-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Li3/xzT0Lo7XibUvBxtVPANA4C6VeRXFX8W6whIESPWyzDEFdc/vx3OD5U9AnhXr xSTt282K+OyCn18dDznHLQ== 0001000577-98-000006.txt : 19981116 0001000577-98-000006.hdr.sgml : 19981116 ACCESSION NUMBER: 0001000577-98-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIMON TRANSPORTATION SERVICES INC CENTRAL INDEX KEY: 0001000577 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 870545608 STATE OF INCORPORATION: NV FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27208 FILM NUMBER: 98748293 BUSINESS ADDRESS: STREET 1: 4646 SOUTH 500 WEST CITY: SALT LAKE CITY STATE: UT ZIP: 84123 BUSINESS PHONE: 8012689100 MAIL ADDRESS: STREET 1: P O BOX 26297 CITY: SALT LAKE CITY STATE: UT ZIP: 84126-0297 10-K 1 ANNUAL REPORT ON FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED For the Fiscal Year Ended September 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED). For the transition period from _____________ to ______________ Commission file number 0-27208 SIMON TRANSPORTATION SERVICES INC. (Exact name of registrant as specified in its charter) Nevada 87-0545608 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 5175 West 2100 South West Valley City, Utah 84120 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: 801/924-7000 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: $0.01 Par Value Class A Common Stock -------------------- 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant was $24,892,065 as of October 30, 1998 (based upon the $5.50 per share closing price on that date as reported by NASDAQ). In making this calculation the registrant has assumed, without admitting for any purpose, that all executive officers, directors, and holders of more than 5% of a class of outstanding common stock, and no other persons, are affiliates. As of October 30, 1998, the registrant had 5,231,083 shares of Class A Common Stock and 913,751 shares of Class B Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE: The information set forth under Part III, Items 10, 11, 12, and 13 of this Report is incorporated by reference from the registrant's definitive proxy statement for the 1998 annual meeting of stockholders that will be filed no later than November 30, 1998. Cross Reference Index The following cross reference index indicates the document and location of the information contained herein and incorporated by reference into the Form 10-K. Document and Location Part I Item 1 Business Pages 3 - 8 herein Item 2 Properties Page 9 herein Item 3 Legal Proceedings Page 9 herein Item 4 Submission of Matters to a Vote of Security Holders Page 9 herein Part II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters Page 10 herein Item 6 Selected Financial and Operating Data Page 11 herein Item 7 Management's Discussion and Analysis of Financial Pages 12 - 19 herein Condition and Results of Operations Item 8 Financial Statements and Supplementary Data Page 20 herein Item 9 Changes in and Disagreements with Accountants on Page 20 herein Accounting and Financial Disclosure Part III Item 10 Directors and Executive Officers of the Registrant Pages 2, 3 and 4 of Proxy Statement Item 11 Executive Compensation Pages 4, 5 and 6 of Proxy Statement Item 12 Security Ownership of Certain Beneficial Owners and Page 8 of Proxy Statement Management Item 13 Certain Relationships and Related Transactions Page 4 of Proxy Statement Part IV Item 14 Exhibits, Financial Statement Schedules and Reports on Pages 22 - 36 herein Form 8-K
This report contains "forward-looking" statements in paragraphs marked with an asterisk. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated. See "Management's Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement Regarding Forward-Looking Statements" for additional information and factors to be considered concerning forward-looking statements. PART I Item 1: BUSINESS The Company Simon Transportation is a rapidly-growing truckload carrier that specializes in temperature-controlled transportation services for major shippers in the food industry. Richard D. Simon founded the Company with one truck in 1955. Today Simon Transportation operates nationwide and in eight Canadian provinces from its strategically located headquarters in Salt Lake City, Utah, and terminals in Phoenix, Arizona; Fontana, California; Atlanta, Georgia; Katy, Texas; and Portland, Oregon. Simon Transportation Services Inc., a Nevada corporation, is a holding company organized in 1995, the sole business of which is to own 100% of the capital stock of Dick Simon Trucking, Inc., a Utah corporation. Dick Simon Trucking, Inc. was incorporated in 1972 and had operated as a sole proprietorship since 1955. Simon Transportation acquired all of the capital stock of Dick Simon Trucking, Inc. contemporaneously with the November 17, 1995 effective date of the Company's initial public offering. Prior to such time, Dick Simon Trucking, Inc. had elected to be taxed as an S corporation. References to the "Company" herein refer to the consolidated operations of Simon Transportation Services and Dick Simon Trucking. See "Selected Financial and Operating Data", "Management's Discussion and Analysis of Financial Condition and Results of Operations", and Consolidated Financial Statements. Strategy The Company has grown rapidly in recent years by adding revenue equipment to meet the service demands of new and existing customers and expanding core carrier partnerships. Management plans to continue the Company's growth by capitalizing on the trend among shippers to place increased reliance on a smaller number of financially stable, service-oriented truckload carriers. The key elements of the Company's strategy are: Food Industry Focus. Simon Transportation focuses on providing specialized service to sophisticated, high-volume customers in the food industry such as Albertson's, Campbell's Soup, Coca-Cola Foods, ConAgra, Kraft, Nestle, North American Logistics, Pillsbury, and Procter & Gamble. These customers seek nationwide transportation partners that understand the specialized needs of food industry shippers and offer the late-model equipment, experienced personnel, advanced technology, and geographic coverage to provide "continuous movement" of temperature-controlled and dry loads from processing or packaging plants to distribution centers and other destinations. Management believes the food industry is an attractive niche because it is generally less affected by economic cycles and many shippers require time-sensitive and specialized service that justifies a higher rate per mile. Core Carrier Partnerships. Simon Transportation has grown by establishing core carrier partnerships with high-volume, service sensitive shippers. Core carriers provide customers with consistent equipment availability and premium service such as time-definite pick-up and delivery, express time-in-transit, multiple delivery stops, and real-time access to load information through satellite-based tracking and communication systems and EDI capability. The Company also meets specialized customer requests for access to terminal facilities, stationing employees at customer locations, and dedicating equipment to specific traffic lanes. Management believes major shippers favor their core carrier "partners" during periods of reduced demand for truck service, and that the trend among major shippers to reduce the number of carriers used in favor of core carriers will continue.(*) Dedicated Fleets. Simon Transportation emphasizes dedicated fleet operations in which it offers round trip or continuous movement service to a shipper (or a shipper and one or more of its suppliers) by dedicating certain tractors and trailers exclusively to that shipper's needs. Dedicated service is desirable because the customers typically pay a round-trip rate per mile assuming that the truck will return empty and cover all loading, unloading, and pallet costs. The Company frequently is able to further enhance revenue per mile by locating a profitable load to cover unloaded segments. In addition, drivers prefer the predictable runs and priority treatment at shipping and receiving locations. Management intends to aggressively grow its dedicated fleet operations and expects this service niche to expand as shippers outsource transportation needs presently served by private carriage.(*) _________________________________ (*) "Forward-looking" statements. Modern Fleet. Simon Transportation intends to maintain modern tractor and trailer fleets. Reliable, late-model equipment promotes customer service and driver recruitment and retention by minimizing the delays caused by breakdowns and excessive maintenance. In addition, management believes that a practice of replacing tractors while under warranty will reduce expenses and permit the Company to take advantage of improvements in fuel economy and equipment technology.(*) Technology. Simon Transportation is an industry leader in technology and was the thirteenth carrier to offer a fleetwide Qualcomm satellite-based tracking and communication system. This system and EDI capability improve customer service and operating efficiency by offering the Company and customers real time access to load locations and advance warning of potential delivery delays. The Company's document imaging system allows prompt and simultaneous processing of payroll and billing in a paperless work environment. The Company's load optimization software has been implemented and is constantly updated to enhance service and profitability. Management believes shippers will continue to demand advanced technology of their core carriers and plans to respond to such requirements. (*) Operations The Company conducts a centralized dispatch and customer service operation at its Salt Lake City headquarters to offer the precision scheduling required by its customers. The operations center features a fully-integrated, computerized network of dispatch, customer service, and driver liaison personnel. Customer service representatives solicit and accept freight, quote rates, and serve as the primary contact with customers. After accepting a load, customer service representatives transfer the pick-up and delivery information to the computer screen of the appropriate load planner, who assigns the load to an available driver based upon the proximity of the trucks, scheduled "home time," and available hours-in-service. Dispatchers then use the Qualcomm satellite-based tracking and communication system to locate the position and availability status of equipment and notify the driver of pick-up and delivery requirements, route and fueling instructions, and other information. Upon the assignment of a load, the Company's proprietary software calculates the projected travel time from origin to destination and uses satellite position updates and driver communications to provide load progress reports at thirty-minute intervals. The system automatically advises