sold, the gain or loss indicated is recognized. When equipment is traded, the basis of the new equipment is adjusted when necessary for any gain indicated. The cost of tires and tubes are capitalized as part of the tractors and trailers at the time of acquisition and depreciated as a component of the tractors and trailers. Replacement tires and tubes are charged to maintenance expense when installed. Depreciation of property and equipment is computed using straight line methods and the following estimated useful lives: Assets Estimated Useful Lives Tractors 3.4 years Trailers 10 years Computer equipment, software and other property 5 - 12 years Buildings and improvements 31.5 - 40 years The company depreciates tractors to estimated salvage values, currently 46% to 51% of original cost. The company depreciates trailers to estimated salvage values, currently 21% to 24% of original cost. Fair Value of Financial Instruments Cash, accounts receivable, payables and accruals approximate fair value. The fair value of long-term debt, including current portion, approximates carrying value based on duration of notes and their interest rates. Insurance and Claims Accrued expenses include reserves for the estimated cost of claims for health, workers' compensation, personal injury, property damage, and cargo loss not covered by insurance. Reserves are established by management based on the most current information available regarding the accident or claim. Adjustments to previously established reserves, if required, are included in operating results. Management does not believe future adjustments to these reserves, if any, will have a significant impact on financial position or results of operations. 2. PROPERTY AND EQUIPMENT 1997 1996 Cost
Tractors $41,277,834 $39,261,365 Trailers 13,906,069 10,352,234 Land 838,962 838,962 Buildings and improvements 2,879,459 2,879,459 Computers and onboard communications equipment 2,358,357 2,140,269 Other 1,235,196 1,081,808 Total cost 62,495,877 56,554,097 Less accumulated depreciation 15,685,100 13,659,572 Net property and equipment $46,810,777 $42,894,525
3. BANK NOTE PAYABLE Bank note payable at December 31, 1996 consisted of a $5,500,000 short-term line of credit bearing interest at the prime rate, collateralized by qualified accounts receivable, as defined. In June 1997, the company elected to convert the note to a long-term revolving line of credit at another lending institution as more fully described in Note 4. Borrowings on the line totaled $1,389,000 at December 31, 1996. The company had $2,029,000 of additional borrowing availability as of December 31, 1996. At December 31, 1996, $1,501,000 of the available line was allocated to outstanding letters of credit. The weighted average interest rate on the line of credit for the year ended December 31, 1996 was 8.50%. The annual average balance borrowed on the line of credit for the year ended December 31, 1996 was $1,242,000. 4. LONG-TERM DEBT 1997 1996 Line of credit , interest payable monthly at the prime rate (8.50% at December 31, 1997) due June 9, 2000, collateralized by accounts receivable (1) $ 3,481,312 $ - Installment notes, 6.20% to 9.16% payable in monthly installments of principal and interest through January 2003, collateralized by tractors, trailers and computer equipment 35,961,915 33,824,958 Installment notes, 7% to 8.75%, payable in monthly installments through January 2005, collateralized by real property 1,504,830 1,556,047 40,948,057 35,381,005 Less current portion 14,259,700 14,361,651 Long-term debt $26,688,357 $21,019,354 4. LONG-TERM DEBT (continued) Maturities of long-term debt are as follows: 1998 $14,259,700 1999 10,460,444 2000 11,972,116 2001 2,993,947 2002 1,013,015 Thereafter 248,835 $40,948,057
