UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2005 [ _ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______to______ Commission File Number 0-15057 ------- P.A.M. TRANSPORTATION SERVICES, INC. ------------------------------------ (Exact name of registrant as specified in its charter) Delaware 71-0633135 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 297 West Henri De Tonti Blvd, Tontitown, Arkansas 72770 ------------------------------------------------------- (Address of principal executive offices)(Zip Code) Registrants telephone number, including area code: (479) 361-9111 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ _ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ _ ] Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act). Yes [ _ ] No [ X ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Class Outstanding at November 4, 2005 ----- ------------------------------- Common Stock, $.01 Par Value 10,744,207
PART I - FINANCIAL INFORMATION Item 1. Financial Statements
<TABLE> <CAPTION> P.A.M. TRANSPORTATION SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data) September 30, December 31, 2005 2004 ---- ---- (unaudited) (see note) <S> <C> <C> ASSETS CURRENT ASSETS: Cash and cash equivalents $ 8,968 $ 19,659 Accounts receivable-net: Trade 62,345 47,926 Other 1,236 1,110 Inventories 770 913 Prepaid expenses and deposits 9,989 14,862 Marketable equity securities available-for-sale 10,406 8,792 Income taxes refundable 561 754 --------- --------- Total current assets 94,275 94,016 PROPERTY AND EQUIPMENT: Land 2,674 2,674 Structures and improvements 9,319 9,299 Revenue equipment 249,889 238,750 Office furniture and equipment 6,644 6,449 --------- --------- Total property and equipment 268,526 257,172 Accumulated depreciation (88,518) (83,029) --------- --------- Net property and equipment 180,008 174,143 OTHER ASSETS: Goodwill 15,413 15,413 Non-compete agreements 467 654 Other 1,122 1,123 --------- --------- Total other assets 17,002 17,190 --------- --------- TOTAL ASSETS $ 291,285 $ 285,349 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 28,871 $ 28,702 Accrued expenses and other liabilities 11,512 9,828 Current maturities of long-term debt 2,336 2,080 Income taxes payable 1,281 - Deferred income taxes-current 7,587 7,162 --------- --------- Total current liabilities 51,587 47,772 Long-term debt-less current portion 23,928 23,225 Deferred income taxes-less current portion 47,351 45,375 Other 285 434 --------- --------- Total liabilities 123,151 116,806 --------- --------- SHAREHOLDERS' EQUITY: Preferred stock, $.01 par value: 10,000,000 shares authorized; none issued - - Common stock, $.01 par value: 40,000,000 shares authorized; issued and outstanding- 10,744,207 at September 30, 2005, 11,303,207 at December 31, 2004 113 113 Additional paid-in capital 76,429 76,050 Accumulated other comprehensive income 1,590 1,151 Treasury stock, at cost; 600,000 shares (10,023) - Retained earnings 100,025 91,229 --------- --------- Total shareholders' equity 168,134 168,543 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 291,285 $ 285,349 ========= ========= Note: The balance sheet at December 31, 2004 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to condensed consolidated financial statements. </TABLE>
<TABLE> <CAPTION> P.A.M. TRANSPORTATION SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (in thousands, except per share data) Three Months Ended Nine Months Ended September 30, September 30, 2005 2004 2005 2004 ---- ---- ---- ---- <S> <C> <C> <C> <C> OPERATING REVENUES: Revenue, before fuel surcharge $ 79,062 $ 75,222 $ 242,492 $ 231,966 Fuel surcharge 9,422 3,857 23,211 9,518 --------- --------- --------- --------- 88,484 79,079 265,703 241,484 --------- --------- --------- --------- OPERATING EXPENSES AND COSTS: Salaries, wages, and benefits 29,992 28,060 92,641 88,098 Operating supplies and expenses 27,589 19,030 75,357 55,995 Rents and purchased transportation 9,495 9,505 28,750 29,277 Depreciation and amortization 7,662 7,649 22,785 22,534 Operating taxes and licenses 3,907 3,708 11,911 11,664 Insurance and claims 3,584 3,848 12,215 11,741 Communications and utilities 638 639 1,980 2,005 Other 1,698 745 4,365 3,649 (Gain) loss on sale or disposal of equipment (94) 306 (20) 584 --------- --------- --------- --------- Total operating expenses and costs 84,471 73,490 249,984 225,547 --------- --------- --------- --------- NET OPERATING INCOME 4,013 5,589 15,719 15,937 NON-OPERATING INCOME 155 161 454 316 INTEREST EXPENSE (422) (466) (1,341) (1,320) --------- --------- --------- --------- NET INCOME BEFORE INCOME TAXES 3,746 5,284 14,832 14,933 FEDERAL AND STATE INCOME TAXES: Current 3,181 (257) 3,931 378 Deferred (1,648) 2,393 2,105 5,729 --------- --------- --------- --------- Total federal and state income taxes 1,533 2,136 6,036 6,107 --------- --------- --------- --------- NET INCOME $ 2,213 $ 3,148 $ 8,796 $ 8,826 ========= ========= ========= ========= EARNINGS PER COMMON SHARE: Basic $ 0.20 $ 0.28 $ 0.79 $ 0.78 ========= ========= ========= ========= Diluted $ 0.20 $ 0.28 $ 0.79 $ 0.78 ========= ========= ========= ========= AVERAGE COMMON SHARES OUTSTANDING: Basic 10,818 11,298 11,077 11,296 ========= ========= ========= ========= Diluted 10,821 11,324 11,090 11,323 ========= ========= ========= ========= See notes to condensed consolidated financial statements. </TABLE>
<TABLE> <CAPTION> P.A.M. TRANSPORTATION SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands) Nine Months Ended September 30, 2005 2004 ---- ---- <S> <C> <C> OPERATING ACTIVITIES: Net income $ 8,796 $ 8,826 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 22,785 22,534 Bad debt expense (recoveries) 765 (533) Non-compete agreement amortization-net of payments 38 - Provision for deferred income taxes 2,105 5,729 (Gain) loss on sale or disposal of equipment (20) 584 Changes in operating assets and liabilities: Accounts receivable (15,329) (9,080) Prepaid expenses, inventories, and other assets 5,016 (3,456) Income taxes payable 1,474 (2,067) Trade accounts payable (4,253) (635) Accrued expenses 1,684 (380) --------- --------- Net cash provided by operating activities 23,061 21,522 --------- --------- INVESTING ACTIVITIES: Purchases of property and equipment (39,591) (35,691) Proceeds from sale or disposal of equipment 15,796 23,296 Purchase of marketable equity securities (1,291) (225) Other 20 44 --------- --------- Net cash used in investing activities (25,066) (12,576) --------- --------- FINANCING ACTIVITIES: Borrowings under line of credit 298,605 259,313 Repayments under line of credit (297,365) (262,182) Borrowings of long-term debt 1,977 4,380 Repayments of long-term debt (2,258) (3,669) Repurchases of common stock (10,023) - Other 378 54 --------- --------- Net cash used in financing activities (8,686) (2,104) --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (10,691) 6,842 CASH AND CASH EQUIVALENTS-Beginning of period 19,659 3,064 --------- --------- CASH AND CASH EQUIVALENTS-End of period $ 8,968 $ 9,906 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION- Cash paid during the period for: Interest $ 1,428 $ 1,331 ========= ========= Income taxes $ 2,603 $ 550 ========= ========= See notes to condensed consolidated financial statements. </TABLE>
