SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarter ended June 30, 2005 Commission File No. 0-15087 HEARTLAND EXPRESS, INC. (Exact Name of Registrant as Specified in Its Charter) Nevada 93-0926999 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 2777 Heartland Drive, Coralville, Iowa 55241 (Address of Principal Executive Office) (Zip Code) Registrant's telephone number, including area code (319) 545-2728 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] At June 30, 2005, there were 73,866,000 shares of the Company's $.01 par value common stock outstanding.
PART I FINANCIAL INFORMATION Page Number Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets June 30, 2005 and December 31, 2004 1-2 Consolidated Statements of Income for the Three and Six Months Ended June 30, 2005 and 2004 3 Consolidated Statement of Stockholders' Equity for the Six Months Ended June 30, 2005 4 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004 5 Notes to Consolidated Financial Statements 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 Item 4. Controls and Procedures 14 PART II OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Changes in Securities 15 Item 3. Defaults Upon Senior Securities 15 Item 4. Submission of Matters to a Vote of 15 Security Holders Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15-19
HEARTLAND EXPRESS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> ASSETS June 30, December 31, 2005 2004 ------------ ------------ (Unaudited) CURRENT ASSETS <S> <C> <C> Cash and cash equivalents ................... $ 5,450,670 $ 1,610,543 Short-term investments ...................... 259,897,769 256,727,782 Trade receivables, less allowance of $775,000 in 2005 and 2004 ................ 39,324,840 37,102,813 Prepaid tires ............................... 3,334,620 2,692,090 Deferred income taxes ....................... 25,897,000 24,964,000 Other prepaid expenses ...................... 3,970,018 158,267 ------------ ------------ Total current assets .................. 337,874,917 323,255,495 ------------ ------------ PROPERTY AND EQUIPMENT Land and land improvements .................. 10,779,812 9,543,953 Buildings ................................... 17,494,255 17,494,255 Furniture and fixtures ...................... 1,042,131 1,210,424 Shop and service equipment .................. 2,547,294 2,557,654 Revenue equipment ........................... 228,753,937 222,842,499 ------------ ------------ 260,617,429 253,648,785 Less accumulated depreciation ............... 74,950,010 68,973,751 ------------ ------------ Property and equipment, net ................. 185,667,419 184,675,034 ------------ ------------ GOODWILL ........................................ 4,814,597 4,814,597 OTHER ASSETS .................................... 4,132,950 4,266,725 ------------ ------------ $532,489,883 $517,011,851 ============ ============ </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 1
HEARTLAND EXPRESS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> June 30, December 31, 2005 2004 ------------- ------------- (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES <S> <C> <C> Accounts payable & accrued liabilities .. $ 11,907,394 $ 9,722,099 Compensation & benefits ................. 15,254,959 11,151,523 Income taxes payable .................... 7,780,478 7,918,914 Insurance accruals ...................... 48,064,478 45,995,442 Other ................................... 7,023,630 5,995,943 ------------- ------------- Total current liabilities ............ 90,030,939 80,783,921 ------------- ------------- DEFERRED INCOME TAXES ........................ 44,753,000 46,885,000 ------------- ------------- CONTINGENCIES STOCKHOLDERS' EQUITY Preferred, $.01 par value; authorized 5,000,000 share; none issued ......... -- -- Common, $.01 par value; authorized 395,000,000 shares; issued and outstanding: 73,866,000 in 2005 and 75,000,000 in 2004 ................... 738,660 750,000 Additional paid-in capital .............. -- 8,510,305 Retained earnings ....................... 397,595,465 380,906,884 ------------- ------------- 398,334,125 390,167,189 Less: unearned compensation ............. (628,181) (824,259) ------------- ------------- 397,705,944 389,342,930 ------------- ------------- $ 532,489,883 $ 517,011,851 ============= ============= </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 2
HEARTLAND EXPRESS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) <TABLE> <CAPTION> Three months ended Six months ended June 30, June 30, 2005 2004 2005 2004 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> OPERATING REVENUE .......................... $128,851,347 $113,511,541 $247,528,818 $220,348,453 ------------ ------------ ------------ ------------ OPERATING EXPENSES: Salaries, wages, and benefits ........... $ 43,447,096 $ 39,091,825 $ 86,163,937 $ 78,857,921 Rent and purchased transportation ....... 7,829,721 9,522,915 15,541,933 20,041,540 Operations and maintenance .............. 32,276,024 22,710,926 60,409,972 43,656,478 Taxes and licenses ...................... 2,180,646 2,204,958 4,255,936 4,495,240 Insurance and claims .................... 3,969,432 5,395,577 6,801,697 7,892,218 Communications and utilities ............ 928,039 980,349 1,626,916 1,942,532 Depreciation ............................ 9,053,013 6,757,757 17,441,697 13,371,461 Other operating expenses ................ 3,886,320 3,345,772 7,939,371 6,813,555 ------------ ------------ ------------ ------------ 103,570,291 90,010,079 200,181,459 177,070,945 ------------ ------------ ------------ ------------ Operating income ............... 25,281,056 23,501,462 47,347,359 43,277,508 Interest income ......................... 2,052,067 651,871 3,387,292 1,219,387 ------------ ------------ ------------ ------------ Income before income taxes ........... 27,333,123 24,153,333 50,734,651 44,496,895 Income taxes ............................ 9,703,258 8,453,664 18,010,801 15,675,629 ------------ ------------ ------------ ------------ Net income ........................... $ 17,629,865 $ 15,699,669 $ 32,723,850 $ 28,821,266 ============ ============ ============ ============ Earnings per common share: Basic earnings per share ............ $ 0.24 $ 0.21 $ 0.44 $ 0.38 ============ ============ ============ ============ Basic weighted average shares outstanding 74,751,459 75,000,000 74,875,043 75,000,000 ============ ============ ============ ============ Dividends declared per share ............. $ 0.020 $ 0.013 $ 0.040 $ 0.027 ============ ============ ============ ============ </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 3