the appropriate dispatcher and customer service representative if a load is behind schedule, and customers are able to use EDI to access information about load locations at any time. Management believes that these satellite and computer systems are crucial to satisfying the stringent service standards, such as 30-minute pick-up and delivery windows, demanded by shippers of their core carriers. Management measures the Company's efficiency through miles per tractor, empty miles percentage, revenue per mile, and revenue per tractor. Fleet productivity is tracked daily in the operations center, with actual progress matched against a monthly goal. All operations personnel have access to these statistics on a real time basis, and all participate in a cash bonus program for achieving certain fleetwide levels of miles per tractor per month, driver turnover, and revenue per mile. Customers and Marketing The Company's sales and marketing function is led by senior management and other sales professionals based in its Salt Lake City headquarters and near key customers. These sales personnel aggressively market Simon Transportation to food industry shippers as a customer-oriented provider of dependable, on-time service. The Company targets customers that seek financially stable, long-term transportation partners offering dependable equipment, satellite and EDI technologies, and premium service. This customer service philosophy has contributed to continuing demands for added equipment to expand service for existing shippers and establishing core carrier relationships with Albertson's, Campbell's Soup, Coca-Cola Foods, ConAgra, Kraft, Nestle, North American Logistics, Pillsbury, Procter & Gamble, and other major customers. Management intends to continue developing business with existing customers and attempting to add new core carrier relationships. The Company's top 5, 10, and 25 customers accounted for 33%, 47%, and 64% of revenue, respectively, during fiscal 1998, with Nestle (including Nestle's Stouffer's and Friskie's units) accounting for 11% of revenue. No other customer accounted for more than 10% of revenue during the fiscal year. _________________________________ (*) "Forward-looking" statements. Simon Transportation is a North American truck line that provides service to and from customer locations throughout the United States, in several Canadian provinces and Mexico. The Company does not maintain any foreign currency positions and therefore does not engage in any hedging transactions to manage foreign currency exposure. The Company's operations are strongest in the western United States and between points in the West to and from points in the East and Southeast. In addition to traditional for-hire service, management emphasizes the marketing of dedicated fleet and regional distribution services. Dedicated fleets generally receive compensation for all miles, and regional operations provide a stronger presence for driver recruiting. Management believes that these services offer consistent equipment utilization and predictable home-time for drivers. The Company has written contracts with substantially all of its customers. These contracts generally specify service standards and rates, eliminating the need for negotiating the rate for individual shipments. Although a contract typically runs for a specified term of at least one year, it generally may be terminated by either party upon 30 days' notice. Technology The Company uses computer and satellite technology to enhance efficiency and customer service in all aspects of its operations, and management believes the Company is among the industry leaders in applying advanced technology to improve transportation service. The Qualcomm OmniTRACSTM satellite-based tracking and communication system provides hourly updates of the position of each tractor and permits real time communication between operations personnel and every driver. As a result, dispatchers relay pick-up and delivery times, weather and road information, route and fueling directions, and other instructions without waiting for a driver to stop and call the Company. The Company's entire fleet has been equipped with the Qualcomm systems since 1992, making it the thirteenth carrier in the nation to install the units in 100% of its tractors. The Company's proprietary software also monitors load progress against projected delivery time every half-hour and warns the appropriate dispatcher and customer service representative if a load is behind schedule. This software also facilitates early routing toward each driver's home base by signaling dispatchers several days in advance of drivers' requested home-time dates. The Company's EDI capability permits customers to communicate directly via computer link to tender loads, receive load confirmation, check load status, and receive billing information. The Company's largest customers require EDI service from their core carriers, and more than 50% of the Company's revenue is generated by customers that actively use EDI. EDI not only improves customer service and communication, but also benefits the Company's cash flow through accelerated receivable collection. The Company further enhances its operations through its document imaging technology, which provides customer service representatives and other personnel (all of whom have computers) real-time access to freight bills, supplier invoices, and other information. Management believes that advanced technology will be required by an increasing number of large shippers as they reduce the number of carriers they use in favor of core carriers. The Company has designed a load optimization software program that allows customer service representatives to quote rates by automatically computing the range of acceptable rates between any two points, based upon the rates for all Simon Transportation loads in and out of the applicable region during the past year and the need for pallets, multiple stops, and other additional charges. The system then prioritizes the loads and identifies the optimal tractor to accept a load, based upon location, empty miles required, revenue per mile, remaining driver hours-in-service, maintenance scheduling, driver home time, and other factors. The Company's maintenance shops are fully computerized and paperless, and all maintenance, repair, and inspection records for each vehicle are instantly accessible. Drivers are able to monitor maintenance progress on computer screens located in the driver lounge. Year 2000 Compliance The Company has completed a review of each of its core systems to determine year 2000 (Y2K) compliance. The Company's billing, dispatch, EDI, fueling, payroll, telephone, vehicle maintenance, and yard and equipment inventory systems and all other critical hardware and software systems were designed to be Y2K compliant from inception. The Company is currently reviewing the Y2K compliance status of its facilities and equipment. The Company expects to complete this review and have taken actions toward making each non-core system Y2K compliant by June 1999. The Company relies on Qualcomm to provide the satellite tracking system necessary to track the location of its equipment, and to provide dispatch and routing information to its drivers. The Company has been informed that the software utilized by Qualcomm and the Company is fully Y2K compliant. The Company utilizes Comdata to transmit payroll funds to its drivers and to allow drivers to purchase fuel outside of the Company's terminal locations. The Company has been informed that Comdata expects to be fully Y2K compliant by June 1999. The Company also interacts with many of its vendors through electronic data interchange (EDI). Although the Company is Y2K compliant in its EDI applications, we cannot and do not guarantee the Y2K compliance of our business partners' systems. The Company has incurred internal staff costs necessary to review and further Y2K compliance of its core operating systems. Because the systems were designed to be Y2K compliant since inception, the costs have not had a material effect on the Company's financial position or results of operations. The Company will incur additional internal staff time to complete its compliance review of non-core systems embedded in facilities and equipment. These non-core systems include microcontrollers contained in tractor engines and other components, refrigeration units, and terminal facilities. The costs of such review are not expected to be incremental since they represent the redeployment of existing information technology resources. Because of the relatively young age of its facilities and equipment, the Company does not expect to find non-core systems that need to be replaced to further Y2K compliance. The Company anticipates that the risks related to its core and non-core systems will be mitigated by ongoing assessment and correction of the systems. The primary risk to operations is service disruption from third-party providers that supply satellite communication, telephone, fueling and financial services. Any disruption of these critical services would hinder the Company's ability to receive, process and track its freight or communicate with its customers and drivers. A failure of the satellite communication system could have a materially adverse effect on the Company's business and results of operations. The Company is relying on the contingency plan established by Qualcomm to prevent the interruption of business. As an additional backup, the Company plans to use its existing telephone systems to dispatch its equipment and provide support to its drivers in the event of a complete satellite system failure. In the event of EDI failures on the part of our customers, the Company plans to use its telephone and facsimile system to receive load tenders from its customers. The Company would switch to paper invoices for its customers unable to use EDI. Management believes that the Company's current state of readiness, the nature of the Company's business, and the availability of the contingency plans minimizes Y2K risks. Management does not foresee significant liability to third parties if the Company's systems are not Y2K compliant. Revenue Equipment Simon Transportation's equipment strategy is to operate modern tractors and trailers that help reduce parts, maintenance, and fuel costs, promote the reliable service customers demand from core carriers, and attract and retain drivers. The Company operates conventional tractors (engine-forward) equipped with electronic engines and Eaton transmissions. All Simon Transportation tractors are equipped with electronic engines, and most are covered by three-year, 500,000-mile engine warranties and lifetime transmission warranties. Most of the tractors also are equipped with the "condo" sleeper cabs preferred by drivers. The Company's practice is to trade or replace its tractors on a three-year cycle, and