(1) The line of credit agreement provides for maximum borrowings of $7,000,000 based on an 85% advance rate on eligible accounts receivable, as defined, through December 31, 1997. Should the company's tangible net worth, as defined, exceed $9,000,000 million based on the December 31, 1997 audited financial statements, the maximum borrowing on the line increases to $8,000,000. The line bears interest at a variable rate, based upon the prime rate, or LIBOR, at the company's election. The agreement contains certain covenants relating to tangible net worth, leverage ratios, debt service coverage and other factors. The company was in compliance with all required covenants at December 31, 1997. A total of $1,500,000 of the credit line was committed for letters of credit. The unborrowed amount available at December 31, 1997 was $1,500,000. The weighted average interest rate on the line of credit for the year ended December 31, 1997 was 8.80%. The annual average balance borrowed on the line of credit and the bank note payable (Note 3) for the year ended December 31, 1997 was $2,332,000. 5. STOCK OPTION PLAN The company has reserved 110,000 shares of its common stock for issuance to key management personnel and directors of the company under three stock option plans. The plans permit grants of nonqualified stock options. The option price cannot be lower than the fair market value of the stock at the date of grant. The options are exercisable over a period not to exceed 10 years from the date of grant (5 years for a more than 10% shareholder). Options outstanding at December 31, 1997 had a weighted average contractual life of seven years, eight months and exercise prices ranged from $3.75 to $6.00 per share. The company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for its plan, and accordingly has not recognized compensation costs in its financial statements for such plans. Had compensation costs been recognized in accordance with Financial Accounting Standards Board Statement No. 123, Accounting for Stock-Based Compensation, the company's operating results would have been reported at the unaudited pro forma amounts indicated below: 1997 1996 1995 Net income (loss): As reported $509,478 $(368,320) $(157,272) Pro Forma $480,071 $(388,216) $(191,017) Earnings (loss) per share: As reported $ 0.28 $ (0.20) $ (0.09) Pro Forma $ 0.26 $ (0.21) $ (0.10) 5. STOCK OPTION PLAN (continued) The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for the 1997, 1996 and 1995 grants: 1997 1996 1995 Dividend yield None None None Expected volatility 40.5% 32.6% to 36.3% 43.7% Risk-free interest rate 5.7% to 6.4% 5.9% to 6.2% 5.4% Expected option life 3 years 3 years 3 Years A summary of the company's stock option plans as of December 31, 1997 and changes during 1997, 1996 and 1995 is presented below: 1997 1996 1995 Shares Per Share Shares Per Share Shares Per Share (a) (a) (a) Outstanding at beginning of year 80,000 $5.18 50,000 $5.30 - - Granted 30,000 $5.63 30,000 $4.99 50,000 $5.30 Exercised - - - - - - Forfeited - - - - - - Outstanding at end of year 110,000 $5.30 80,000 $5.18 50,000 $5.30 Exercisable at end of year 52,545 26,333 - Weighted average fair value of options granted during the year $47,000 $32,000 $54,000 (a) Weighted average exercise price per share. 6. EMPLOYEE STOCK OWNERSHIP PLAN The company has a non-qualified ESOP which enables eligible employees to acquire shares of the company's common stock. The cost of the ESOP is borne by the company. In each of the years 1997, 1996 and 1995, 7,000 shares of stock held by the ESOP were allocated to participants, resulting in ESOP expense of $41,160, $24,500 and $31,500 for the years ended December 31, 1997, 1996 and 1995, respectively. The company has elected to grant 3,500 shares to the ESOP in 1998. 