HEARTLAND EXPRESS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY <TABLE> <CAPTION> Capital Additional Unearned Stock, Paid-In Retained Compen- Common Capital Earnings sation Total ----------- ----------- ------------- ----------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> Balance, December 31, 2004 ......................... $ 750,000 $ 8,510,305 $ 380,906,884 $ (824,259) $ 389,342,930 Net income ......................................... -- -- 32,723,850 -- 32,723,850 Dividends on common stock, $0.04 per share ......... -- -- (2,988,598) -- (2,988,598) Stock repurchase ................................... (11,340) (8,492,713) (13,046,671) -- (21,550,724) Forfeiture of stock awards ......................... -- (17,592) -- 17,592 -- Amortization of unearned compensation .............. -- -- -- 178,486 178,486 ----------- ----------- ------------- ---------- ------------- Balance, June 30, 2005 ............................. $ 738,660 $ -- $ 397,595,465 $ (628,181) $ 397,705,944 =========== =========== ============= ========== ============= </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 4
HEARTLAND EXPRESS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> Six months ended June 30, 2005 2004 ------------ ------------ OPERATING ACTIVITIES <S> <C> <C> Net income .................................. $ 32,723,850 $ 28,821,266 Adjustments to reconcile to net cash provided by operating activities: Depreciation and amortization ............ 17,451,698 13,381,463 Deferred income taxes .................... (3,065,000) (3,057,000) Unearned compensation .................... 178,486 190,214 Gain on disposal of fixed assets ......... (301,641) (101,889) Changes in certain working capital items: Trade receivables ..................... (2,222,027) (1,229,026) Other prepaid expenses ................ (3,811,751) (2,938,528) Prepaid tires ......................... 197,470 416,100 Accounts payable and accrued expenses . 8,512,463 7,201,997 Accrued income taxes .................. (138,436) 793,495 ------------ ------------ Net cash provided by operating activities 49,525,112 43,478,092 ------------ ------------ INVESTING ACTIVITIES Proceeds from sale of property and equipment 600,593 101,889 Capital additions ........................... (19,663,849) (15,044,846) Net purchases of municipal bonds ............ (3,169,987) (52,857,210) Change in other assets ...................... 123,773 121,811 ------------ ------------ Net cash used in investing activities ....... (22,109,470) (67,678,356) ------------ ------------ FINANCING ACTIVITIES Cash dividend ............................... (2,997,356) (1,998,526) Stock repurchase ............................ (20,578,159) ------------ ------------ Net cash used in financing actitvities ... (23,575,515) (1,998,526) ------------ ------------ Net increase (decrease) in cash and cash equivalents ......................... 3,840,127 (26,198,790) CASH AND CASH EQUIVALENTS Beginning of period ......................... 1,610,543 38,618,430 ------------ ------------ End of period ............................... $ 5,450,670 $ 12,419,640 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Income taxes, net ........................... $ 21,214,137 $ 17,939,134 Noncash investing activities: Book value of revenue equipment traded....... $ 12,136,903 $ 5,487,691 </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 5
HEARTLAND EXPRESS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Basis of Presentation The accompanying unaudited consolidated financial statements of Heartland Express, Inc. and subsidiaries (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal, recurring adjustments considered necessary for a fair presentation have been included. The financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2004 included in the Annual Report on Form 10-K of the Company filed with the Securities and Exchange Commission. Interim results of operations are not necessarily indicative of the results to be expected for the full year or any other interim periods. Note 2. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. Note 3. Segment Information The Company has nine operating divisions; however, it has determined that it has one reportable segment. All of the divisions are managed based on similar economic characteristics. Each of the regional operating divisions provides short-to-medium haul truckload carrier services of general commodities to a similar class of customers. In addition, each division exhibits similar financial performance, including average revenue per mile and operating ratio. As a result of the foregoing, the Company has determined that it is appropriate to aggregate its operating divisions into one reportable segment consistent with the guidance in SFAS No. 131. Accordingly, the Company has not presented separate financial information for each of its operating divisions as the Company's consolidated financial statements present its one reportable segment. Note 4. Cash and Cash Equivalents Cash equivalents are short-term, highly liquid investments with insignificant interest rate risk and original maturities of three months or less. The Company previously reported municipal bonds with a reset provision of three months or less as a cash equivalent. The Company is now classifying all municipal bonds based upon their original maturity date without respect to any reset provisions. Reclassifications have been completed on all prior periods reported herein to be consistent with this change. Restricted and designated cash and short-term investments totaling $4.1 million at June 30, 2005 and $3.9 million at June 30, 2004 are classified as other assets. The restricted funds represent those required for self-insurance purposes and designated funds that are earmarked for a specific purpose not for general business use. Note 5. Short-term Investments Investments primarily include municipal bonds with interest reset provisions and short-term municipal bonds. The cost approximates the fair value due to the nature of the investments. Therefore, accumulated other comprehensive income (loss) has not been recognized as a separate component of stockholders' equity. 6