to trade or replace its trailers on a five-year cycle. Drivers and Other Personnel Driver hiring and retention are critical to the success of all trucking companies. Simon Transportation emphasizes driver satisfaction and has made significant investments to improve its drivers' employment experience. Drivers are selected in accordance with specific Company quality guidelines relating primarily to safety history, driving experience, road test evaluations, and other personnel evaluations, including physical examinations and mandatory drug testing. The Company offers competitive compensation, including mileage pay, and full participation in all employee benefit and profit-sharing plans. The Company uses proprietary software to warn dispatchers in advance of a driver's requested home time. Management believes it has promoted driver loyalty by assigning drivers to a single dispatcher, regardless of geographic area, awarding dedicated routes and regional distribution positions to senior, top-performing drivers, and educating customers concerning the need to treat drivers with respect. The truckload industry has experienced a shortage of qualified drivers. Strict DOT enforcement of hours-in-service limitations, mandatory drug and alcohol testing, and other safety measures have shrunk the available pool of drivers and increased the cost of recruiting and retention. The industry-wide driver shortage adversely affected the Company's operations during the 1998 fiscal year resulting in an unusually high number of tractors without drivers. The Company's driver turnover was 93% in fiscal 1998, measuring drivers after they are assigned a tractor. At September 30, 1998, Simon Transportation employed approximately 600 non-driver employees and approximately 1,800 drivers. The Company's employees have never been represented by or attempted to organize a union, and management believes it has a good relationship with the Company's employees. Safety and Insurance Simon Transportation emphasizes safety in all aspects of its operations. Its safety program includes: (i) initial orientation; (ii) a four-week to eight-week, on-the-road training program; (iii) 100% log monitoring; and (iv) progressive penalties for excessive speed. The Company has earned the highest DOT safety and fitness rating of "satisfactory," which most recently was extended on June 7, 1995. The Company carries primary and excess liability insurance coverage of $50 million, with a $100,000 deductible for personal injury and property damage. The Company's workers' compensation coverage also carries a $100,000 deductible, with no coverage limit. The Company's equipment is insured for fair market value, subject to deductibles of $25,000 for tractors and $10,000 for trailers, and cargo loss is covered to $200,000 with a $10,000 deductible. Effective November 1, 1998, the Company's equipment and cargo loss is insured subject to a "basket deductible" of $250,000 per occurrence. Management believes these coverages are adequate to cover reasonably anticipated claims. Competition The truckload segment of the trucking industry is highly competitive and fragmented, and no carrier or group of carriers dominates the temperature-controlled or dry van market. According to the September 1998 issue of Refrigerated Transporter, the five largest temperature-controlled carriers by revenue are Frozen Food Express Industries, C. R. England & Sons, Rocor International, Prime, Inc., and Ameritruck. The combined revenue reported for these five carriers comprises approximately 25% of the estimated $4 billion for-hire, temperature-controlled market. The proprietary fleet portion of the temperature-controlled market has been estimated at an additional $3 billion. The Company's 1998 fiscal year revenue constituted approximately two percent of the total market for temperature-controlled services and approximately four percent of the for-hire market. The Company competes with a number of other trucking companies, as well as private truck fleets used by shippers to transport their own products. The Company competes to a limited extent with rail and rail-truck intermodal service, but attempts to limit this competition by seeking service-sensitive freight. There are other trucking companies, including diversified carriers with large temperature-controlled fleets, possessing substantially greater financial resources and operating more equipment than the Company. Fuel Availability and Cost The Company actively manages its fuel costs by requiring drivers to fuel at Company terminals or, whenever possible en route, at service centers with which the Company has established volume purchasing arrangements. The Company controls fuel purchases by using its proprietary software and Qualcomm communications ability to schedule fueling stops and amounts purchased based upon fuel prices at locations on drivers' routes. The Company historically has been able to pass through most increases in fuel prices and taxes to customers in the form of higher rates or fuel surcharges. Regulation The Company is a common and contract motor carrier of general commodities. Historically, the Interstate Commerce Commission (the "ICC") and various state agencies regulated motor carriers' operating rights, accounting systems, mergers and acquisitions, periodic financial reporting, and other matters. In 1995, federal legislation preempted state regulation of prices, routes, and services of motor carriers and eliminated the ICC. Several ICC functions were transferred to the Department of Transportation (the "DOT"). Management does not believe that regulation by the DOT or by the states in their remaining areas of authority will have a material effect on the Company's operations. The Company's employee and independent contractor drivers also must comply with the safety and fitness regulations promulgated by the DOT, including those relating to drug and alcohol testing and hours of service. The Company's operations are subject to various federal, state, and local environmental laws and regulations, implemented principally by the EPA and similar state regulatory agencies, governing the management of hazardous wastes, other discharge of pollutants into the air and surface and underground waters, and the disposal of certain substances. These regulations extend to the above ground and underground fuel storage tanks located at each of the Company's terminal facilities. All of the Company's tanks are of double hull construction in accordance with EPA requirements and equipped with monitoring devices which constantly monitor for leakage. Management is not aware of any fuel spills or hazardous substance contamination on its properties and believes that its operations are in material compliance with current laws and regulations. Item 2. PROPERTIES Simon Transportation operates terminals and driver recruitment offices at five locations. The Company's headquarters and primary terminal is located on fifty-five acres near the intersection of Interstates 15 and 80 in Salt Lake City, Utah. This facility includes a 60,000 square foot office building housing all operations and administrative personnel and maintenance facilities and a driver center covering approximately 97,000 square feet. The Company's additional terminal and driver recruitment facilities include owned locations in Phoenix, Arizona; Fontana, California; and Atlanta, Georgia; and leased locations in Katy, Texas; and Portland, Oregon. The Company leases trailer drop yards at Tulare, California and various customer locations. All terminals have modern fuel facilities with environmental monitoring equipment. The Company completed construction of its new headquarters, shop, terminal, and driver center during fiscal year 1998. The available acreage will accommodate future expansion, and the facility has been designed so that additions can be constructed to serve the Company's foreseeable future needs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity." Item 3. LEGAL PROCEEDINGS The Company from time to time is a party to litigation arising in the ordinary course of its business, substantially all of which involves claims for personal injury and property damage incurred in the transportation of freight. The Company presently is not a party to any legal proceeding other than litigation arising from vehicle accidents, and management is not aware of any claims or threatened claims that reasonably would be expected to exceed insurance limits or have a materially adverse effect upon the Company's operations or financial position. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year ended September 30, 1998, no matters were submitted to a vote of security holders. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Price Range of Common Stock. The Company's Class A Common Stock has been traded on the NASDAQ National Market under the NASDAQ symbol SIMN, since November 17, 1995, the date of the Company's initial public offering. The following table sets forth for the calendar periods indicated the range of high and low bid quotations for the Company's Class A Common Stock as reported by NASDAQ for the fiscal years ended September 30, 1997 and 1998. Period High Low - ---------------------------- ------------- ------------- 4th Quarter $ 17 1/4 $ 13 3/4 Calendar Year 1997 1st Quarter $ 18 1/8 $ 15 2nd Quarter $ 20 1/2 $ 16 1/2 3rd Quarter $ 23 7/8 $ 19 4th Quarter $ 24 3/4 $ 21 3/4 Calendar Year 1998 1st Quarter $ 24 $ 13 3/8 2nd Quarter $ 15 5/8 $ 6 3/8 3rd Quarter $ 6 7/8 $ 4 7/8 The prices reported reflect interdealer quotations without retail mark-ups, mark-downs or commissions, and may not represent actual transactions. As of October 31, 1998, the Company had 182 stockholders of record of its common stock. However, the Company believes that it has approximately 1,500 beneficial holders of common stock including shares held of record by brokers or dealers for their customers in street names. Dividend Policy. The Company has never declared and paid a cash dividend on its common stock. It is the current intention of the Company's Board of Directors to continue to retain earnings to finance the growth of the Company's business rather than to pay dividends. Future payments of cash dividends will depend upon the financial condition, results of operations and capital commitments of the Company, restrictions under then-existing agreements, and other factors deemed relevant by the Board of Directors. Item 6. SELECTED FINANCIAL AND OPERATING DATA The selected consolidated financial data presented below reflect the consolidated financial position and results of operations of Simon Transportation Services Inc. and its subsidiary. The selected consolidated financial data are derived from the Company's consolidated financial statements and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's consolidated financial statements and notes thereto included elsewhere herein.