<TABLE> <CAPTION> P.A.M. TRANSPORTATION SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited) (in thousands) - ------------------------------------------------------------------------------------------------------------------------------------ Accumulated Additional Other Other Common Stock Paid-In Comprehensive Comprehensive Treasury Retained Shares Amount Capital Income Income Stock Earnings Total - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> BALANCE AT DECEMBER 31, 2004 11,303 $113 $76,050 $1,151 $91,229 $168,543 Components of comprehensive income: Net income $ 8,796 8,796 8,796 Other comprehensive income- Unrealized gain on hedge, net of tax of $168 244 244 244 Unrealized gain on marketable securities, net of tax of $134 195 195 195 -------- Total comprehensive income $ 9,235 ======== Treasury stock repurchases (600) $(10,023) (10,023) Exercise of stock options- shares issued including tax benefits 41 379 379 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT SEPTEMBER 30, 2005 10,744 $113 $76,429 $1,590 $(10,023) $100,025 $168,134 ==================================================================================================================================== See notes to condensed consolidated financial statements. </TABLE>
P.A.M. TRANSPORTATION SERVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2005 NOTE A: BASIS OF PRESENTATION - ------------------------------ The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In management's opinion, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the nine-month period ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the consolidated financial statements and the footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2004. NOTE B: DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES - ---------------------------------------------------------------- Effective February 28, 2001, the Company entered into an interest rate swap agreement on a notional amount of $15,000,000. The pay fixed rate under the swap is 5.08%, while the receive floating rate is "1-month" LIBOR. This interest rate swap agreement terminates on March 2, 2006. Effective May 31, 2001, the Company entered into an interest rate swap agreement on a notional amount of $5,000,000. The pay fixed rate under the swap is 4.83%, while the receive floating rate is "1-month" LIBOR. This interest rate swap agreement terminates on June 2, 2006. The Company designates both of these interest rate swaps as cash flow hedges of its exposure to variability in future cash flows resulting from interest payments indexed to "1-month" LIBOR. Changes in future cash flows from the interest rate swaps will offset changes in interest rate payments on the first $20,000,000 of the Company's current revolving credit facility or future "1-month" LIBOR based borrowings that reset on the last London Business Day prior to the start of the next interest period. The hedge locks the interest rate at 5.08% or 4.83% plus the pricing spread (currently 1.15%) for the notional amounts of $15,000,000 and $5,000,000, respectively. These interest rate swap agreements meet the specific hedge accounting criteria. The measurement of hedge effectiveness is based upon a comparison of the floating-rate leg of the swap and the hedged floating-rate cash flows on the underlying liability. The effective portion of the cumulative gain or loss has been reported as a component of accumulated other comprehensive income in shareholders' equity and will be reclassified into current earnings by June 2, 2006, the latest termination date for all current swap agreements. The December 31, 2004 balance of the net after tax deferred hedging loss in accumulated other comprehensive income ("AOCI") related to these swap agreements was approximately $301,000 and the ending balance as of September 30, 2005 was approximately $57,000. The change in AOCI related to these swap agreements during the current year was approximately $244,000. As of September 30, 2005 the fair value of approximately $96,000 is included in accrued liabilities in the accompanying consolidated financial statements. Ineffectiveness related to these hedges was not significant. In July 2001, the Company entered into an agreement to obtain price protection and reduce a portion of our exposure to fuel price fluctuations. Under this agreement, we were obligated to purchase a minimum amount of diesel fuel per month, with a price protection component, for the six month period ended February 28, 2002. The agreement also provided that if during the twelve-month period commencing January 2005, the average NY MX HO is below $.58 per gallon, we will be obligated to pay the contract holder the difference between $.58 and the average NY MX HO price for such month, multiplied by 1,000,000 gallons. During September 2005, the average NY MX HO price was $1.796. The value of the agreement is periodically adjusted to fair value, as determined by obtaining an offer from the contract holder of the dollar amount required to terminate all future liability under the contract, and as of September 30, 2005 the estimated fair value of $125,000 is included in accrued liabilities in the accompanying consolidated financial statements. For the three and nine month period ended September 30, 2005 an adjustment of $125,000 and $375,000, respectively was made to reflect the decline in fair value of the agreement which had the effect of reducing operating supplies expense and other current liabilities each by $125,000 and $375,000 during each respective period in the accompanying consolidated financial statements. NOTE C: RECENT ACCOUNTING PRONOUNCEMENTS - ----------------------------------------- In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3 ("SFAS No. 154"). SFAS No. 154 requires retrospective application to prior periods' financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This Statement applies to all voluntary changes in accounting principle as well as to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS No. 154 further requires a change in depreciation, amortization or depletion method for long-lived, non-financial assets to be accounted for as a change in accounting estimate effected by a change in accounting principle. Corrections of errors in the application of accounting principles will continue to be reported by retroactively restating the affected financial statements. The provisions of this Statement are effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. Adoption of this statement is not expected to have a material effect on the Company's consolidated financial statements. In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations- an interpretation of FASB Statement No. 143 ("FIN 47"). FIN 47 clarifies the term conditional asset retirement obligation as used in Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, and requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated. Any uncertainty about the amount and/or timing of future settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective for fiscal years ending after December 15, 2005. Adoption of this statement is not expected to have a material effect on the Company's consolidated financial statements. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123(R) , Share-Based Payment, ("SFAS No. 123(R)") which replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123(R) requires compensation costs relating to share-based payment transactions be recognized in financial statements. The pro forma disclosure previously permitted under SFAS No. 123 will no longer be an acceptable alternative to recognition of expenses in the financial statements. SFAS No. 123(R) was originally to be effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005, with early adoption encouraged. In April 2005, the Securities and Exchange Commission announced the adoption of a new rule that amends the effective date of SFAS No. 123(R). The effective date of the new standard under these new rules for our consolidated financial statements is January 1, 2006. Management is currently evaluating the possible future impact on the Company's financial position and results of operations. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, Exchanges of Nonmonetary Assets-an amendment to APB Opinion No. 29 ("SFAS No. 153"). This statement amends Accounting Principles Board Opinion No. 29 ("APB No. 29") to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. Adoption of this statement is not expected to have a material effect on the Company's consolidated financial statements. NOTE D: MARKETABLE SECURITIES - ------------------------------ The Company accounts for its marketable securities in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS No. 115"). SFAS No. 115 requires companies to classify their investments as either trading, available-for-sale or held-to-maturity. The Company's investments in marketable securities are classified as available-for-sale and consist of equity securities. Management determines the appropriate classification of these securities at the time of purchase and re-evaluates such designation as of each balance sheet date. During the first nine months of 2005 there were no sales or reclassifications of marketable securities. These securities are carried at fair value, with the unrealized gains and losses, net of tax, included as a component of accumulated other comprehensive income in shareholders' equity. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in non-operating income. Realized gains and losses, and declines in value judged to be other-than-temporary on available-for-sale securities, if any, are included in the determination of net income as gains (losses) on the sale of securities. As of September 30, 2005, these equity securities had a combined original cost of approximately $7,629,000 and a combined fair market value of approximately $10,406,000. For the nine months ended September 30, 2005, the Company had net unrealized gains in market value of approximately $195,000, net of deferred income taxes. These securities had gross unrealized gains of approximately $3,030,000 and gross unrealized losses of approximately $253,000. As of September 30, 2005, the total unrealized gain, net of deferred income taxes, in accumulated other comprehensive income was approximately $1,647,000. NOTE E: STOCK BASED COMPENSATION - --------------------------------- The Company adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation: <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, 2005 2004 2005 2004 ------- ------- ------- ------- (in thousands, except per share data) <S> <C> <C> <C> <C> Net income $ 2,213 $ 3,148 $ 8,796 $ 8,826 Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (74) (74) (222) (222) ------- ------- ------- ------- Pro forma net income $ 2,139 $ 3,074 $ 8,574 $ 8,604 ======= ======= ======= ======= Earnings per share: Basic - as reported $ .20 $ .28 $ .79 $ .78 Basic - pro forma $ .20 $ .27 $ .77 $ .76 Diluted - as reported $ .20 $ .28 $ .79 $ .78 Diluted - pro forma $ .20 $ .27 $ .77 $ .76 </TABLE>
NOTE F: SEGMENT INFORMATION - ---------------------------- The Company considers the guidance provided by Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS No. 131"), in its identification of operating segments. The Company has determined that it has a total of eight operating segments whose primary operations can be characterized as either Truckload Services or Brokerage and Logistics Services, however in accordance with the aggregation criteria provided by SFAS No. 131 the Company has determined that the operations of the eight operating segments can be aggregated into a single reporting segment, motor carrier operations. Truckload Services revenues and Brokerage and Logistics Services revenues, each before fuel surcharges, for the three and nine months ending September 30, 2005 and 2004 were as follows: <TABLE> <CAPTION> Three Months Ended September 30, Nine Months Ended September 30, 2005 2004 2005 2004 -------------- -------------- --------------- --------------- Amount % Amount % Amount % Amount % ------- ----- ------- ----- -------- ----- -------- ----- (in thousands, except percentage data) <S> <C> <C> <C> <C> <C> <C> <C> <C> Truckload Services revenues (1) $69,437 87.8 $64,925 86.3 $212,951 87.8 $200,252 86.3 Brokerage and Logistics Services revenues (1) 9,625 12.2 10,297 13.7 29,541 12.2 31,714 13.7 ------- ----- ------- ----- -------- ----- -------- ----- Total revenues (1) $79,062 100.0 $75,222 100.0 $242,492 100.0 $231,966 100.0 ======= ===== ======= ===== ======== ===== ======== ===== - --------------------------- (1) Before fuel surcharges. </TABLE> NOTE G: TREASURY STOCK - ----------------------- On April 11, 2005, the Company announced that its Board of Directors had authorized the Company to repurchase up to 600,000 shares of its common stock during the six month period ending October 11, 2005. All 600,000 shares of common stock authorized under this plan have been repurchased as of September 30, 2005 as remaining purchases totaling 154,200 shares were made during the three month period ending September 30, 2005. On September 6, 2005, the Company announced that its Board of Directors had authorized the Company to extend the stock repurchase program until September 6, 2006 and to include up to an additional 900,000 shares of its common stock. During the three months ended September 30, 2005, the Company has made no purchases under the extended program. The Company accounts for Treasury stock using the cost method and as of September 30, 2005, 600,000 shares were held in the treasury at an aggregate cost of approximately $10,023,000. NOTE H: COMPREHENSIVE INCOME - ----------------------------- Comprehensive income was comprised of net income plus or minus market value adjustments related to our interest rate swap agreements and marketable securities. The components of comprehensive income were as follows: <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, 2005 2004 2005 2004 ---- ---- ---- ---- (in thousands) <S> <C> <C> <C> <C> Net income $ 2,213 $ 3,148 $ 8,796 $ 8,826 Other comprehensive income (loss): Reclassification adjustment for losses (gains) on derivative instruments included in net income accounted for as hedges, net of income taxes 51 111 193 349 Change in fair value of interest rate swap agreements, net of income taxes 18 (84) 51 (10) Change in fair value of marketable securities, net of income taxes 139 74 195 65 ------- ------- ------- ------- Total comprehensive income $ 2,421 $ 3,249 $ 9,235 $ 9,230 ======= ======= ======= ======= </TABLE>