Note 6. Property, Equipment, and Depreciation The Company's tractor fleet has historically been depreciated by the 125% declining balance method applied to cost, net of salvage value. Tractors purchased beginning in June 2004 are being depreciated by the 125% declining balance method applied to the book value of the asset at the beginning of each period. The salvage value is no longer being deducted from the book value each period when computing the depreciation base used to calculate the declining balance depreciation. This resulted in additional depreciation of $980,000 in the second quarter of 2005 and $1.7 million for the six months ended June 30, 2005. Gains on the disposal of fixed assets have been offset against other operating expenses for the periods presented. For the three months ended June 30, 2005 and 2004, $120,299 and $65,638, respectively, of gains on disposal of fixed assets are presented as a reduction of other operating expenses. For the six months ended June 30, 2005 and 2004, $301,641 and $101,889, respectively, of gain on the disposal of fixed assets are presented as a reduction of other operating expenses. Note 7. Stock Split On July 21, 2004, the Board of Directors approved a three-for-two stock split, effected in the form of a fifty percent stock dividend. The stock split occurred on August 20, 2004, to shareholders of record as of August 9, 2004. This stock split increased the number of outstanding shares to 75.0 million from 50.0 million. The number of common shares issued and outstanding and all per share amounts have been adjusted to reflect the stock split for all periods presented. Note 8. Stock Repurchase In September 2001, the Board of Directors approved a repurchase of up to 5.0 million shares of Heartland Express, Inc. common stock. During the quarter ended June 30, 2005, 1.1 million shares were repurchased for $21.6 million at approximately $19.00 per share and the shares were retired. The cost of such shares purchased and retired in excess of their par value was charged to additional paid-in capital of $8.5 million, and the remainder of $13.0 million was charged to retained earnings. Note 9. Earnings Per Share Basic earnings per share are based upon the weighted average common shares outstanding during each year. Diluted earnings per share are based upon the weighted average common and common equivalent shares outstanding during each year. Heartland Express has no common stock equivalents; therefore, diluted earnings per share are equal to basic earnings per share. All earnings per share data presented have been restated to reflect a three-for-two stock split on August 20, 2004. Note 10. Stock Based Compensation At June 30, 2005 the Company has a restricted stock award plan. The plan shares are being amortized over a five year period as compensation expense. For the three months ended June 30, 2005 and 2004, compensation expense of $83,378 and $95,106, respectively, was amortized. For the six months ended June 30, 2005 and 2004, compensation expense of $178,486 and $190,214, respectively, was recognized. All stock based compensation is recorded in salaries, wages, and benefits on the statement of operations. The unamortized portion of the stock awards is recorded in stockholders' equity as unearned compensation. All unvested shares are included in the Company's 73.9 million outstanding shares. 7
Note 11. New Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," a revision of SFAS No. 123, which addresses the accounting for share-based payment transactions. SFAS No. 123(R) eliminates the ability to account for employee share-based compensation transactions using APB Opinion No. 25, "Accounting for Stock Issued to Employees," and generally requires instead that such transactions be accounted and recognized in the statement of operations based on their fair value. The Company does not anticipate that SFAS No. 123(R) will have an impact on the Company. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary Assets--An Amendment of APB Opinion No. 29, Accounting for Non-monetary Transactions" ("SFAS 153"). SFAS 153 eliminates the exception from fair value measurement for non-monetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, "Accounting for Non-monetary Transactions," and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for the fiscal periods beginning after June 15, 2005. As of June 30, 2005, we believe that SFAS 153 will result in increased depreciation expense of approximately $0.4 million in the third quarter and fourth quarters of 2005. In addition to increased depreciation, gains on the trade-in of assets previously recorded as a reduction in the cost of new assets of approximately $5.4 million will be recorded and offset against other operating expenses in the last six months of 2005. We believe this new accounting pronouncement will increase earnings per share by approximately $0.04 per share during the last six months of 2005. Note 12. Commitments and Contingencies The Company is party to ordinary, routine litigation and administrative proceedings incidental to its business. In the opinion of management, the Company's potential exposure under pending legal proceedings is adequately provided for in the accompanying consolidated financial statements. The Company has commitments at June 30, 2005 to acquire revenue equipment for approximately $26.0 million in the third and fourth quarters of 2005 and $55.9 million in 2006, net of trade-ins. These commitments are expected to be financed from existing cash and investment balances and cash flows from operations. Note 13. Related Party Transactions The Company leases two office buildings and a storage building from its president under a lease which provides for monthly rentals of $27,618 plus the payment of all property taxes, insurance and maintenance. The lease was renewed for a five year term on June 1, 2005 increasing the monthly rental from $24,969 to $27,618. In the opinion of management, the rates paid are comparable to those that could be negotiated with a third party. Rent expense paid to the Company's president totaled $152,463 and $149,814 for the six months ended June 30, 2005 and 2004, respectively. Note 14. Reclassifications Certain reclassifications have been made to the prior period financial statements to conform to the June 30, 2005 presentation. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statements Except for certain historical information contained herein, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements 8