Fiscal Years Ended September 30, -------------------------------------------------------------- (In thousands, except per share amounts & operating 1998 1997 1996 1995 1994 data) ---- ---- ---- ---- ---- Statement of Earnings Data: Operating revenue................................. $193,507 $155,296 $101,090 $ 75,218 $ 71,691 -------------------------------------------------------------- Operating expenses: Salaries, wages, and benefits................... 80,500 60,504 40,015 28,035 25,949 Fuel and fuel taxes............................. 35,281 30,069 20,359 14,115 14,363 Operating supplies and expenses................. 26,156 19,289 13,701 10,839 8,978 Taxes and licenses.............................. 6,557 5,197 3,288 2,756 2,558 Insurance and claims............................ 5,217 3,404 2,172 2,003 1,995 Communications and utilities.................... 3,946 2,550 1,680 1,245 1,274 Depreciation and amortization................... 4,728 5,396 5,920 7,223 6,857 Rent............................................ 28,987 17,143 4,794 2,926 3,435 -------------------------------------------------------------- Total operating expenses...................... 191,372 143,552 91,929 69,142 65,409 -------------------------------------------------------------- Operating earnings............................ 2,135 11,744 9,161 6,076 6,282 Gain on sale of real property..................... -- 1,896 -- -- -- Interest expense and other, net................... (1,500) (1,134) (2,758) (3,527) (3,136) -------------------------------------------------------------- Earnings before provision for income taxes........ 635 12,506 6,403 2,549 3,146 Provision for income taxes1....................... 297 4,727 5,454 -- -- -------------------------------------------------------------- Net earnings...................................... $ 338 $ 7,779 $ 949 $ 2,549 $ 3,146 ============================================================== Pro Forma Statement of Earnings Data: 1 Earnings before provision for income taxes........ $ 635 $ 12,506 $ 6,403 $ 2,549 $ 3,146 Provision for income taxes........................ 297 4,727 2,536 1,010 1,246 -------------------------------------------------------------- Net earnings...................................... $ 338 $ 7,779 $ 3,867 $ 1,539 $ 1,900 ============================================================== Diluted net earnings per common share............. $ 0.05 $ 1.33 $ 0.87 $ 0.67 $ 0.83 ============================================================== Diluted weighted average shares outstanding....... 6,270,734 5,864,043 4,464,837 2,300,000 2,300,000 Balance Sheet Data (at end of period): Net property and equipment........................ $64,618 $71,154 $56,714 $52,200 $49,039 Total assets...................................... 99,526 107,704 78,223 61,437 56,752 Long-term debt and capitalized leases, including current portion............... 21,206 32,791 37,428 47,903 44,525 Stockholders' equity.............................. 59,699 59,849 29,103 9,033 7,443 Operating Data: Operating ratio2.................................. 98.9% 92.4% 90.9% 91.9% 91.2% Average revenue per loaded mile................... $1.25 $1.25 $1.24 $1.26 $1.23 Average revenue per total mile.................... $1.11 $1.10 $1.10 $1.11 $1.10 Average revenue per tractor per week.............. $2,510 $2,627 $2,526 $2,417 $2,489 Empty miles percentage............................ 11.8% 11.9% 11.7% 11.3% 10.7% Average length of haul in miles................... 1,026 1,001 984 949 725 Weighted average tractors during period........... 1,494 1,142 774 598 554 Tractors at end of period......................... 1,655 1,344 940 623 570 Trailers at end of period......................... 2,455 1,998 1,430 877 873 1 The Company was treated as an S Corporation for federal and state income tax purposes from October 1, 1990 to November 16, 1995. As a result, the Company's taxable earnings for such period were taxed for federal and state income tax purposes directly to the Company's then-existing stockholders. The pro forma statement of earnings data give effect to an adjustment for a provision for federal and state income taxes as if the Company had been treated as a C Corporation during such periods. The pro forma statement of earnings data do not give effect to the one-time, non-cash charge of $2,980,115 in recognition of deferred income taxes that resulted from the termination of the Company's S Corporation status. The provision for income taxes for fiscal 1996 includes the one-time, non-cash charge of $2,980,115. Pro forma net earnings per share and pro forma weighted average shares outstanding give effect to the Company's August 1995 reverse stock split and all share issuances and contributions during 1995 as if they had been outstanding for all periods presented. See Notes 1 and 3 to Consolidated Financial Statements. 2 Operating expenses as a percentage of revenue.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Simon Transportation provides nationwide, predominantly temperature-controlled truckload transportation for numerous major shippers. In recent years, much of the Company's growth has resulted from earning core carrier status with major shippers and meeting the demands of these shippers for additional equipment. The Company has grown to $193.5 million in revenue for its fiscal year ended September 30, 1998, from $71.7 million in revenue for fiscal 1994, a compounded annual growth rate of 28.2%. From fiscal 1994 through fiscal 1997, the Company's pretax earnings grew to $12.5 million from $3.1 million, a compounded annual growth rate of 59.2%. The increase in pretax earnings was attributable primarily to revenue growth, greater equipment productivity, and the reduction in financing costs attributable to public offerings in 1995 and 1997. During fiscal 1998, the Company continued its strong revenue growth, with revenue increasing approximately 25%. Pretax earnings decreased substantially, however, as the Company experienced financial and operating difficulties. For much of the year the industry-wide driver shortage contributed to a substantial number of unseated tractors. To address this problem, the Company raised driver wages by a total of four cents per mile. Although management believes the higher wages have made the Company more competitive in attracting and retaining drivers, the combination of unproductive equipment and higher wages adversely affected the Company's profitability. The Company's financial results also were affected by unusually high accident claims and repair expense during the second fiscal quarter. Since May of 1998, the Company has raised its freight rates to partially offset the increased wages, and the insurance and repair expenses have returned to historical levels.(*) Going forward, management has deferred deliveries of new tractors to better match the anticipated availability of drivers. This is expected to reduce revenue growth compared with historical levels, but improve profitability compared with fiscal 1998.(*) In comparing the Company's historical financial position and results of operations, readers should be aware of changes in financing methods. During fiscal years 1994 and 1995, the Company financed most of its tractors and trailers with debt and capitalized leases. During fiscal years 1996, 1997 and 1998, the Company has financed most of this revenue equipment under operating lease arrangements. Financing equipment with operating leases increases the Company's operating ratio because the implied interest component of the lease payments is reflected as an "above-the-line" operating expense rather than as interest expense. The use of operating leases also affects the presentation of the Statement of Cash Flows. However, the method of financing does not affect net earnings or net cash flows. The Company's operating ratio may fluctuate from time-to-time based upon the method of equipment financing. The Company operated as an S corporation from October 1, 1990 to November 16, 1995. As a result, the Company's net taxable earnings were taxed directly to the Company's existing stockholders rather than to the Company. The pro forma statement of earnings data included in the "Selected Financial and Operating Data" set forth the Company's net earnings for such periods as if the Company had been subject to federal and state income taxes at a combined effective rate of 46.8% for fiscal year 1998, 37.8% for fiscal year 1997, and a combined effective rate of 39.6% for fiscal years 1994 through 1996. In addition to the ongoing income tax effect, the termination of the Company's S corporation status resulted in a one-time, non-cash charge of approximately $3.0 million during fiscal year 1996 in recognition of deferred income taxes. _________________________________ (*) "Forward-looking" statements. Results of Operations The following table sets forth the percentage relationship of certain items to operating revenue for the periods indicated:
Fiscal Years Ended September 30, ---------------------------------- 1998 1997 1996 --------------------------------- Operating revenue.............................................................. 100.0% 100.0% 100.0% Operating expenses: Salaries, wages, and benefits................................................ 41.6 39.0 39.6 Fuel and fuel taxes.......................................................... 18.2 19.4 20.1 Operating supplies and expenses.............................................. 13.5 12.4 13.6 Taxes and licenses........................................................... 3.4 3.3 3.3 Insurance and claims......................................................... 2.7 2.2 2.1 Communications and utilities................................................. 2.0 1.6 1.6 Depreciation and amortization................................................ 2.4 3.5 5.9 Rent......................................................................... 15.0 11.0 4.7 --------------------------------- Total operating expenses 98.9 92.4 90.9 --------------------------------- Operating earnings............................................................. 1.1 7.6 9.1 Gain on sale of real property.................................................. -- 1.2 -- Interest expense and other, net................................................ (0.8) (0.7) (2.8) --------------------------------- Earnings before provision for income taxes..................................... 0.3 8.1 6.3 Pro forma provision for income taxes........................................... (0.1) (3.1) (2.5) --------------------------------- Pro forma net earnings......................................................... 0.2% 5.0% 3.8% =================================