PART I - FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING INFORMATION - ---------------------------- Certain information included in this Quarterly Report on Form 10-Q constitutes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may relate to expected future financial and operating results or events, and are thus prospective. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Potential risks and uncertainties include, but are not limited to, excess capacity in the trucking industry; surplus inventories; recessionary economic cycles and downturns in customers' business cycles; increases or rapid fluctuations in fuel prices, interest rates, fuel taxes, tolls, license and registration fees; the resale value of the Company's used equipment and the price of new equipment; increases in compensation for and difficulty in attracting and retaining qualified drivers and owner-operators; increases in insurance premiums and deductible amounts relating to accident, cargo, workers' compensation, health, and other claims; unanticipated increases in the number or amount of claims for which the Company is self insured; inability of the Company to continue to secure acceptable financing arrangements; seasonal factors such as harsh weather conditions that increase operating costs; competition from trucking, rail, and intermodal competitors including reductions in rates resulting from competitive bidding; the ability to identify acceptable acquisition candidates, consummate acquisitions, and integrate acquired operations; a significant reduction in or termination of the Company's trucking service by a key customer; and other factors, including risk factors, referred to from time to time in filings made by the Company with the Securities and Exchange Commission. The Company undertakes no obligation to update or clarify forward-looking statements, whether as a result of new information, future events or otherwise. CRITICAL ACCOUNTING POLICIES - ---------------------------- The Company's management makes estimates and assumptions in preparing the consolidated financial statements that affect reported amounts and disclosures therein. In the opinion of management, the accounting policies that generally have the most significant impact on the financial position and results of operations of the Company include: Accounts Receivable. We continuously monitor collections and payments from our customers, third parties and vendors and maintain a provision for estimated credit losses based upon our historical experience and any specific collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Property and equipment. Management must use its judgment in the selection of estimated useful lives and salvage values for purposes of depreciating tractors and trailers which in some cases do not have guaranteed residual values. Estimates of salvage value at the expected date of trade-in or sale are based on the expected market values of equipment at the time of disposal which, in many cases include guaranteed residual values by the manufacturers. Self Insurance. The Company is self-insured for health and workers' compensation benefits up to certain stop-loss limits. Such costs are accrued based on known claims and an estimate of incurred, but not reported (IBNR) claims. IBNR claims are estimated using historical lag information and other data either provided by outside claims administrators or developed internally. This estimation process is subjective, and to the extent that future actual results differ from original estimates, adjustments to recorded accruals may be necessary. Revenue Recognition. Revenue is recognized in full upon completion of delivery to the receiver's location. For freight in transit at the end of a reporting period, the Company recognizes revenue prorata based on relative transit miles completed as a portion of the estimated total transit miles. Expenses are recognized as incurred. Prepaid Tires. Tires purchased with revenue equipment are capitalized as a cost of the related equipment. Replacement tires are included in prepaid expenses and deposits and are amortized over a 24-month period. Costs related to tire recapping are expensed when incurred. Income Taxes. Significant management judgment is required to determine the provision for income taxes and to determine whether deferred income taxes will be realized in full or in part. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. When it is more likely that all or some portion of specific deferred income tax assets will not be realized, a valuation allowance must be established for the amount of deferred income tax assets that are determined not to be realizable. A valuation allowance for deferred income tax assets has not been deemed to be necessary due to the Company's profitable operations. Accordingly, if the facts or financial circumstances were to change, thereby impacting the likelihood of realizing the deferred income tax assets, judgment would need to be applied to determine the amount of valuation allowance required in any given period. Business Segment and Concentrations of Credit Risk. The Company operates in one reporting segment, motor carrier operations. The Company provides transportation services to customers throughout the United States and portions of Canada and Mexico. The Company performs ongoing credit evaluations and generally does not require collateral from its customers. The Company maintains reserves for potential credit losses. In view of the concentration of the Company's revenues and accounts receivable among a limited number of customers within the automobile industry, the financial health of this industry is a factor in the Company's overall evaluation of accounts receivable. Business Combinations and Goodwill. Upon acquisition of an entity, the cost of the acquired entity must be allocated to assets and liabilities acquired. Identification of intangible assets, if any, that meet certain recognition criteria is necessary. This identification and subsequent valuation requires significant judgments. The carrying value of goodwill is tested annually and as of December 31, 2004 the Company determined that there was no impairment. BUSINESS OVERVIEW - ----------------- The Company's administrative headquarters are in Tontitown, Arkansas. From this location, we manage operations conducted through wholly owned subsidiaries based in various locations around the United States and Canada. The operations of these subsidiaries can generally be classified into either truckload services or brokerage and logistics services. Truckload services include those transportation services in which we utilize company owned tractors or owner-operator owned tractors. Brokerage and logistics services consist of services such as transportation and other value added services related to the transportation of freight which may or may not involve the usage of company owned or owner-operator owned equipment. Both our truckload operations and our brokerage/logistics operations have similar economic characteristics and are impacted by virtually the same economic factors as discussed elsewhere in this Report. All of the Company's operations are in the motor carrier reporting segment. For both operations, substantially all of our revenue is generated by transporting freight for customers and is predominantly affected by the rates per mile received from our customers, equipment utilization, and our percentage of non-compensated miles. These aspects of our business are carefully managed and efforts are continuously underway to achieve favorable results. For both the three and nine month period ended September 30, 2005, truckload services revenues, excluding fuel surcharges, represented 87.8% of total revenues, excluding fuel surcharges, with remaining revenues, excluding fuel surcharges, being generated by our brokerage and logistics services. For both the three and nine month period ended September 30, 2004, truckload services revenues, excluding fuel surcharges, represented 86.3% of total revenues, excluding fuel surcharges, with remaining revenues, excluding fuel surcharges, being generated by our brokerage and logistics services. The main factors that impact our profitability on the expense side are costs incurred in transporting freight for our customers. Currently our most challenging costs include fuel, driver