involve risks, assumptions and uncertainties which are difficult to predict. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including any projections of earnings, revenues, or other financial items; any statements of plans, strategies, and objectives of management for future operations; any statements concerning proposed new strategies or developments; any statements regarding future economic conditions or performance; any statements of belief and any statement of assumptions underlying any of the foregoing. Words such as "believe," "may," "could," "expects," "anticipates," and "likely," and variations of these words or similar expressions, are intended to identify such forward-looking statements. The Company's actual results could differ materially from those discussed in the section entitled "Factors That May Affect Future Results," included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" set forth in the Company's Annual report on Form 10-K, which is by this reference incorporated herein. The Company does not assume, and specifically disclaims, any obligation to update any forward-looking statements contained in this Quarterly report. Overview Heartland Express, Inc. is a short-to-medium haul truckload carrier. The Company transports freight for major shippers and generally earns revenue based on the number of miles per load delivered. During the first six months of 2005, freight revenue, excluding fuel surcharge, increased 7.2% to $224.5 million from $209.5 million in the first six months of 2004. The Company takes pride in the quality of the service that it provides to its customers. The keys to maintaining a high level of service are experienced drivers, reliable equipment and equipment availability. Heartland has one of the newest fleets in the industry with an average tractor age of 19 months and trailer age of 36 months. During April 2004, the Company entered into an agreement to replace its entire tractor fleet by December 2006. The Company started taking delivery of the new tractors during June 2004. The Company expects future revenue equipment purchases to be financed using current cash and investment balances and cash flow provided by operations. The Company continues to work with shippers and drivers to minimize the impact of the revised DOT hours-of-service regulations that took effect on January 4, 2004. These new regulations were rescinded in September 2004 by the United States Circuit Court of Appeals for the District of Columbia on grounds that driver health was not properly addressed. At that time the new regulations were extended to September 30, 2005, at which time further rule changes could become effective. The trucking industry continues to experience a shortage of qualified drivers. In order to attract and retain experienced drivers, the Company increased pay for all drivers $0.03 per mile during the first quarter of 2004 and again in the first quarter of 2005. Management believes that the Company continues to offer one of the highest pay packages in the industry. This pay package along with increased recruiting efforts should allow the Company to attract additional qualified drivers; however, a long-term shortage of drivers could hinder growth. Effective October 1, 2002, all newly manufactured truck engines must comply with the engine emission standards mandated by the Environmental Protection Agency (EPA). The new engines have resulted in a significant increase in the cost of new tractors, lower fuel efficiency, and higher maintenance costs. All new tractor purchases beginning in 2004 will include engines that conform to the new standards. As a result of these purchases, the operating costs associated with new replacement tractors have increased. Additional EPA engine design requirements will take effect in 2007 and are expected to further reduce fuel efficiency and increase engine prices. 9
Results of Operations: The following table sets forth the percentage relationship of expense items to operating revenue for the periods indicated. Three Months Ended Six Months Ended June 30, June 30, 2005 2004 2005 2004 -------- -------- -------- -------- Operating revenue 100.0% 100.0% 100.0% 100.0% -------- -------- -------- -------- Operating expenses: Salaries, wages, and benefits 33.7% 34.4% 34.8% 35.8% Rent and purchased transportation 6.1 8.4 6.3 9.1 Operations and maintenance 25.0 20.0 24.4 19.8 Taxes and licenses 1.7 1.9 1.7 2.0 Insurance and claims 3.1 4.8 2.7 3.6 Communications and utilities 0.7 0.9 0.7 0.9 Depreciation 7.0 5.9 7.1 6.1 Other operating expenses 3.1 3.0 3.2 3.1 -------- -------- -------- -------- Total operating expenses 80.4% 79.3% 80.9% 80.4% -------- -------- -------- -------- Operating income 19.6% 20.7% 19.1% 19.6% Interest income 1.6 0.6 1.4 0.6 -------- -------- -------- -------- Income before income taxes 21.2% 21.3% 20.5% 20.2% Federal and state income taxes 7.5 7.5 7.3 7.1 -------- -------- -------- -------- Net income 13.7% 13.8% 13.2% 13.1% ======== ======== ======== ======== The following is a discussion of the results of operations of the three and six month periods ended June 30, 2005 compared with the same periods in 2004, and the changes in financial condition through the second quarter of 2005. Three Months Ended June 30, 2005 and 2004 Operating revenue increased $15.4 million (13.5%), to $128.9 million in the second quarter of 2005 from $113.5 million in the second quarter of 2004. The increase in revenue resulted from additional business from existing customers, growth of our customer base, and rate increases. Operating revenue for both periods was positively impacted by fuel surcharges assessed to customers. Fuel surcharge revenue increased $6.7 million to $13.0 million in the second quarter of 2005 from $6.3 million in the second quarter of 2004. Salaries, wages, and benefits increased $4.4 million (11.1%), to $43.5 million in the second quarter of 2005 from $39.1 million in the second quarter of 2004. These increases were primarily the result of increased reliance on employee drivers due to a decrease in the number of independent contractors utilized by the Company and a driver pay increase. During the second quarter of 2005, employee drivers accounted for 91% and independent contractors 9% of the total fleet miles, compared with 88% and 12%, respectively, in the second quarter of 2004. The Company increased pay for all drivers $0.03 per mile during the first quarter of 2005. During the second quarter of 2005, the Company experienced a decrease in workers' compensation costs due to a decrease in frequency and severity of claims. In addition, the Company incurred increased health insurance costs due to increased frequency and severity of claims. Rent and purchased transportation decreased $1.7 million (17.8%), to $7.8 million in the second quarter of 2005 from $9.5 million in the second quarter of 2004. This reflects the Company's decreased reliance upon independent contractors. Rent and purchased transportation for both periods includes amounts 10