7. INCOME TAXES Deferred income taxes reflect the impact of temporary differences between assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. Deferred tax assets and liabilities are comprised of the following at December 31: 1997 1996 Deferred tax assets Claims and other reserves $ 472,507 $ 378,341 Net operating loss carryforward 1,069,926 2,023,708 Other 273,208 182,655 1,815,641 2,584,704 Deferred tax liabilities Property and equipment 3,416,036 3,983,038 Revenue 259,408 200,680 3,675,444 4,183,718 Net deferred tax liability $1,859,803 $1,599,014 A reconciliation between the provision for income taxes and the expected taxes using the federal statutory rate of 34% follows: 1997 1996 1995 Tax expense (benefit) at federal statutory rate $ 279,392 $(201,982) $ (86,246) State income tax expense (benefit) 32,870 (23,762) (10,147) Deferred income tax expense (benefit) $ 312,262 $(225,744) $ (96,393) The company has available net operating loss carryforwards of approximately $2,816,000 for regular income tax purposes expiring through 2011. 8. EARNINGS PER SHARE In February, 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 128, "Earnings Per Share", effective for periods ending after December 15, 1997, requiring presentation of basic and diluted earnings per share. SFAS 128 supersedes Accounting Principles Board Opinion (APB) No. 15 and related pronouncements and replaces the computations of primary and fully diluted earnings per share (EPS) with basic and diluted EPS, respectively. Basic earnings per share is based upon the weighted average common shares outstanding during the year. Dilutive earnings per share is based upon the weighted average common and common equivalent shares outstanding during each year. Employee stock options are the company's only common stock equivalents; there are no other potentially dilutive securities. There was no effect of this accounting change on previously reported earnings per share. Basic earnings (loss) per share and diluted earnings per share were $.28, ($.20), and ($.09) for the years ending December 31, 1997, 1996, and 1995 respectively. Options to purchase 5,000 shares that would have been outstanding upon the assumed exercise of dilutive options were immaterial for the year ended December 31, 1997. Options to purchase an additional 105,000 shares of common stock at various exercise prices ranging from $3.75 - $6.00 were outstanding during 1997, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average marker price of the common shares. These options, which expire in 3 to 10 years, were still outstanding at the end of 1997. 9. COMMITMENTS AND CONTINGENCIES Various legal actions, claims and assessments are pending against the company. It is the opinion of management that these actions will have no significant impact on the company's financial condition or its results of operations. Under an agreement with its auto liability insurance carrier, the company retains the first $100,000 of paid losses for any single occurrence involving cargo, personal injury or property damage. Liability in excess of these amounts is generally assumed by the carrier up to $10 million per occurrence. The agreement with the carrier is collateralized by letters of credit totaling $396,000 and deposits of $39,750. The company is self-insured for workers' compensation through a program with the State of Kansas. All claims are processed by a third party administrator and the company will pay all losses and loss adjusting expense. The company carries an excess reinsurance policy that will limit the company's losses to $250,000 per occurrence and $10,000,000 aggregate per year. The agreement with the State of Kansas is collateralized by letters of credit totaling $1,100,000. Board of Directors Executive and Other Officers William P. Ward (1) William P. Ward Chairman of the Board Chairman of the Board OTR Express, Inc. Gary J. Klusman Gary J. Klusman (1) President and President and Chief Executive Officer Chief Executive Officer OTR Express, Inc. Janice Kathryn Ward Janice Kathryn Ward Vice President Compensation Vice President Compensation Administration and Administration OTR Express, Inc. Steven W. Ruben Vice President Finance and Chief Financial Officer Dr. James P. Anthony (2) Radiologist