Comparison of fiscal year ended September 30, 1998, with fiscal year ended September 30, 1997. Operating revenue increased $38.2 million (24.6%), to $193.5 million during the 1998 fiscal year from $155.3 million during the 1997 fiscal year. The increase in revenue was primarily attributable to a 30.8% increase in the weighted average number of tractors, to 1,494 during the 1998 fiscal year from 1,142 during the 1997 fiscal year. This increase was partially offset by a decrease in the average revenue per tractor per week to $2,510 during the 1998 fiscal year from $2,627 during the 1997 fiscal year due to a substantial number of tractors without drivers throughout most of the year. The Company's average revenue per loaded mile, net of fuel surcharges, remained constant at $1.25 during both the 1998 and 1997 fiscal years. Salaries, wages and benefits increased $20.0 million (33.1%), to $80.5 million in the 1998 fiscal year from $60.5 million in the 1997 fiscal year. As a percentage of revenue, salaries, wages, and benefits increased to 41.6% of revenue during the 1998 fiscal year from 39.0% during the 1997 fiscal year. The increase is primarily attributable to driver wage increases. In order to remain competitive, the Company raised driver base pay two cents per mile effective January 1, 1998 and an additional two cents per mile effective April 15, 1998. Fuel and fuel taxes increased $5.2 million (17.3%), to $35.3 million in the 1998 fiscal year from $30.1 million in the 1997 fiscal year. As a percentage of revenue, fuel and fuel taxes decreased to 18.2% of revenue during the 1998 fiscal year from 19.4% during the 1997 fiscal year. The decrease resulted principally from lower fuel prices in the 1998 fiscal year and an overall increase in the fuel efficiency of the Company's fleet. Operating supplies and expenses increased $6.9 million (35.8%), to $26.2 million in the 1998 fiscal year from $19.3 million in the 1997 fiscal year. As a percentage of revenue, operating supplies and expenses increased to 13.5% of revenue during the 1998 fiscal year, from 12.4% during the 1997 fiscal year. The increase was attributable primarily to costs incurred during the second fiscal quarter for accident repairs, preparing equipment for trade, and completing work on and opening the Atlanta terminal. Taxes and licenses increased $1.4 million (26.9%), to $6.6 million in the 1998 fiscal year from $5.2 million in the 1997 fiscal year. As a percentage of revenue, taxes and licenses remained essentially constant at 3.4% of revenue during the 1998 fiscal year compared to 3.3% of revenue during the 1997 fiscal year. Insurance and claims increased $1.8 million (52.9%), to $5.2 million in the 1998 fiscal year from $3.4 million in the 1997 fiscal year. As a percentage of revenue, insurance and claims increased to 2.7% of revenue for the 1998 fiscal year compared to 2.2% during the 1997 fiscal year. Most of the increase was attributable to an unusually high number of severe accidents suffered during the second fiscal quarter. Insurance and claims returned to 2.2% of revenue during the fourth quarter.(*) Communications and utilities increased $1.3 million (50.0%), to $3.9 million in the 1998 fiscal year from $2.6 million in the 1997 fiscal year. As a percentage of revenue, communications and utilities increased to 2.0% of revenue during the 1998 fiscal year from 1.6% of revenue during the 1997 fiscal year primarily as a result of an access fee charged to the Company by the owners of pay telephones based on calls to toll free numbers. In addition, the fixed costs of utilities for the Company's terminals and costs associated with the usage of the Company's satellite tracking system did not remain proportionate with the decreased revenue per tractor. Depreciation and amortization decreased $700,000 (13.0%), to $4.7 million in the 1998 fiscal year from $5.4 million in the 1997 fiscal year. As a percentage of revenue, depreciation and amortization (adjusted for the net gain on sale of equipment) decreased to 2.4% of revenue during the 1998 fiscal year from 3.5% during the 1997 fiscal year primarily because of a decrease in the percentage of the Company's revenue equipment that was owned or acquired under capitalized leases. Depreciation and amortization (unadjusted for the net gain on sale of equipment) decreased to 3.6% of revenue ($7.0 million) during the 1998 fiscal year from 4.5% of revenue ($7.0 million) during the 1997 fiscal year. Depreciation was adjusted for a $2.3 million net gain on the sale of revenue equipment during the 1998 fiscal year compared with a $1.6 million net gain during the 1997 fiscal year. _________________________________ (*) "Forward-looking" statements. Rent increased $11.9 million (69.6%), to $29.0 million in the 1998 fiscal year from $17.1 million in the 1997 fiscal year. As a percentage of revenue, rent increased to 15.0% of revenue during the 1998 fiscal year from 11.0% during the 1997 fiscal year as the Company added new equipment and replaced equipment that had been financed under capital lease arrangements with equipment financed under operating leases. The Company has utilized operating leases in the most recent year because of more favorable terms. If the Company continues to use operating lease financing, its operating ratio may be affected in future periods because the implied financing costs of such equipment are included as operating expenses instead of as interest expense. As a result of the foregoing, the Company's operating ratio increased to 98.9% during the 1998 fiscal year from 92.4% during the 1997 fiscal year. The Company realized a $1.9 million gain on the sale of its former headquarters facilities during the 1997 fiscal year. This non-recurring transaction increased earnings before provision for income taxes by 1.2% of revenue during the 1997 period. Interest expense and other, net increased $400,000 (36.4%), to $1.5 million in the 1998 fiscal year from $1.1 million in the 1997 fiscal year. As a percentage of revenue, interest expense and other, net remained essentially constant at 0.8% of revenue during the 1998 fiscal year compared with 0.7% during the 1997 fiscal year. The Company's effective combined federal and state income tax rate for the 1998 fiscal year was 46.8% compared to 37.8% for the 1997 fiscal year as a result of adjusting the tax provision for non-deductible expenses in fiscal 1998. These expenses remained essentially constant during both the 1998 and 1997 fiscal years; however, the effect of these items on the tax rate is magnified because of the lower earnings experienced in the 1998 fiscal year. As a result of the factors described above, net earnings decreased $7.5 million (96.2%) to $338,000 during the 1998 fiscal year from $7.8 million ($6.6 million excluding the gain on the sale of the Company's former headquarters) during the 1997 fiscal year. As a percentage of revenue, net earnings decreased to 0.2% of revenue in the 1998 fiscal year from 5.0% (4.2% of revenue excluding the gain on the sale of the Company's former headquarters) in the 1997 fiscal year. Comparison of fiscal year ended September 30, 1997, with fiscal year ended September 30, 1996. Operating revenue increased $54.2 million (53.6%), to $155.3 million during the 1997 fiscal year from $101.1 million during the 1996 fiscal year. The increase in revenue was primarily attributable to a 47.5% increase in the weighted average number of tractors, to 1,142 during the 1997 fiscal year from 774 during the 1996 fiscal year, an increase in the average revenue per tractor per week to $2,627 during the 1997 fiscal year from $2,526 during the 1996 fiscal year, and an increase in the Company's average revenue per loaded mile to $1.25 during the 1997 fiscal year from $1.24 during the 1996 fiscal year. These increases were partially offset by an increase in empty miles percentage to 11.9% during the 1997 fiscal year from 11.7% during the 1996 fiscal year. Salaries, wages and benefits increased $20.5 million (51.3%), to $60.5 million in the 1997 fiscal year from $40.0 million in the 1996 fiscal year. As a percentage of revenue, salaries, wages, and benefits decreased to 39.0% of revenue during the 1997 fiscal year from 39.6% during the 1996 fiscal year. The change is primarily attributable to a decrease in the ratio of administrative personnel to driving personnel and reduced workers' compensation premiums. Fuel and fuel taxes increased $9.7 million (47.5%), to $30.1 million in the 1997 fiscal year from $20.4 million in the 1996 fiscal year. As a percentage of revenue, fuel and fuel taxes decreased to 19.4% of revenue during the 1997 fiscal year from 20.1% during the 1996 fiscal year as a result of a decrease in fuel prices. The decrease in fuel expense as a percentage of revenue also was aided by an overall increase in the fuel efficiency of the Company's fleet. Operating supplies and expenses increased $5.6 million (40.9%), to $19.3 million in the 1997 fiscal year from $13.7 million in the 1996 fiscal year. As a percentage of revenue, operating supplies and expenses decreased to 12.4% of revenue during the 1997 fiscal year, from 13.6% during the 1996 fiscal year, primarily as a result of decreased parts costs, outside repairs, and maintenance expense associated with a decrease in the average age of the Company's tractor fleet. Most tractors are now covered by three-year, 500,000-mile warranties. Taxes and licenses increased $1.9 million (57.6%), to $5.2 million in the 1997 fiscal year from $3.3 million in the 1996 fiscal year. As a percentage of revenue, taxes and licenses remained constant at 3.3% of revenue during the 1997 and 1996 fiscal years. Insurance and claims increased $1.2 million (54.5%), to $3.4 million in the 1997 fiscal year from $2.2 million in the 1996 fiscal year. As a percentage of revenue, insurance and claims remained essentially unchanged at 2.2% of revenue during the 1997 fiscal year compared to 2.1% during the 1996 fiscal year. Communications and utilities increased $870,000 (51.8%), to $2.6 million in the 1997 fiscal year from $1.7 million in the 1996 fiscal year. As a percentage of revenue, communications and utilities remained essentially unchanged at 1.6% of revenue during the 1997 and 1996 fiscal years. Depreciation and amortization decreased $523,000 (8.8%), to $5.4 million in the 1997 fiscal year from $5.9 million in the 1996 fiscal year. As a percentage of revenue, depreciation and amortization (adjusted for the net gain on sale of equipment) decreased to 3.5% of revenue during the 1997 fiscal year from 5.9% during the 1996 fiscal year. Depreciation and amortization (unadjusted for the net gain on sale of equipment) decreased to 4.5% of revenue ($7.0 million) during the 1997 fiscal year from 8.3% of revenue ($8.4 million) during the 1996 fiscal year as a result of a decrease in the percentage of the Company's revenue equipment that was owned or acquired under capitalized leases. This decrease in depreciation was adjusted for a $1.6 million net gain on the sale of revenue equipment during the 1997 fiscal year compared with a $2.4 million net gain during the 1996 fiscal year. Rent increased $12.3 million (256.3%), to $17.1 million in the 1997 fiscal year from $4.8 million in the 1996 fiscal year. As a percentage of revenue, rent increased to 11.0% of revenue during the 1997 fiscal year from 4.7% during the 1996 fiscal year as the Company added new equipment and replaced equipment that had been financed under capital lease arrangements with equipment financed under operating leases. The Company utilized operating leases during fiscal year 1997 because of more favorable terms. As a result of the foregoing, the Company's operating ratio increased to 92.4% during the 1997 fiscal year from 90.9% during the 1996 fiscal year. The Company realized a gain of $1,896,025 on the sale of its former headquarters facilities during the 1997 fiscal year. This non-recurring transaction increased earnings before provision for income taxes by 1.2% of revenue during the period. Interest expense and other, net decreased $1.7 million (60.7%), to $1.1 million in the 1997 fiscal year from $2.8 million in the 1996 fiscal year. As a percentage of revenue, interest expense and other, net decreased to 0.7% of revenue during the 1997 fiscal year from 2.8% during the 1996 fiscal year. This resulted from application of $13.3 million in net proceeds from the