paid to independent contractors under the Company's fuel stability program. The Company increased the independent contractor base mileage pay by $0.03 per mile on January 1, 2005. Operations and maintenance increased $9.6 million (42.1%), to $32.3 million in the second quarter of 2005 from $22.7 million in the second quarter of 2004. The increase in operations and maintenance is primarily attributable to increased fuel costs due to the increased percentage of fleet miles driven by employee drivers and record high fuel prices during the second quarter of 2005. In addition, fuel efficiency for new tractors purchased beginning in 2004 is being negatively impacted due to EPA-mandated engine clean air standards. Insurance and claims decreased $1.4 million (26.4%), to $4.0 million in the second quarter of 2005 from $5.4 million in the second quarter of 2004. Insurance and claims expense decreased due to a decline in the severity of claims and a decrease in the development factors. Insurance and claims expense will vary as a percentage of operating revenue from period to period based on the frequency and severity of claims incurred in a given period as well as changes in claims development trends. Depreciation increased $2.3 million (34.0%), to $9.1 million during the second quarter of 2005 from $6.8 million in the second quarter of 2004. Effective June 1, 2004, the Company began depreciating new tractors by applying the 125% declining balance to the book cost of the tractor. Previously, the 125% declining balance method was applied to book cost, net of salvage. This change in estimate increased depreciation by approximately $980,000 during the three months ended June 30, 2005. In addition, depreciation increased because of the growth of our company-owned tractor and trailer fleet. Other operating expenses increased $0.6 million (16.2%), to $3.9 million during the second quarter of 2005 from $3.3 million during the second quarter of 2004. Other operating expenses consist primarily of costs incurred for freight handling, highway tolls, driver recruiting expenses, and administrative costs. During the second quarter of 2005, freight handling and tolls increased $0.6 million and advertising expense related to driver recruiting increased $0.2, million while professional services declined by $0.2 million compared to the second quarter of 2004. For the quarters ended June 30, 2005 and 2004, $120,299 and $65,638, respectively, of gain on the disposal of fixed assets is presented as a reduction of other operating expenses. The Company's effective tax rate was 35.5% and 35.0% for the second quarter of 2005 and 2004, respectively. The increase resulted from an increase in state income taxes. As a result of the foregoing, the Company's operating ratio (operating expenses as a percentage of operating revenue) was 80.4% during the second quarter of 2005 compared with 79.3% during the second quarter of 2004. Net income increased $1.9 million (12.3%), to $17.6 million during the second quarter of 2005 from $15.7 million during the second quarter of 2004. Six Months Ended June 30, 2005 and 2004 Operating revenue increased $27.2 million (12.3%), to $247.5 million in the six months ended June 30, 2005 from $220.3 million in the 2004 period. The increase in revenue resulted from additional business from existing customers, growth of our customer base, and rate increases. Operating revenue for both periods was positively impacted by fuel surcharges assessed to customers. Fuel surcharge revenue increased $12.2 million to $23.1 million for the six months ended June 30, 2005 from $10.9 million in the compared 2004 period. Salaries, wages, and benefits increased $7.3 million (9.3%), to $86.2 million in the six months ended June 30, 2005 from $78.9 million in the 2004 period. These increases were a result of increased reliance on employee drivers due to a decrease in the number of independent contractors utilized by the 11
Company and a driver pay increase. During the first six months of 2005, employee drivers accounted for 91% and independent contractors 9% of the total fleet miles, compared with 87% and 13%, respectively, in the compared 2004 period. The Company increased pay for all drivers $0.03 per mile during the first quarter of 2005. In addition, the Company experienced a decrease in workers' compensation costs during the six month period of 2005 due to a decrease in the frequency and severity of workers' compensation claims during the period. The Company experienced an increase in health insurance expense during the six month period of 2005 due to an increase in the frequency and severity of health insurance claims during the period. Rent and purchased transportation decreased $4.5 million (22.5%), to $15.5 million in the first six months of 2005 from $20.0 million in the 2004 period. This reflects the Company's decreased reliance upon independent contractors. Rent and purchased transportation for both periods includes amounts paid to independent contractors under the Company's fuel stability program. The Company increased the independent contractor base mileage pay by $0.03 per mile on January 1, 2005. Operations and maintenance increased $16.7 million (38.4%), to $60.4 million in the six months ended June 30, 2005 from $43.7 million in the 2004 period. The increase in operations and maintenance is primarily attributable to increased fuel costs due to the increased percentage of fleet miles driven by employee drivers and record high fuel prices during the first six months of 2005. In addition, fuel efficiency for new tractors purchased beginning in 2004 is being negatively impacted due to EPA-mandated engine clean air standards. Insurance and claims decreased $1.1 million (13.8%), to $6.8 million in the first six months of 2005 from $7.9 million in the compared 2004 period. The severity of the claims incurred in the six months ended June 30, 2004 exceeded those incurred in the same period of 2005. In addition, the Company experienced a decline in development factors. Insurance and claims expense will vary as a percentage of operating revenue from period to period based on the frequency and severity of claims incurred in a given period as well as changes in claims development trends. Depreciation increased $4.0 million (30.4%), to $17.4 million during the first six months of 2005 from $13.4 million in the compared 2004 period. Effective June 1, 2004, the Company began depreciating new tractors by applying the 125% declining balance to the book cost of the tractor. Previously, the 125% declining balance method was applied to book cost, net of salvage. This change in estimate increased depreciation by approximately $1.7 million during the six months ended June 30, 2005. In addition, depreciation increased because of the growth of our company-owned tractor and trailer fleet. Other operating expenses increased $1.1 million (16.5%), to $7.9 million during the first six months 2005 from $6.8 million during the compared 2004 period. Other operating expenses consist primarily of freight handling, highway tolls, driver recruiting expenses, and administrative costs. During the six months ended June 30, 2005, freight handling and tolls increased $1.2 million and advertising expense related to driver recruiting increased $0.4 million, while professional services declined by $0.2 million compared to the same period of 2004. For the six months ended June 30, 2005 and 2004, $301,641 and $101,889, respectively, of gain on the disposal of fixed assets is presented as a reduction of other operating expenses. The Company's effective tax rate was 35.5% and 35.2% for the six months ended June 30, 2005 and 2004, respectively. The increase resulted from an increase in state income taxes. As a result of the foregoing, the Company's operating ratio (operating expenses as a percentage of operating revenue) was 80.9% during the first six months of 2005 compared with 80.4% during the first six months of 2004. Net income increased $3.9 million (13.5%), to $32.7 million during the first six months of 2005 from $28.8 million during the compared 2004 period. 12