recruitment, training, wage and benefit costs, independent broker costs (which we record as purchased transportation), insurance, and maintenance and capital equipment costs. In discussing our results of operations we use revenue, before fuel surcharge, (and fuel expense, net of surcharge), because management believes that eliminating the impact of this sometimes volatile source of revenue allows a more consistent basis for comparing our results of operations from period to period. During the three and nine months ending September 30, 2005, approximately $9.4 million and $23.2 million, respectively, of the Company's total revenue was generated from fuel surcharges. For the three and nine months ending September 30, 2004, approximately $3.9 million and $9.5 million, respectively, of the Company's total revenue was generated from fuel surcharges. We also discuss certain changes in our expenses as a percentage of revenue, before fuel surcharge, rather than absolute dollar changes. We do this because we believe the high variable cost nature of certain expenses makes a comparison of changes in expenses as a percentage of revenue more meaningful than absolute dollar changes. RESULTS OF OPERATIONS - TRUCKLOAD SERVICES - ------------------------------------------ The following table sets forth, for truckload services, the percentage relationship of expense items to operating revenues, before fuel surcharges, for the periods indicated. Operating supplies expense, which includes fuel costs, are shown net of fuel surcharges. <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, 2005 2004 2005 2004 ---- ---- ---- ---- <S> <C> <C> <C> <C> Operating revenues, before fuel surcharge 100.0% 100.0% 100.0% 100.0% ------ ------ ------ ------ Operating expenses: Salaries, wages, and benefits 42.4 42.4 42.8 43.1 Operating supplies and expenses (1) 26.6 23.6 24.8 23.4 Rent and purchased transportation 1.2 0.5 1.0 0.5 Depreciation and amortization 11.0 11.7 10.7 11.2 Operating taxes and licenses 5.6 5.7 5.6 5.8 Insurance and claims 5.2 5.9 5.7 5.9 Communications and utilities 0.9 0.9 0.9 0.9 Other 2.1 0.9 1.8 1.6 (Gain) loss on sale or disposal of property (0.1) 0.5 0.0 0.3 ------- ------ ------ ------ Total operating expenses 94.9 92.1 93.3 92.7 ------- ------ ------ ------ Operating income 5.1 7.9 6.7 7.3 Non-operating income 0.2 0.2 0.2 0.1 Interest expense (0.5) (0.6) (0.5) (0.5) ------- ------ ------ ------ Income before income taxes 4.8% 7.5% 6.4% 6.9% ------- ------ ------ ------ - ----------------------------- (1) Net of fuel surcharges. </TABLE> THREE MONTHS ENDED SEPTEMBER 30, 2005 VS. THREE MONTHS ENDED SEPTEMBER 30, 2004 For the quarter ended September 30, 2005, truckload services revenues, before fuel surcharges, increased 6.9% to $69.4 million as compared to $64.9 million for the quarter ended September 30, 2004. The increase was due to a 7.5% increase in the average rate per total mile from $1.15 during the third quarter of 2004 to $1.23 during the third quarter of 2005. Operating supplies and expenses increased from 23.6% of revenues, before fuel surcharges, in the third quarter of 2004 to 26.6% of revenues, before fuel surcharges in the third quarter of 2005. The increase relates to an increase in fuel costs resulting from a 39.3% increase in the average price per gallon paid by the Company during the third quarter of 2005 as compared to the third quarter of 2004. During periods of rising fuel prices the Company is often able to recoup at least a portion of the increase through fuel surcharges passed along to its customers. Fuel costs, net of fuel surcharges, increased to $12.5 million in the third quarter of 2005 from $10.0 million in the third quarter of 2004. Rent and purchased transportation increased from 0.5% of revenues, before fuel surcharges, in the third quarter of 2004 to 1.2% of revenues, before fuel surcharges in the third quarter of 2005. The increase relates primarily to an increase in amounts paid to third party transportation companies for intermodal services. Depreciation and amortization decreased from 11.7% of revenues, before fuel surcharges, in the third quarter of 2004 to 11.0% of revenues, before fuel surcharges, in the third quarter of 2005. This decrease as a percentage of revenues is the result of the interaction of higher revenues as a result of an increased rate per mile charged to customers and the fixed cost nature of depreciation expense. Insurance and claims decreased from 5.9% of revenues, before fuel surcharges, in the third quarter of 2004 to 5.2% of revenues, before fuel surcharges, in the third quarter of 2005. The decrease was the result of renegotiations with one of the Company's insurance providers to change the method of determining the Company's auto liability insurance premiums. Previously, the Company's auto liability premiums were determined using a specified rate per one hundred dollars of revenue including fuel surcharges. This method had the unintended consequence of penalizing the Company with increased insurance costs solely from passing increased fuel costs along to its customers in the form of fuel surcharges. The method of determining the Company's auto liability premium is now based on the number of miles traveled instead of revenue generated. Other expenses increased from .9% of revenues, before fuel surcharges, in the third quarter of 2004 to 2.1% of revenues, before fuel surcharges, in the third quarter of 2005. The increase relates to the recovery of approximately $635,000 during the third quarter of 2004 of amounts previously reserved by the Company pending the outcome of a lawsuit alleging that preferential transfers in the amount of $660,055 were made within the 90 day period preceding the bankruptcy petition date of a customer. The lawsuit was settled October 21, 2004 at a cost of approximately $25,000. Accordingly, the remaining amount of approximately $635,000 was removed as a liability on the Company's financial statements and the related expense originally recorded as bad debt expense was appropriately reduced during the third quarter of 2004. The increase was partially offset by a decrease in amounts paid for advertising during the third quarter of 2005 as compared to the third quarter of 2004. The truckload services division operating ratio, which measures the ratio of operating expenses, net of fuel surcharges, to operating revenues, before fuel surcharges, increased to 94.9% for the third quarter of 2005 from 92.1% for the third quarter of 2004. NINE MONTHS ENDED SEPTEMBER 30, 2005 VS. NINE MONTHS ENDED SEPTEMBER 30, 2004 For the first nine months ended September 30, 2005, truckload services revenues, before fuel surcharges, increased 6.3% to $213.0 million as compared to $200.3 million for the nine months ended September 30, 2004. The increase was due to a 9.8% increase in the average rate per total mile from $1.12 during the first nine months of 2004 to $1.23 during the first nine months of 2005. The revenue growth attributable to the increase in average rate per mile was partially offset by a 2.9% reduction in total miles traveled from approximately 178,957,000 during the first nine months of 2004 to approximately 173,782,000 miles during the first nine months of 2005. Salaries, wages and benefits decreased from 43.1% of revenues, before fuel surcharges, in the first nine months of 2004 to 42.8% of revenues, before fuel surcharges, in the first nine months of 2005. The decrease relates primarily to a decrease in driver lease expense as the average number of owner operators under contract decreased