Company's secondary public offering to purchase revenue equipment, a decrease in the Company's average interest rate in the 1997 fiscal year compared with the 1996 fiscal year, and an increase in the percentage of the Company's tractor and trailer fleets being obtained through operating leases. The Company's effective combined federal and state income tax rate for the 1997 fiscal year was 37.8%, compared with an estimated combined federal and state income tax rate of 39.6% used for fiscal year 1996. As a result of the factors described above, pro forma net earnings increased $3.9 million (100.0%) to $7.8 million ($6.6 million excluding the gain on the sale of the Company's former headquarters) during the 1997 fiscal year from $3.9 million during the 1996 fiscal year. As a percentage of revenue, pro forma net earnings increased to 5.0% (4.2% of revenue excluding the gain on the sale of the Company's former headquarters) of revenue in the 1997 fiscal year from 3.8% in the 1996 fiscal year. Liquidity and Capital Resources The growth of the Company's business has required significant investment in new revenue equipment that the Company historically has financed with borrowings under installment notes payable to commercial lending institutions and equipment manufacturers, equipment leases from third-party lessors, borrowings under its line of credit, and cash flow from operations. The Company's primary sources of liquidity currently are funds provided by operations and borrowings and leases with financial institutions and equipment manufacturers. During the 1998, 1997 and 1996 fiscal years, the Company financed most of its tractors with operating leases. Net cash provided by operating activities was $4.2 million, $7.9 million, and $7.0 million, for the fiscal years ended September 30, 1998, 1997, and 1996, respectively. The Company's principal use of cash from operations is to service debt and capitalized leases incurred to purchase new revenue equipment and internally finance accounts receivable associated with growth in the business. Accounts receivable increased $627,000, $6,362,000, and $5,930,000, for the fiscal years ended September 30, 1998, 1997, and 1996, respectively. The average age of the Company's accounts receivable was 35, 41, and 39 days for the fiscal years ended September 30, 1998, 1997, and 1996, respectively. Net cash provided by (used in) investing activities was $1.8 million, ($19.0 million), and ($4.6 million), for the fiscal years ended September 30, 1998, 1997, and 1996, respectively, and consisted of net purchases of property and equipment. The Company expects capital expenditures (primarily for revenue equipment, and satellite communications units), net of revenue equipment trade-ins, to be approximately $61.0 million in aggregate for fiscal years 1999 and 2000. The Company's projected capital expenditures will be funded mostly with operating leases, borrowings and cash flows from operations.(*) Net cash (used in) provided by financing activities was ($11.0 million), $18.3 million, and $2.9 million, for the fiscal years ended September 30, 1998, 1997, and 1996, respectively. Primary sources of cash were approximately $23.0 million in net proceeds from the Company's February 1997 secondary public offering, and $19.7 million in net proceeds from the Company's November 1995 initial public offering. Primary uses of cash were net payments on borrowings of $11.6 million, $4.6 million, and $12.0 million of principal under the Company's long-term debt and capitalized lease agreements and net payments of $0, $0, and $4.3 million, under the Company's line of credit for the fiscal years ended September 30, 1998, 1997, and 1996, respectively. During the 1998 fiscal year, the Company repurchased 81,100 shares of Common Stock at an average market price of $6.55 per share for a total cash outlay of $530,000. In addition, the Company paid S corporation dividends to its stockholders of $605,000 for the fiscal year ended September 30, 1996. The maximum amount committed under the Company's line of credit at September 30, 1998 was $10 million and no borrowings were outstanding. The interest rate on the line of credit is one-half percent (.5%) above the 30-day London Interbank Offered Rate ("LIBOR") in effect from time-to-time. At September 30, 1998, the Company had outstanding long-term debt and capitalized lease obligations (including current portions) of approximately $21.2 million, most of which comprised obligations for the purchase of revenue equipment. As of September 30, 1998, the Company's future commitments under noncancelable operating leases amounted to $71.4 million. See Notes 4 and 5 to Consolidated Financial Statements. The Company's working capital at September 30, 1998, 1997, and 1996 was $15.6 million, $15.9 million and $6.7 million, respectively. Management believes that available borrowings under the line of credit, future borrowings under installment notes payable or lease arrangements for revenue equipment, and cash flow generated from operations, will allow the Company to continue to meet its working capital requirements, anticipated capital expenditures, and obligations under debt and capitalized and operating leases at least through fiscal year 1999.(*) _________________________________ (*) "Forward-looking" statements. Inflation Inflation has had a minimal effect upon the Company's profitability in recent years. Most of the Company's operating expenses are inflation-sensitive, with inflation generally producing increased costs of operation. The Company expects that inflation will affect its costs no more than it affects those of other truckload carriers. Seasonality The Company experiences some seasonal fluctuations in freight volume, as shipments have historically decreased during the first calendar quarter. In addition, the Company's operating expenses historically have been higher in the winter months due to decreased fuel efficiency and increased maintenance costs in colder weather. Fuel Availability and Cost The Company actively manages its fuel costs by requiring drivers to fuel at Company terminals or, whenever possible en route, at service centers with which the Company has established volume purchasing arrangements. The Company controls fuel purchases by using its proprietary software and Qualcomm communications ability to schedule fueling stops and amounts purchased based upon fuel prices at locations on drivers' routes. The Company historically has been able to pass through most increases in fuel prices and taxes to customers in the form of higher rates and fuel surcharges. Year 2000 Compliance The Company has completed a review of each of its core systems to determine year 2000 (Y2K) compliance. The Company's billing, dispatch, EDI, fueling, payroll, telephone, vehicle maintenance, and yard and equipment inventory systems and all other critical hardware and software systems were designed to be Y2K compliant from inception. The Company is currently reviewing the Y2K compliance status of its facilities and equipment. The Company expects to complete this review and have taken actions toward making each non-core system Y2K compliant by June 1999. The Company relies on Qualcomm to provide the satellite tracking system necessary to track the location of its equipment, and to provide dispatch and routing information to its drivers. The Company has been informed that the software utilized by Qualcomm and the Company is fully Y2K compliant. The Company utilizes Comdata to transmit payroll funds to its drivers and to allow drivers to purchase fuel outside of the Company's terminal locations. The Company has been informed that Comdata expects to be fully Y2K compliant by June 1999. The Company also interacts with many of its vendors through electronic data interchange (EDI). Although the Company is Y2K compliant in its EDI applications, we cannot and do not guarantee the Y2K compliance of our business partners' systems. The Company has incurred internal staff costs necessary to review and further Y2K compliance of its core operating systems. Because the systems were designed to be Y2K compliant since inception, the costs have not had a material effect on the Company's financial position or results of operations. The Company will incur additional internal staff time to complete its compliance review of non-core systems embedded in facilities and equipment. These non-core systems include microcontrollers contained in tractor engines and other components, refrigeration units, and terminal facilities. The costs of such review are not expected to be incremental since they represent the redeployment of existing information technology resources. Because of the relatively young age of its facilities and equipment, the Company does not expect to find non-core systems that need to be replaced to further Y2K compliance. The Company anticipates that the risks related to its core and non-core systems will be mitigated by ongoing assessment and correction of the systems. The primary risk to operations is service disruption from third-party providers that supply satellite communication, telephone, fueling and financial services. Any disruption of these critical services would hinder the Company's ability to receive, process and track its freight or communicate with its customers and drivers. A failure of the satellite communication system could have a materially adverse effect on the Company's business and results of operations. The Company is relying on the contingency plan established by Qualcomm to prevent the interruption of business. As an additional backup, the Company plans to use its existing telephone systems to dispatch its equipment and provide support to its drivers in the event of a complete satellite system failure. In the event of EDI failures on the part of our customers, the Company plans to use its telephone and facsimile system to receive load tenders from its customers. The Company would switch to paper invoices for its customers unable to use EDI. Management believes that the Company's current state of readiness, the nature of the Company's business, and the availability of the contingency plans minimizes Y2K risks. Management does not foresee significant liability to third parties if the Company's systems are not Y2K compliant. Cautionary Statement Regarding Forward Looking Statements The Company may from time-to-time make written or oral forward-looking statements. Written forward-looking statements may appear in documents filed with the Securities and Exchange Commission, in press releases, and in reports to stockholders. The Private Securities Litigation Reform Act of 1995 contains a safe harbor for forward-looking statements. The Company relies on this safe harbor in making such disclosures. In connection with this "safe harbor" provision, the Company is hereby identifying important factors that could cause actual results to differ materially from those contained in any forward-looking statement made by or on behalf of the Company. Factors that might cause such a difference include, but are not limited to the following: Economic Factors; Fuel Prices. Negative economic factors such as recessions, downturns in customers' business cycles, surplus inventories, inflation, and higher interest rates could impair the Company's operating results by decreasing equipment utilization or increasing costs of operations. Increases in fuel prices usually are not fully recoverable. Accordingly, high fuel prices can have a negative impact on the Company's profitability. Recruitment, Retention, and Compensation of Qualified Drivers. Competition for drivers is intense in the trucking industry. There is, and historically has been, an industry-wide shortage of qualified drivers. This shortage could force the Company to significantly increase the compensation it pays to drivers or curtail the Company's growth. Item 8. . FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's audited financial statements, including its consolidated balance sheets and consolidated statements of earnings, cash flows, and stockholders' equity, and notes related thereto, are included at pages 24 to 36 of this report. The supplementary quarterly financial data follow: Quarterly Financial Data: Fourth Third Second First Quarter Quarter Quarter Quarter 1998 1998 1998 1998 ------------------ ---------------- ------------------- ---------------- Revenue $50,296 $50,055 $46,149 $ 47,006 Operating earnings (loss) 945 (90) (2,105) 3,386 Earnings (loss) before income taxes 608 (435) (2,536) 2,997 Provision (benefit) for income taxes 286 (165) (959) 1,132 Net earnings (loss) 322 (270) (1,577) 1,864 Diluted net earnings (loss) per share $ 0.05 $ (0.04) $ (0.25) $ 0.29 Fourth Third Second First Quarter Quarter Quarter Quarter 1997 1997 1997 1997 ------------------ ---------------- ------------------- ---------------- Revenue $44,175 $41,191 $35,765 $ 34,166 Operating earnings 3,571 3,278 2,462 2,433 Earnings before income taxes 3,375 4,919 2,225 1,987 Provision for income taxes 1,276 1,859 841 751 Net earnings 2,099 3,060 1,384 1,236 Diluted net earnings per share $ 0.33 $ 0.48 $ 0.25 $ 0.26