Liquidity and Capital Resources The growth of the Company's business has required significant investments in new revenue equipment. Historically the Company has been debt-free, funding revenue equipment purchases with cash flow provided by operations. The Company also obtains tractor capacity by utilizing independent contractors, who provide a tractor and bear all associated operating and financing expenses. The Company's primary source of liquidity for the six months ended June 30, 2005, was net cash provided by operating activities of $49.5 million compared to $43.5 million in the compared 2004 period. Capital expenditures for property and equipment, primarily revenue equipment net of trade-ins, totaled $19.7 million for the first six months of 2005 compared to $15.0 million for the same period in 2004. Capital expenditures during the last six months of 2005 for revenue equipment net of trade-ins are projected to be approximately $35.1 million. During the quarter ended June 30, 2005, the Company repurchased 1.1 million shares of Heartland Express, Inc. common stock, resulting in expenditures of $21.6 million. The Company's Board of Directors has authorized a repurchase of up to a maximum of 5.0 million shares of Heartland Express, Inc. common stock. In addition, the Company paid cash dividends of $3.0 million during the first six months of 2005. The Company declared a $1.5 million cash dividend in June 2005, payable July 1, 2005. Management believes the Company has adequate liquidity to meet its current and projected needs. The Company will continue to have significant capital requirements over the long term. Future capital expenditures are expected to be funded by cash flow provided by operations and from existing cash, cash equivalents, and short-term investments. The Company ended the quarter with $265.3 million in cash, cash equivalents, and short-term investments and no debt. Based on the Company's strong financial position, management believes outside financing could be obtained, if necessary, to fund capital expenditures. Factors That May Affect Future Results The Company's future results may be affected by a number of factors over which the Company has little or no control. Fuel prices, insurance and claims costs, liability claims, interest rates, the availability of qualified drivers, fluctuations in the resale value of revenue equipment, economic and customer business cycles, and shipping demands are economic factors over which the Company has little or no control. Significant increases or rapid fluctuations in fuel prices, interest rates or insurance and claims costs, to the extent not offset by increases in freight rates, and the resale value of revenue equipment, could reduce the Company's profitability. Weakness in the general economy, including a weakness in consumer demand for goods and services, could adversely affect the Company's customers and the Company's growth and revenues, if customers reduce their demand for transportation services. Customers encountering adverse economic conditions represent a greater potential for loss, and the Company may be required to increase its reserve for bad debt losses. Weakness in customer demand for the Company's services or in the general rate environment may also restrain the Company's ability to increase rates or obtain fuel surcharges. Inflation and Fuel Cost Most of the Company's operating expenses are inflation-sensitive, with inflation generally producing increased costs of operations. During the past three years, the most significant effects of inflation have been on revenue equipment prices and the compensation paid to the drivers. Innovations in equipment technology and comfort have resulted in higher tractor prices, and there has been an industry-wide increase in wages paid to attract and retain qualified drivers. The Company historically has limited the effects of inflation through increases in freight rates and certain cost control efforts. 13
In addition to inflation, fluctuations in fuel prices can affect profitability. Based on the Department of Energy national average diesel prices, the cost of fuel increased 31% over the second quarter of 2004. Most of the Company's contracts with customers contain fuel surcharge provisions. Although the Company historically has been able to pass through most long-term increases in fuel prices and operating taxes to customers in the form of surcharges and higher rates, short-term increases are not fully recovered. Competitive conditions in the transportation industry, such as lower demand for transportation services, could affect the Company's ability to obtain rate increases or fuel surcharges. We expect that high fuel prices will continue to adversely affect our operating expenses during the last six months of 2005. Seasonality The nature of the Company's primary traffic (appliances, automotive parts, paper products, retail goods, and packaged foodstuffs) causes it to be distributed with relative uniformity throughout the year. However, seasonal variations during and after the winter holiday season have historically resulted in reduced shipments by several industries served. In addition, the Company's operating expenses historically have been higher during the winter months due to increased operating costs and higher fuel consumption in colder weather. Concentrations of Credit Risk and Major Customers The Company's major customers represent the consumer goods, appliances, food products, and automotive industries. Credit is usually granted to customers on an unsecured basis. The Company's five largest customers accounted for 32% of revenues for the quarters ended June 30, 2005 and 2004, respectively. For the six months ended June 30, 2005 and 2004, the top five largest customers accounted for 33% of revenues for both periods. Operating revenue from one customer exceeded 10% of total gross revenues in the three months ended June 30, 2005 and 2004, respectively. Operating revenue from two customers each exceeded 10% of total gross revenues in the six months ended June 30, 2005, while one customer exceeded 10% of gross revenues for the same period of 2004. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company purchases only high quality, liquid investments. Primarily all investments as of June 30, 2005 have an original maturity or interest reset date of twelve months or less. Due to the short term nature of the investments, the Company is exposed to minimal market risk related to its cash equivalents and investments. The Company has no debt outstanding as of June 30, 2005, and therefore, has no market risk related to debt. As of June 30, 2005, the Company has no derivative financial instruments to reduce its exposure to fuel price fluctuations. Item 4. Controls and Procedures As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operations of the Company's disclosure controls and procedures, and as defined in Exchange Act Rule 15d-15(e). Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in enabling the Company to record, process, summarize, and report information required to be included in the Company's periodic SEC filings within the required time period. There have been no changes in the Company's internal controls over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 14
PART II OTHER INFORMATION Item 1. Legal Proceedings The Company is a party to ordinary, routine litigation and administrative proceedings incidental to its business. None of the claims would materially impact net income or financial position. These proceedings primarily involve claims for personal injury and property damage incurred in connection with the transportation of freight. The Company maintains insurance to cover liabilities arising from the transportation of freight for amounts in excess of certain self-insured retentions. Item 2. Changes in Securities The following table provides information on the purchase of Heartland Express, Inc. common stock for the periods indicated. Period Total Number Average Price Authorization of Shares Paid per Remaining Purchased Share 4/1/2005 - 4/30/2005 - - - - 5,000,000 5/1/2005 - 5/31/2005 239,700 $ 19.09 4,760,300 6/1/2005 - 6/30/2005 894,300 $ 18.95 3,866,000 ------------ ------------- ----------- Total 1,134,000 $ 18.97 3,866,000 ============ ============= =========== In September 2001, the Board of Directors of Heartland Express, Inc. approved a Stock Repurchase plan authorizing the repurchase of up to 5.0 million shares of Heartland Express, Inc. common shares. All purchases noted above were made pursuant to that program. Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 10.1 Business Property Lease between Russell A. Gerdin as Lessor and the Company as Lessee, regarding the Company's headquarters at 2777 Heartland Drive, Coralville, Iowa 52241 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securi- ties Exchange Act, as amended. 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securi- ties Exchange Act, as amended. 32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. 15
(b) Reports on Form 8-K 1 Report on Form 8-K, dated April 14, 2005, announcing the Company's financial results for the quarter ended March 31, 2005. 2 Report on Form 8-K, dated June 9, 2005, announcing the declaration of a quarterly cash dividend. No other information is required to be filed under Part II of the form. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. HEARTLAND EXPRESS, INC. Date: August 4 , 2005 BY /s/JOHN P. COSAERT John P. Cosaert Executive Vice President-Finance, Chief Financial Officer and Treasurer (principal accounting and financial officer) 16
Exhibit No. 31.1 Certification I, Russell A. Gerdin, Chairman, President and Chief Executive Officer of Heartland Express, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Heartland Express, Inc. (the "Registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or cause such disclosure controls and procedures to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls: and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 4 , 2005 By /s/ RUSSELL A GERDIN Russell A. Gerdin Chairman, President and Chief Executive Officer 17
Exhibit No. 31.2 Certification I, John P. Cosaert, Executive Vice President, Chief Financial Officer and Treasurer of Heartland Express, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Heartland Express, Inc. (the "Registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Designed such internal control over financial reporting, or cause such disclosure controls and procedures to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls: and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 4 , 2005 By /s/ JOHN P COASERT John P. Cosaert Executive Vice President-Finance Chief Financial Officer and Treasurer (principal accounting and financial officer) 18
Exhibit No. 32 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Russell A. Gerdin, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Heartland Express, Inc., on Form 10-Q for the period ended June 30, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Heartland Express, Inc. Dated: August 4 , 2005 By /s/ RUSSELL A GERDIN Russell A. Gerdin Chairman, President and Chief Executive Officer I, John P. Cosaert, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Heartland Express, Inc., on Form 10-Q for the period ended June 30, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Heartland Express, Inc. Dated: August 4 , 2005 By: /s/ JOHN P COSAERT John P. Cosaert Executive Vice President and Chief Financial Officer 19