from 95 in the first nine months of 2004 to 70 in the first nine months of 2005. The decrease associated with driver lease expense was partially offset by an increase in amounts paid to the corresponding company driver replacement, and in other costs normally absorbed by the owner operator such as repairs and fuel. Operating supplies and expenses increased from 23.4% of revenues, before fuel surcharges, in the first nine months of 2004 to 24.8% of revenues, before fuel surcharges, in the first nine months of 2005. The primary reason for the increase relates to an increase in fuel costs resulting from a 34.7% increase in the average price per gallon paid by the Company during the first nine months of 2005 as compared to the first nine months of 2004. During periods of rising fuel prices the Company is often able to recoup at least a portion of the increase through fuel surcharges passed along to its customers. Fuel costs, net of fuel surcharges, increased to $35.6 million in the first nine months of 2005 from $30.6 million in the first nine months of 2004. Fuel costs were also affected by the replacement of owner operators with company drivers as discussed above. Rent and purchased transportation increased from 0.5% of revenues, before fuel surcharges, in the first nine months of 2004 to 1.0% of revenues, before fuel surcharges in the first nine months of 2005. The increase relates primarily to an increase in amounts paid to third party transportation companies for intermodal services. Depreciation and amortization decreased from 11.2% of revenues, before fuel surcharges, in the first nine months of 2004 to 10.7% of revenues, before fuel surcharges, in the first nine months of 2005. This decrease as a percentage of revenues is the result of the interaction of higher revenues as a result of an increased rate per mile charged to customers and the fixed cost nature of depreciation expense. Other expenses increased from 1.6% of revenues, before fuel surcharges, in the first nine months of 2004 to 1.8% of revenues, before fuel surcharges, in the first nine months of 2005. The increase relates to the recovery of approximately $635,000 during the third quarter of 2004 of amounts previously reserved by the Company pending the outcome of a lawsuit alleging that preferential transfers in the amount of $660,055 were made within the 90 day period preceding the bankruptcy petition date of a customer. The lawsuit was settled October 21, 2004 at a cost of approximately $25,000. Accordingly, the remaining amount of approximately $635,000 was removed as a liability on the Company's financial statements and the related expense originally recorded as bad debt expense was appropriately reduced during the third quarter of 2004. The increase was partially offset by a decrease in amounts paid for advertising during the first nine months of 2005 as compared to the first nine months of 2004. The truckload services division operating ratio, which measures the ratio of operating expenses, net of fuel surcharges, to operating revenues, before fuel surcharges, increased to 93.3% for the first nine months of 2005 from 92.7% for the first nine months of 2004. RESULTS OF OPERATIONS - LOGISTICS AND BROKERAGE SERVICES - -------------------------------------------------------- The following table sets forth, for logistics and brokerage services, the percentage relationship of expense items to operating revenues, before fuel surcharges, for the periods indicated. Brokerage service operations occur specifically in certain divisions; however, brokerage operations occur throughout the Company in similar operations having substantially similar economic characteristics. Rent and purchased transportation, which includes costs paid to third party carriers, are shown net of fuel surcharges. <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, 2005 2004 2005 2004 ---- ---- ---- ---- <S> <C> <C> <C> <C> Operating revenues, before fuel surcharge 100.0% 100.0% 100.0% 100.0% ------ ------ ------ ------ Operating expenses: Salaries, wages, and benefits 5.4 5.6 5.2 5.4 Operating supplies and expenses 0.0 0.0 0.0 0.0 Rent and purchased transportation (1) 87.1 87.4 87.6 87.8 Depreciation and amortization 0.2 0.3 0.3 0.3 Operating taxes and licenses 0.0 0.0 0.0 0.0 Insurance and claims 0.1 0.1 0.1 0.1 Communications and utilities 0.4 0.4 0.4 0.4 Other 2.1 1.5 1.7 1.5 (Gain) loss on sale or disposal of property 0.0 0.0 0.0 0.0 ------ ------ ------ ------ Total operating expenses 95.3 95.3 95.3 95.5 ------ ------ ------ ------ Operating income 4.7 4.7 4.7 4.5 Non-operating income 0.0 0.0 0.0 0.0 Interest expense (0.6) (0.7) (0.6) (0.7) ------ ------ ------ ------ Income before income taxes 4.1% 4.0% 4.1% 3.8% ------ ------ ------ ------ - ----------------------------- (1) Net of fuel surcharges. </TABLE> THREE MONTHS ENDED SEPTEMBER 30, 2005 VS. THREE MONTHS ENDED SEPTEMBER 30, 2004 For the quarter ended September 30, 2005, logistics and brokerage services revenues, before fuel surcharges, decreased 6.5% to $9.6 million as compared to $10.3 million for the quarter ended September 30, 2004. The decrease was primarily due to a 26.3% decrease in the number of loads serviced during the third quarter of 2005 as compared to the third quarter of 2004. The decrease was partially offset by an increase in the average revenue collected per load resulting from increased fees charged by the Company. The logistics and brokerage services division operating ratio, which measures the ratio of operating expenses, net of fuel surcharges, to operating revenues, before fuel surcharges, remained at 95.3% for both periods compared. NINE MONTHS ENDED SEPTEMBER 30, 2005 VS. NINE MONTHS ENDED SEPTEMBER 30, 2004 For the nine months ended September 30, 2005, logistics and brokerage services revenues, before fuel surcharges, decreased 6.9% to $29.5 million as compared to $31.7 million for the nine months ended September 30, 2004. The decrease was primarily due to a 20.8% decrease in the number of loads serviced during the first nine months of 2005 as compared to the first nine months of 2004. The decrease was partially offset by an increase in the average revenue collected per load resulting from increased fees charged by the Company. The logistics and brokerage services division operating ratio, which measures the ratio of operating expenses, net of fuel surcharges, to operating revenues, before fuel surcharges, decreased to 95.3% for the first nine months of 2005 from 95.5% for the first nine months of 2004. RESULTS OF OPERATIONS - COMBINED SERVICES - ----------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, 2005 VS. NINE MONTHS ENDED SEPTEMBER 30, 2004 Net income for all divisions was $8.8 million, or 3.6% of revenues, before fuel surcharge in the first nine months of 2005 as compared to $8.8 million, or 3.8% of revenues, before fuel surcharge in the first nine months of 2004. Net income for the nine months compared remained constant, however basic and diluted net income per share increased to $.79 in the first nine months of 2005 from $.78 in the first nine months of 2004. The increase was the result of a decrease in average shares outstanding due to treasury stock repurchases. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The growth of our business has required, and will continue to require, a significant investment in new revenue equipment. Our primary sources of liquidity have been funds provided by operations, proceeds from the sales of revenue equipment, issuances of equity securities, and borrowings under our line of credit. During the first nine months of 2005, the Company generated $23.1 million of cash from operating activities. Investing activities used $25.1 million in cash in the first nine months of 2005. Financing activities used $8.7 million in the first nine months of 2005. Our primary use of funds is for the purchase of revenue equipment. We typically use our existing lines of credit, proceeds from the sale or trade of equipment, and cash flows from operations to finance capital expenditures and repay long-term debt. During the first nine months of 2005, we utilized cash on hand and our lines of credit to finance revenue equipment purchases of approximately $39.3 million. Occasionally we finance the acquisition of revenue equipment through installment notes with fixed interest rates and terms ranging from 36 to 48 months, however as of September 30, 2005, we had no outstanding indebtedness under such installment notes. In order to maintain our tractor fleet count it is often necessary to purchase replacement tractors and place them in service before trade units are removed from service. The timing difference created during this process often requires the Company to pay for new units without any reduction in price for trade units. In this situation, the Company later receives payment for the trade units as they are delivered to the equipment vendor and have passed vendor inspection. During the nine months ended September 30, 2005, the Company received approximately $8.9 million for tractors delivered for trade and expects to receive approximately $9.9 million during the remainder of the year. During the remainder of 2005, we expect to purchase approximately 177 new tractors and approximately 225 new trailers while continuing to sell or trade older equipment, which we expect to result in net capital expenditures of approximately $14.9 million. Management believes we will be able to finance our near term needs for working capital over the next twelve months, as well as acquisitions of revenue equipment during such period, with cash balances, cash flows from operations, and borrowings believed to be available from financing sources. We will continue to have significant capital requirements over the long-term, which may require us to incur debt or seek additional equity capital. The availability of additional capital will depend upon prevailing market conditions, the market price of our common stock and several other factors over which we have limited control, as well as our financial condition and results of operations. Nevertheless, based on our recent operating results, current cash position, anticipated future cash flows, and sources of financing that we expect will be available to us, we do not expect that we will experience any significant liquidity constraints in the foreseeable future. We maintain a $20.0 million revolving line of credit and a $30.0 million revolving line of credit (Line A and Line B, respectively) with separate financial institutions. Amounts outstanding under Line A bear interest at LIBOR, as determined on the first day of each month, plus 1.40% (5.1% at September 30, 2005), are secured by our accounts receivable and mature on May 31, 2007. At September 30, 2005, $1.5 million, including $.3 million in letters of credit were outstanding under Line A with availability to borrow $18.5 million. Amounts outstanding under Line B bear interest at LIBOR, as determined on the last day of the previous month, plus 1.15% (4.83 at September 30, 2005), are secured by revenue equipment and mature on June 30, 2007. At September 30, 2005, $26.6 million, including $6.6 million in letters of credit were outstanding under Line B with availability to borrow $3.4 million. In an effort to reduce interest rate risk associated with these floating rate facilities, we have entered into interest rate swap agreements in an aggregate notional amount of $20.0 million. For additional information regarding the interest rate swap agreements, see Note B to the condensed consolidated financial statements. Trade accounts receivable at September 30, 2005 increased approximately $14.4 million from December 31, 2004. Certain of the Company's largest customers regularly schedule plant shutdowns for various periods during December and the volume of freight we ship is reduced during such scheduled shutdowns. This reduction in freight volume results in a reduction in accounts receivable at the end of each year. Prepaid expenses and deposits at September 30, 2005 decreased approximately $4.9 million as compared to December 31, 2004. The decrease reflects the amortization of prepaid tractor and trailer license fees and auto liability insurance premiums. In December 2004, approximately $3.0 million of the 2005 license fees and approximately $5.0 million of the 2005 auto liability insurance premiums were paid in advance. These prepaid expenses will be amortized to expense through the remainder of the year. Treasury stock at September 30, 2005 increased approximately $10.0 million as compared to December 31, 2004. This increase relates to the repurchase of 600,000 shares of the Companys common stock under its stock repurchase program. For additional information regarding the stock repurchase program, see Note G to the condensed consolidated financial statements. NEW ACCOUNTING PRONOUNCEMENTS - ----------------------------- See Note C to the condensed consolidated financial statements for a description of the most recent accounting pronouncements and their impact, if any, on the Company. Item 3. Quantitative and Qualitative Disclosures about Market Risk. - -------------------------------------------------------------------- Our primary market risk exposures include equity price risk, interest rate risk, and commodity price risk (the price paid to obtain diesel fuel for our tractors). The potential adverse impact of these risks and the general strategies we employ to manage such risks are discussed below. The following sensitivity analyses do not consider the effects that an adverse change in the overall economy may have nor do they consider additional actions we may take to mitigate our exposure to such changes. Actual results of changes in prices or rates may differ materially from the hypothetical results described below. EQUITY PRICE RISK We hold certain actively traded marketable equity securities which subjects the Company to fluctuations in the fair market value of its investment portfolio based on current market price. The recorded value of marketable equity securities increased to $10.4 million at September 30, 2005 from $8.8 million at December 31, 2004. The increase is primarily the result of additional purchases during the first nine months of 2005. A 10% decrease in the market price of our marketable equity securities would cause a corresponding 10% decrease in the carrying amounts of these securities, or approximately $1,040,000. For additional information with respect to the marketable equity securities, see Note D to our condensed consolidated financial statements. INTEREST RATE RISK Our two lines of credit each bear interest at a floating rate equal to LIBOR plus a fixed percentage. Accordingly, changes in LIBOR, which are effected by changes in interest rates, will affect the interest rate on, and therefore our costs under, the lines of credit. In an effort to manage the risks associated with changing interest rates, we entered into interest rate swap agreements effective February 28, 2001 and May 31, 2001, on notional amounts of $15,000,000 and $5,000,000, respectively. The "pay fixed