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No reports on Form 8-K have been filed within the twenty-four months prior to September 30, 1998, involving a change of accountants or disagreements on accounting and financial disclosure. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information respecting executive officers and directors set forth under the captions "Election of Directors - Information Concerning Directors and Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" on pages 2, 3, and 6 of Registrant's Proxy Statement for the 1998 annual meeting of stockholders, which will be filed with the Securities and Exchange Commission in accordance with Rule 14a-6 promulgated under the Securities Exchange Act of 1934, as amended (the "Proxy Statement"), is incorporated by reference. Item 11. EXECUTIVE COMPENSATION The information respecting executive compensation set forth under the caption "Executive Compensation" on pages 4, 5 and 6 of the Proxy Statement is incorporated herein by reference; provided, that the "Compensation Committee Report on Executive Compensation" contained in the Proxy Statement is not incorporated by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information respecting security ownership of certain beneficial owners and management set forth under the caption "Security Ownership of Principal Stockholders and Management" on page 8 of the Proxy Statement is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information respecting certain relationships and transactions of management set forth under the captions "Compensation Committee Interlocks and Insider Participation" and "Certain Transactions" on pages 3 and 4 of the Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements. The Company's audited financial statements are set forth at the following pages of this report: Page Consolidated Statement of Earnings....................................... 24 Consolidated Statement of Financial Position............................. 25 Consolidated Statement of Stockholders' Equity........................... 26 Consolidated Statement of Cash Flows..................................... 27 Notes to Consolidated Financial Statements............................... 28 Report of Independent Public Accountants................................. 37 2. Financial Statement Schedules. Financial statement schedules are not required because all required information is included in the financial statements. (b) Reports on Form 8-K There were no reports on Form 8-K filed during the fourth quarter ended September 30, 1998. (c)......Exhibits NumberDescription 1 + Form of Underwriting Agreement. 3.1 + Articles of Incorporation. 3.2 + Bylaws. 4.1 + Articles of Incorporation. 4.2 + Bylaws. 10.2+ Outside Director Stock Option Plan. 10.3+ Incentive Stock Plan. 10.4+ 401(k) Plan. 10.1# Loan Agreement (Line of Credit) dated April 29, 1996 (replaced loan agreement dated December 1, 1995) between U.S. Bank of Utah and Simon Transportation Services Inc. 10.1# Loan Agreement (Headquarter's Loan) dated May 23, 1996 between U.S. Bank of Utah and Dick Simon Trucking, Inc. 21 + List of subsidiaries. 23 Consent of Arthur Andersen LLP, independent public accountants. 27 Financial Data Schedule + Filed as an exhibit to the registrant's Registration Statement on Form S-1, Registration No. 33-96876, effective November 17, 1995, and incorporated herein by reference. # Filed as an exhibit to the registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1996, Commission File No. 0-27208, dated August 9, 1996, and incorporated herein by reference. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIMON TRANSPORATION SERVICES, INC. Date: November 12, 1998 By: /s/ Alban B. Lang ----------------- ----------------- Alban B. Lang Treasurer and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Position Date - --------- -------- ---- /s/ Richard D. Simon Chairman of the Board, President, and Chief November 12, 1998 - -------------------------------------- Executive Officer (principal executive officer) Richard D. Simon /s/ Alban B. Lang Treasurer and Chief Financial Officer November 12, 1998 - -------------------------------------- (principal financial and accounting officer); Alban B. Lang Director /s/ Kelle A. Simon Vice President of Maintenance; Director November 12, 1998 - -------------------------------------- Kelle A. Simon /s/ A. Lyn Simon Vice President of Sales and Operations; Director November 12, 1998 - -------------------------------------- A. Lyn Simon /s/ Richard D. Simon, Jr. Vice President of Driver Relations; Director November 12, 1998 - -------------------------------------- Richard D. Simon, Jr. /s/ Sherry L. Bokovoy Assistant Secretary/Treasurer; Director November 12, 1998 - -------------------------------------- Sherry L. Bokovoy /s/ Irene Warr Director November 12, 1998 - -------------------------------------- Irene Warr /s/ H.J. Frazier Director November 12, 1998 - -------------------------------------- H.J. Frazier
SIMON TRANSPORTATION SERVICES INC. CONSOLIDATED STATEMENT OF EARNINGS For the Years Ended September 30, ---------------------------------------------------------- 1998 1997 1996 ---------------------------------------------------------- Operating Revenue $193,506,902 $155,296,354 $101,089,530 ---------------------------------------------------------- Operating Expenses: Salaries, wages, and benefits 80,499,985 60,504,236 40,014,702 Fuel and fuel taxes 35,280,815 30,068,552 20,359,375 Operating supplies and expenses 26,155,797 19,288,560 13,701,428 Taxes and licenses 6,557,109 5,197,086 3,287,833 Insurance and claims 5,216,804 3,404,550 2,172,308 Communications and utilities 3,945,707 2,550,301 1,679,967 Depreciation and amortization 4,728,477 5,396,198 5,919,494 Rent 28,987,072 17,142,835 4,793,804 ---------------------------------------------------------- Total operating expenses 191,371,766 143,552,318 91,928,911 ---------------------------------------------------------- Operating earnings 2,135,136 11,744,036 9,160,619 Other (Expense) Earnings: Gain on sale of real property -- 1,896,025 -- Interest expense (1,818,100) (1,761,939) (2,849,549) Other, net 317,644 627,769 92,025 ---------------------------------------------------------- Earnings before provision for income taxes 634,680 12,505,891 6,403,095 Provision for income taxes (Note 3) 296,536 4,727,227 5,454,170 ---------------------------------------------------------- Net Earnings $ 338,144 $ 7,778,664 $ 948,925 ========================================================== Unaudited Pro Forma Information: (Note 9) Earnings before provision for income taxes $ 634,680 $ 12,505,891 $ 6,403,095 Provision for income taxes 296,536 4,727,227 2,535,626 ========================================================== Net earnings $ 338,144 $ 7,778,664 $ 3,867,469 ========================================================== Net earnings per common share Basic $ 0.05 $ 1.36 $ 0.88 Diluted $ 0.05 $ 1.33 $ 0.87 ========================================================== Weighted average common shares outstanding Basic 6,270,734 5,707,642 4,417,643 Diluted 6,270,734 5,864,043 4,464,837 ========================================================== The accompanying notes to consolidated financial statements are an integral part of this consolidated financial statement.
SIMON TRANSPORTATION SERVICES INC. CONSOLIDATED STATEMENT OF FINANCIAL POSITION ASSETS September 30, ---------------------------------- 1998 1997 ---------------------------------- Current Assets: Cash $ 7,826,365 $ 12,766,001 Receivables, net of allowance for doubtful accounts of $189,000 and $62,000, respectively 20,250,931 20,712,286 Operating supplies 1,069,095 752,213 Income taxes receivable 2,593,105 -- Prepaid expenses and other 2,181,980 1,558,923 Current deferred income tax asset 762,463 635,027 ---------------------------------- Total current assets 34,683,939 36,424,450 ---------------------------------- Property and Equipment, at cost: Land 8,589,422 7,632,711 Revenue equipment 47,702,977 59,392,072 Buildings and improvements 18,350,370 14,321,869 Office furniture and equipment 8,573,389 5,974,291 ---------------------------------- 83,216,158 87,320,943 Less accumulated depreciation and amortization (18,598,221) (16,166,473) ---------------------------------- 64,617,937 71,154,470 ---------------------------------- Other Assets 223,823 125,450 ---------------------------------- $ 99,525,699 $ 107,704,370 ================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 7,627,142 $ 6,382,697 Current portion of capitalized lease obligations 2,030,988 5,346,645 Accounts payable 5,015,049 3,593,420 Accrued liabilities 3,188,405 3,325,279 Accrued claims payable 1,260,827 1,259,674 Income taxes payable -- 631,776 ---------------------------------- Total current liabilities 19,122,411 20,539,491 ---------------------------------- Long-Term Debt, net of current portion 9,102,649 14,638,389 ---------------------------------- Capitalized Lease Obligations, net of current portion 2,444,856 6,423,385 ---------------------------------- Deferred Income Taxes Payable 9,156,843 6,254,445 ---------------------------------- Commitments (Note 6) Stockholders' Equity: Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued -- -- Class A Common Stock, $.01 par value, 20,000,000 shares authorized, 5,372,683 and 5,320,313 shares issued, respectively 53,727 53,203 Class B Common Stock, $.01 par value, 5,000,000 shares authorized, 913,751 and 962,661 shares issued, respectively 9,138 9,627 Additional paid-in capital 48,277,256 48,233,608 Treasury stock, 81,100 shares at cost (531,547) -- Retained earnings 11,890,366 11,552,222 ---------------------------------- Total stockholders' equity 59,698,940 59,848,660 ---------------------------------- $ 99,525,699 $ 107,704,370 ================================== The accompanying notes to consolidated financial statements are an integral part of this consolidated financial statement.