Exhibit No. 10.1 AMENDED AND RESTATED LEASE AGREEMENT THIS AGREEMENT, effective as of June 1, 2005, is a Lease Agreement by and between Russell A. Gerdin, a resident of Iowa ("Lessor") and Heartland Express, Inc. of Iowa, an Iowa corporation ("Lessee"). THE PARTIES AGREE: 1. Description. The Lessor hereby leases to the Lessee the following described real estate and improvements, all located in the city of Coralville, state of Iowa (the "Property"): (a) Office building at 2777 Heartland Drive (b) Office building at 2757 Heartland Drive (c) Storage building at 2757 Heartland Drive (north of Office Building) 2. Term. The term of this Agreement shall be five (5) years from the 1st day of June 2005, to the 31st day of May 2010. 3. Rent. The Lessee shall pay to the Lessor as rent, at such address as the Lessor may from time to time designate in writing, the sum of $1,657,075.80 in monthly installments of $27,617.93, each payable in advance on the first day of each month commencing on the first day of the term of this Agreement. 4. Opinion to Renew Lease. The Lessee has the option to renew the lease at the end of the term for an additional five (5) years at the existing monthly rent plus a cost-of-living allowance. 5. Use. The Lessee shall use the Property for general office space and storage. The Lessee will not, without the written consent of the Lessor, use Property for any other purpose. The Lessee shall maintain the Property in compliance with all applicable federal, state, and local laws, rules, regulations, and ordinances (collectively, "Laws") including specifically Laws involving protection of the environment and worker safety. Lessee shall indemnify, defend, and hold Lessor harmless from and against any violation of Law as well as any liability arising from the use of or presence on the Property of employees, agents, invitees, or other person connected with Lessee. 6. Lessee's Obligations. The Lessee shall: (a) Maintain, at Lessee's expense, the Property in good condition and repair, including windows but excluding the other exterior of the Property; (b) Pay from time to time, as the utility payments shall become due, all utility payments including water, gas, electricity, sewer, trash removal and similar payments; (c) Pay all real estate taxes and special assessments levied against the Property; (d) Maintain , at Lessee's expense, general liability coverage and any liability coverage which Lessor may require as a result of the particular use of the Property; and (e) Maintain, at Lessee's expense, insurance with respect to the Property against loss by fire, lightning , and other perils covered by the standard all-risk endorsement, in an amount equal to at least 100% of full replacement value thereof, with no deduction for depreciation, and shall maintain, at Lessee's expense, insurance against such other hazards and in such amounts as is customarily carried by operators of similar properties. Lessee shall name Lessor as an additional insured upon the policies. 20
7. Lessee's Improvements. The Lessee shall not make any improvements or alterations to the Property without submitting plans and specifications for such improvements or alterations to the Lessor and securing the Lessor's written consent. The Lessee shall pay all costs of such improvements and alterations, shall provide evidence of such payments to the Lessor upon request, and shall hold the Lessor harmless from any costs, liens, or damages. Any improvements constructed on the Property by the Lessee shall become the property of the Lessor upon the expiration of the term of this Agreement. Any trade fixtures installed by the Lessee may be removed by the Lessee upon the expiration of the term of this Agreement, but the Lessee shall repair ay damage arising from the removal of such trade fixtures. 8. Waste. The Lessee shall not commit or permit any waste of the Property, nor any public or private nuisance on the Property, nor any use of the Property which is contrary to any law, governmental regulation or insurance policy affecting or covering the Property or which may by dangerous to persons or property. The Lessor may enter and inspect the premises at any reasonable time. 9. Assignment. The Lessee shall not assign this Agreement, nor allow any transfer of or lien upon the Lessee's interest in the Agreement by operation of law, nor sublet any portion of the Property, nor permit the use of any portion of the Property by anyone other than the Lessee and the employees, agents and business invitees of the Lessee, without securing the written consent of the Lessor. 10. Condemnation. If all or a substantial portion of the Property shall be taken or condemned for any public use to purpose, so as to render the Property unsuitable for occupancy, this Agreement shall terminate on the date when possession shall be required for such use, or purpose, at the option of the Lessee, and the rent shall be prorated to the date of such termination. The award for such taking or condemnation shall be apportioned between the Lessor and the Lessee, and the Lessee shall be entitled to any portion of the award made for improvements constructed on the Property. 11. Default. Each of the following acts and omissions shall constitute a default by the Lessee and a breach of this Agreement: (a) Voluntary or involuntary bankruptcy, assignment for benefit of creditors, reorganization or rearrangement under the Bankruptcy Code, receivership, dissolution or the commencement of any action or proceeding for the dissolution or liquidation of the Lessee whether instituted by or against the Lessee or any other similar action or proceeding. (b) The failure of the Lessee to pay the rent for a period of 15 days after the rent shall have become due. (c) The failure of the Lessee to perform any other agreement to be performed on the part of the Lessee for a period of 30 days after written notice of such failure. 12. Remedies. Upon a default by the Lessee, the Lessor may reenter and recover possession of the Property with or without terminating the Agreement. If delivery of possession of the Property refused by the Lessee, the Lessor shall be entitled to the appointment of a receiver for the Property by any court of competent jurisdiction, as a matter of right, without regard to the solvency or insolvency of the Lessee, to collect the rents and profits from the Property and apply such rents and profits according to the orders of the court. 13. Termination. Upon termination of the Agreement, the Lessee shall deliver possession of the Property of the Lessor. 14. Miscellaneous. No waiver by the Lessor of a default by the Lessee shall be implied, and no express waiver shall be extended beyond the default and period specified. No term or condition of this Agreement shall be construed to have been waived by the Lessor, unless the Lessee shall have secured such waiver from Lessor in writing. The invalidity or unenforceability of any term or condition of the Agreement shall not prejudice the enforceability of any other term or condition. 21
15. Modification. This Agreement shall not be amended or modified, except by a written instrument executed by both the Lessor and the Lessee. 16. Headings. The paragraph headings of this Lease Agreement are solely for the convenience of the reference and shall not in any way modify the terms and conditions thereof. 17. Binding Effect. This Agreement shall be binding upon the successors in interest of the parties. LESSOR: LESSEE: Heartland Expresss, Inc. of Iowa /s/ RUSSELL A GERDIN By: /s/ RUSSELL A GERDIN Russell A. Gerdin Russell A. Gerdin, President END OF REPORT