rates" under the $15,000,000 and $5,000,000 swap agreements are 5.08% and 4.83%, respectively. The "receive floating rate" for both swap agreements is "1-month" LIBOR. These interest rate swap agreements terminate on March 2, 2006 and June 2, 2006, respectively. Assuming $20.0 million of variable rate debt was outstanding under Line "A" and not covered by the hedge agreement for a full fiscal year, a hypothetical 100 basis point increase in LIBOR would result in approximately $200,000 of additional interest expense, net of the effect of the swap agreements. For additional information with respect to the interest rate swap agreements, see Note B to our condensed consolidated financial statements. COMMODITY PRICE RISK Prices and availability of all petroleum products are subject to political, economic and market factors that are generally outside of our control. Accordingly, the price and availability of diesel fuel, as well as other petroleum products, can be unpredictable. Because our operations are dependent upon diesel fuel, significant increases in diesel fuel costs could materially and adversely affect our results of operations and financial condition. Based upon our 2004 fuel consumption, a 10% increase in the average annual price per gallon of diesel fuel would increase our annual fuel expenses by $5.6 million. In July 2001, the Company entered into an agreement to obtain price protection and reduce a portion of our exposure to fuel price fluctuations. Under this agreement, we were obligated to purchase a minimum amount of diesel fuel per month, with a price protection component, for the six month period ended February 28, 2002. The agreement also provided that if during the twelve-month period commencing January 2005, the average NY MX HO is below $.58 per gallon, we will be obligated to pay the contract holder the difference between $.58 and the average NY MX HO price for such month, multiplied by 1,000,000 gallons. During September 2005, the average NY MX HO price was $1.796. The value of the agreement is periodically adjusted to fair value, as determined by obtaining an offer from the contract holder of the dollar amount required to terminate all future liability under the contract, and as of September 30, 2005 the estimated fair value of $125,000 is included in accrued liabilities in the accompanying consolidated financial statements. For the three and nine month period ended September 30, 2005 an adjustment of $125,000 and $375,000, respectively was made to reflect the decline in fair value of the agreement which had the effect of reducing operating supplies expense and other current liabilities each by $125,000 and $375,000 during each respective period in the accompanying consolidated financial statements. For additional information with respect to this agreement, see Note B to our condensed consolidated financial statements. Item 4. Controls and Procedures. - --------------------------------- Evaluation of disclosure controls and procedures. In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), the Company's management evaluated, with the participation of the Company's President and Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2005. Based upon that evaluation of these disclosure controls and procedures, the President and Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures were effective as of September 30, 2005 so that material information relating to the Company, including its consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this quarterly report on Form 10-Q was being prepared. Changes in internal controls over financial reporting. There was no change in the Company's internal control over financial reporting that occurred during the quarter ended September 30, 2005 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION --------------------------- Item 1. Legal Proceedings. - --------------------------- The nature of the our business routinely results in litigation, primarily involving claims for personal injuries and property damage incurred in the transportation of freight. We believe that an unfavorable outcome in one or more of those cases would not have a material adverse effect on our financial condition. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. - --------------------------------------------------------------------- On April 11, 2005, the Company announced that its Board of Directors had authorized the Company to repurchase up to 600,000 shares of its common stock during the six month period ending October 11, 2005. On September 6, 2005, the Company announced that its Board of Directors had authorized the Company to extend the stock repurchase program until September 6, 2006 and to include up to an additional 900,000 shares of its common stock. The following table summarizes the Company's common stock repurchases during the third quarter of 2005 made pursuant to this authorization. No shares were purchased during the quarter other than through this program, and all purchases were made by or on behalf of the Company and not by any "affiliated purchaser". <TABLE> <CAPTION> Issuer Purchases of Equity Securities Maximum Number (or Approximate) Total Number of Dollar Value) of Total Number Shares (or Units) Shares (or Units) of Shares Average Price Purchased as Part of that May Yet Be (or Units) Paid per Share Publicly Announced Purchased Under the Period Purchased (or Unit) Plans or Programs Plans or Programs - ------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> July 1-31, 2005 - - - 154,200 August 1-31, 2005 154,200 $16.5796 154,200 - September 1-30, 2005 - - - 900,000 -------- -------- --------- Total 154,200 $16.5796 154,200 900,000 ======== ======== ========= </TABLE> Item 6. Exhibits. - ------------------ Exhibits required by Item 601 of Regulations S-K: 3.1 - Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of the Company's Form 10-Q filed on May 15, 2002.) 3.2 - Amended and Restated By-Laws of the Registrant (incorporated by reference to Exhibit 3.2 of the Company's Form 10-Q filed on May 15, 2002.) 11.1 - Statement Re: Computation of Diluted Earnings Per Share 31.1 - Rule 13a-14(a) Certification of Principal Executive Officer 31.2 - Rule 13a-14(a) Certification of Principal Financial Officer 32.1 - Section 1350 Certification of Chief Executive Officer 32.2 - Section 1350 Certification of Chief Financial Officer
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. P.A.M. TRANSPORTATION SERVICES, INC. Dated: November 7, 2005 By: /s/ Robert W. Weaver --------------------------------- Robert W. Weaver President and Chief Executive Officer (principal executive officer) Dated: November 7, 2005 By: /s/ Larry J. Goddard --------------------------------- Larry J. Goddard Vice President-Finance, Chief Financial Officer, Secretary and Treasurer (principal accounting and financial officer)
P.A.M. TRANSPORTATION SERVICES, INC. INDEX TO EXHIBITS TO FORM 10-Q Exhibit Number Exhibit Description - -------- --------------------------------------------------------- 3.1 Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of the Company's Form 10-Q filed on May 15, 2002.) 3.2 Amended and Restated By-Laws of the Registrant (incorporated by reference to Exhibit 3.2 of the Company's Form 10-Q filed on May 15, 2002.) 11.1 Statement Re: Computation of Diluted Earnings Per Share 31.1 Rule 13a-14(a) Certification of Principal Executive Officer 31.2 Rule 13a-14(a) Certification of Principal Financial Officer 32.1 Section 1350 Certification of Chief Executive Officer 32.2 Section 1350 Certification of Chief Financial Officer