Carondelet Radiology Group Christine D. Schowengerdt Treasurer and Assistant Secretary Frank J. Becker President Becker Investments, Inc. Carolyn J. Davidson Administrative Vice President and Secretary Terry G. Christenberry (2) President Christenberry, Collet & Co., Inc. Gary L. Hinkle Vice President Fleet Management Charles M. Foudree (2), (3) Executive Vice President - Finance Susan K. Raymond Harmon Industries, Inc. Vice President Dispatch Administration Marc E. Hirschmann Vice President Maintenance Dean W. Graves (1) & Purchasing Owner, Dean Graves, FAIA Architectural Firm Paul A. MacNaughton Vice President Management Information Systems Dr. Ralph E. MacNaughton (3) Physician, Retired Carondelet Radiology Group Chip Seitz Vice President OTR Services (1) Member of Executive Committee Eric T. Janzen (2) Member of Audit Committee Vice President Marketing (3) Member of Compensation Committee Jeffrey T. Brown Photography by: Vice President Dispatch Larry Andrew, Andrew Photography (Cover and p. 4) , Attig Photography Studio (p. 5) and OTR Express, Inc. driver/managers QUARTERLY FINANCIAL DATA (Unaudited)
1997 (In thousands except per share data) Mar 31 Jun 30 Sep 30 Dec 31 Year INCOME STATEMENT Operating revenue $13,831 $15,663 $17,054 $17,249 $63,797 Operating expenses Salaries, wages and benefits 5,524 6,217 6,796 7,012 25,549 Purchased transportation 940 847 934 1,036 3,757 Fuel 1,824 1,876 1,908 2,024 7,632 Maintenance 856 932 965 901 3,654 Depreciation 1,716 1,811 1,936 1,938 7,401 Insurance and claims 317 535 543 487 1,882 Taxes and licenses 1,455 1,513 1,598 1,558 6,124 Supplies and other 807 894 947 1,060 3,708 Total operating expenses 13,439 14,625 15,627 16,016 59,707 Operating income 392 1,038 1,427 1,233 4,090 Interest expense 720 800 901 848 3,269 Income (loss) before income taxes (328) 238 526 385 821 Income tax expense (benefit) (125) 91 200 146 312 Net income (loss) $ (203) $ 147 $ 326 $ 239 $ 509 Weighted average number of shares Basic 1,841 1,841 1,841 1,841 1,840 Diluted 1,841 1,841 1,841 1,842 1,842 Earnings (loss) per share Basic $ (0.11) $ 0.08 $ 0.18 $ 0.13 $ 0.28 Diluted $ (0.11) $ 0.08 $ 0.18 $ 0.13 $ 0.28 PERCENT OF REVENUE Operating revenue 100.0% 100.0% 100.0% 100.0% 100.0% Operating expenses Salaries, wages and benefits 39.9 39.7 39.8 40.7 40.0 Purchased transportation 6.8 5.4 5.5 6.0 5.9 Fuel 13.2 12.0 11.2 11.7 12.0 Maintenance 6.3 5.9 5.8 5.3 5.8 Depreciation 12.4 11.6 11.4 11.2 11.6 Insurance and claims 2.3 3.4 3.2 2.8 2.9 Taxes and licenses 10.5 9.7 9.2 9.0 9.6 Supplies and other 5.8 5.7 5.5 6.2 5.8 Total operating expenses 97.2 93.4 91.6 92.9 93.6 Operating income 2.8 6.6 8.4 7.1 6.4 Interest expense 5.2 5.1 5.3 4.9 5.1 Income (loss) before income taxes (2.4) 1.5 3.1 2.2 1.3 Income tax expense (benefit) (0.9) 0.6 1.2 0.8 0.5 Net income (loss) (1.5) 0.9 1.9 1.4 0.8
QUARTERLY FINANCIAL DATA (Unaudited)
1996 (In thousands except per share data) Mar 31 Jun 30 Sep 30 Dec 31 Year INCOME STATEMENT Operating revenue $13,033 $13,406 $14,470 $14,352 $55,261 Operating expenses Salaries, wages and benefits 5,404 5,256 5,828 5,907 22,395 Purchased transportation 647 734 702 847 2,930 Fuel 1,639 1,696 1,687 1,989 7,011 Maintenance 804 793 835 878 3,310 Depreciation 1,699 1,755 1,730 1,539 6,723 Insurance and claims 392 361 417 469 1,639 Taxes and licenses 1,523 1,441 1,554 1,530 6,048 Supplies and other 623 663 810 914 3,010 Total operating expenses 12,731 12,699 13,563 14,073 53,066 Operating income 302 707 907 279 2,195 Interest expense 692 646 721 730 2,789 Income (loss) before income taxes (390) 61 186 (451) (594) Income tax expense (benefit) (168) 25 82 (165) (226) Net income (loss) $ (222) $ 36 $ 104 $ (286) $ (368) Weighted average number of shares Basic 1,836 1,836 1,836 1,836 1,836 Diluted 1,836 1,836 1,836 1,836 1,836 Earnings (loss) per share Basic $ (0.12) $ 0.02 $ 0.06 $ (0.16) $ (0.20) Diluted $ (0.12) $ 0.02 $ 0.06 $ (0.16) $ (0.20) PERCENT OF REVENUE Operating revenue 100.0% 100.0% 100.0% 100.0% 100.0% Operating expenses Salaries, wages and benefits 41.5 39.2 40.3 41.2 40.5 Purchased transportation 5.0 5.5 4.8 5.9 5.3 Fuel 12.6 12.7 11.6 13.9 12.7 Maintenance 6.2 5.9 5.8 6.1 6.0 Depreciation 13.0 13.1 12.0 10.7 12.2 Insurance and claims 3.0 2.7 2.9 3.3 3.0 Taxes and licenses 11.7 10.7 10.7 10.7 10.9 Supplies and other 4.7 4.9 5.6 6.3 5.4 Total operating expenses 97.7 94.7 93.7 98.1 96.0 Operating income 2.3 5.3 6.3 1.9 4.0 Interest expense 5.3 4.8 5.0 5.0 5.1 Income (loss) before income taxes (3.0) 0.5 1.3 (3.1) (1.1) Income tax expense (benefit) (1.3) 0.2 0.6 (1.1) (0.4) Net income (loss) (1.7) 0.3 0.7 (2.0) (0.7)
Stockholder Information At March 12, 1998, there were 169 stockholders of record. Since many stockholders hold their certificates in "street name," management estimates the number of individual stockholders is approximately 1,000. Price Range of Stock The company's common stock is traded on The Nasdaq Stock Market/National Market System under the symbol OTRX. The following table sets forth for the periods indicated the high and low sale prices of the common stock, as reported by The Nasdaq Stock Market. 1996 Period Stock Price (Low-High) Jan 1 to Mar 31, 1996 $4.250 - $5.000 Apr 1 to Jun 30, 1996 $4.500 - $5.750 Jul 1 to Sep 30, 1996 $4.875 - $5.875 Oct 1 to Dec 31, 1996 $3.250 - $5.375 1997-1998 Period Stock Price (Low-High) Jan 1 to Mar 31, 1997 $2.625 - $4.000 Apr 1 to Jun 30, 1997 $2.625 - $5.125 Jul 1 to Sep 30, 1997 $4.625 - $5.750 Oct 1 to Dec 31, 1997 $5.250 - $6.250 Jan 1 to Feb 28, 1998 $5.625 - $7.625 To date, the company has not declared or paid any dividends on its Common Stock and presently does not anticipate paying any such dividends in the foreseeable future. It is management's present intention to retain future earnings, if any, for use in the company's business operations. Stockholder Information Corporate Offices Transfer Agent OTR Express, Inc. UMB Bank of Kansas City, N.A. 804 N. Meadowbrook Drive Securities Transfer Division Olathe, Kansas 66062 P.O. Box 410064 (913) 829-1616 Kansas City, Missouri 64141-0064 Mailing address: Independent Auditors P.O. Box 2819 Arthur Andersen LLP Olathe, KS 66063-0819 911 Main Independent Auditors Suite 1500 Kansas City, Missouri 64105 Annual Meeting General Counsel The annual meeting of the stockholders Bryan Cave LLP will be at 3:00 p.m., Wednesday, 7500 College Boulevard May 13, 1998, at the Doubletree Hotel, Suite 1100 10100 College Boulevard, Overland Park, Overland Park, Kansas 66210 Kansas Form 10-K Common Stock Listing Stockholders may receive a copy of OTR Express, Inc. common stock the company's 1997 Annual Report to is traded on the NASDAQ National the Securities and Exchange Commission Market System under the on Form 10-K free of charge by writing symbol: OTRX to: Investor Relations OTR Express, Inc. P.O. Box 2819 Olathe, Kansas 66063-0819 OTR Express, Inc. P.O. Box 2819 Olathe, Kansas 66063-0819 913-829-1616 EX-23 7 Exhibit 23. Consent of Independent Public Accountants As independent public accountants, we hereby consent to the incorporation by reference of our report dated February 5, 1998 included in the Annual Report on Form 10-K filed by OTR Express, Inc. (the "Company") for its fiscal year ended December 31, 1997 and to all references to our Firm included therein, into the Company's previously filed Registration Statements on Form S-8, Nos. 333-13503, 333-13507 and 333-13515. ARTHUR ANDERSEN LLP /s/ Arthur Andersen LLP Kansas City, Missouri March 20, 1998 EX-27 8 ARTICLE 5. FIN. DATA SCHEDULE FOR FISCAL YEAR 1997 10-K
5 1 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 318,760 0 7,837,483 101,123 687,303 9,223,399 62,495,877 15,685,100 56,034,176 18,139,932 0 18,492 0 0 9,327,592 56,034,176 63,796,592 63,796,592 0 0 59,590,192 115,522 3,269,138 821,740 312,262 509,478 0 0 0 509,478 .28 .28
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