SIMON TRANSPORTATION SERVICES INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Class A Class B Additional Total Common Common Paid-in Treasury Retained Stockholders' Stock Stock Capital Stock Earnings Equity ---------------------------------------------------------------------- Balance, September 30, 1995 $ 4,278 $ 18,722 $ 735,292 $ -- $ 8,274,286 $ 9,032,578 Distributions to (605,060) (605,060) stockholders of S corporation Sale of 2,441,968 shares 24,420 19,696,318 19,720,738 of Class A Common Stock in initial public offering, net of issuance costs Change in tax status 4,844,593 (4,844,593) -- Sale of 700 shares of 7 6,293 6,300 Class A Common Stock upon exercise of stock options Net earnings 948,925 948,925 ---------------------------------------------------------------------- Balance, September 30, 1996 28,705 18,722 25,282,496 -- 3,773,558 29,103,481 Sale of 1,535,000 shares 24,445 (9,095) 22,903,411 22,918,761 of Class A Common Stock in secondary public offering, net of issuance costs Sale of 5,306 shares of 53 47,701 47,754 Class A Common Stock upon exercise of stock options Net earnings 7,778,664 7,778,664 ---------------------------------------------------------------------- Balance, September 30, 1997 53,203 9,627 48,233,608 -- 11,552,222 59,848,660 Sale of 48,910 shares of 489 (489) -- Class B Common Stock by major shareholder Sale of 3,460 shares of 35 43,648 43,683 Class A Common Stock upon exercise of stock options Purchase of 81,100 shares (531,547) (531,547) of Class A Common Stock Net earnings 338,144 338,144 ---------------------------------------------------------------------- Balance, September 30, 1998 $ 53,727 $ 9,138 $ 48,277,256 $(531,547) $11,890,366 $ 59,698,940 ====================================================================== The accompanying notes to consolidated financial statements are an integral part of this consolidated financial statement.
SIMON TRANSPORTATION SERVICES INC. CONSOLIDATED STATEMENT OF CASH FLOWS For the Years Ended September 30, ------------------------------------------------------- 1998 1997 1996 ------------------------------------------------------- Cash Flows From Operating Activities: Net earnings $ 338,144 $ 7,778,664 $ 948,925 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 4,728,477 5,396,198 5,919,494 Gain on sale of real property -- (1,896,025) -- Changes in operating assets and liabilities: Increase in receivables, net (627,145) (6,361,812) (5,930,273) (Increase) decrease in operating supplies (316,882) (324,090) 211,792 Increase in prepaid expenses and other (623,057) (256,431) (885,547) Increase in current deferred income tax asset (127,436) (7,144) (627,883) (Increase) decrease in other assets (98,373) 192,195 180,828 Increase in accounts payable 1,421,629 1,901,521 322,648 (Decrease) increase in accrued liabilities (136,874) 1,000,361 489,298 Increase (decrease) in accrued claims payable 1,153 (342,670) 305,769 (Decrease) increase in income taxes payable (3,224,881) (1,560,208) 2,191,984 Increase in deferred income taxes payable 2,902,398 2,373,792 3,880,653 ------------------------------------------------------- Net cash provided by operating activities 4,237,153 7,894,351 7,007,688 ------------------------------------------------------- Cash Flows From Investing Activities: Purchase of property and equipment (12,936,744) (31,815,000) (23,149,090) Proceeds from the sale of property and equipment 15,833,300 12,785,576 18,499,863 ------------------------------------------------------- Net cash provided by (used in) investing activities 2,896,556 (19,029,424) (4,649,227) ------------------------------------------------------- Cash Flows From Financing Activities: Proceeds from issuance of long-term debt 2,900,000 15,894,391 19,666,814 Principal payments on long-term debt (7,191,295) (13,198,750) (12,775,333) Net payments under line-of-credit agreement -- -- (4,279,741) Principal payments under capitalized lease obligations (7,294,186) (7,332,513) (18,871,127) Net proceeds from issuance of common stock 43,683 22,966,515 19,727,037 Purchase of treasury stock (531,547) -- -- Distributions to S corporation stockholders -- -- (605,060) ------------------------------------------------------- Net cash (used in) provided by financing activities (12,073,345) 18,329,643 2,862,590 ------------------------------------------------------- Net (Decrease) Increase In Cash (4,939,636) 7,194,570 5,221,051 Cash at Beginning of Year 12,766,001 5,571,431 350,380 ------------------------------------------------------- Cash at End of Year $ 7,826,365 $ 12,766,001 $ 5,571,431 ======================================================= Supplemental Disclosure of Cash Flow Information: Cash paid during the year for interest $ 1,818,100 $ 1,761,939 $ 2,847,583 Cash paid during the year for income taxes 153,461 4,631,593 -- Supplemental Schedule of Noncash Investing and Financing Activities: Equipment acquired through capitalized lease obligations $ -- $ -- $ 5,784,405 The accompanying notes to consolidated financial statements are an integral part of this consolidated financial statement.
SIMON TRANSPORTATION SERVICES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) DESCRIPTION OF THE COMPANY, ACQUISITIONS, AND RECAPITALIZATION Simon Transportation Services Inc. was incorporated in Nevada on August 15, 1995 to acquire all of the outstanding capital stock of Dick Simon Trucking, Inc., a Utah corporation. The accompanying consolidated financial statements present the consolidated financial position and results of operations of Simon Transportation Services Inc. and Dick Simon Trucking, Inc., its wholly owned subsidiary (collectively, the "Company"). All intercompany accounts and transactions have been eliminated in consolidation. The Company is a truckload carrier that specializes in premium service, primarily through temperature-controlled transportation predominantly for major shippers in the U.S. food industry. Recapitalization Immediately prior to the effective date of the Company's initial public offering, the Company issued 427,839 shares of Class A and 1,872,161 shares of Class B Common Stock of Simon Transportation Services Inc. to the existing shareholders of Dick Simon Trucking, Inc. in exchange for all of the outstanding capital stock of Dick Simon Trucking, Inc. in a transaction intended to qualify as a transfer to a controlled corporation under Section 351 of the Internal Revenue Code. This transaction was consummated on November 17, 1995. On November 17, 1995, the Company completed its initial public offering of 2,441,968 shares of Class A Common Stock which generated net proceeds of $19,720,738 after deducting underwriting commissions and other expenses. A majority of the proceeds were used to pay off certain long-term debt. On February 13, 1997, the Company completed a public offering of 2,530,000 shares of Class A Common Stock. Selling stockholders offered and received net proceeds for 995,000 of these shares (85,500 shares of Class A Common Stock and 909,500 shares of Class B Common Stock reclassified as Class A Common Stock upon completion of the offering). The sale of the 1,535,000 shares of Class A Common Stock offered by the Company generated net proceeds of $22,918,761 after deducting underwriting commissions and other expenses. A majority of the proceeds were used to purchase new revenue equipment. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Revenue Recognition and Significant Customers Freight charges and related direct freight expenses are recognized as revenue and operating expense when freight is delivered at a destination point. One customer accounted for approximately 11, 12, and 18 percent of operating revenue in fiscal years 1998, 1997, and 1996, respectively. At September 30, 1998, the Company had accounts receivable outstanding with this customer totaling $1,485,400. No other customer accounted for more than 10% of revenue during fiscal years 1998, 1997 and 1996. Operating Supplies Operating supplies consist primarily of tires, fuel and maintenance parts for revenue equipment which are stated at the lower of first-in, first-out (FIFO) cost or market value. Property and Equipment Property and equipment are recorded at cost and depreciated based on the straight-line method over their estimated useful lives, taking into consideration salvage values for purchased property and residual values for equipment held under capitalized leases. Leasehold improvements are amortized over the terms of the respective lease or the lives of the assets, whichever is shorter. Expenditures for routine maintenance and repairs are charged to operating expense as incurred. Major renewals and betterments are capitalized and depreciated over their estimated useful lives. Upon retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts, and any gain or loss is recorded as an adjustment to depreciation and amortization. Net gains from the disposition of equipment in the amounts of $2,290,074, $1,563,524, and $2,447,765 for fiscal years 1998, 1997, and 1996, respectively, have been included in depreciation and amortization in the accompanying statements of earnings and cash flows. The estimated useful lives of property and equipment are as follows: Revenue equipment 3 - 7 years Buildings and improvements 30 years Office furniture and equipment 5 - 10 years Tires purchased as part of revenue equipment are capitalized as a cost of the equipment. Replacement tires are expensed when placed in service. Fair Value of Financial Instruments The carrying amounts reported in the accompanying consolidated statements of financial position for cash, accounts receivable, and accounts payable approximate fair values because of the immediate or short-term maturities of these financial instruments. The carrying amounts of the Company's long-term debt also approximate fair values based on current rates for similar debt. Insurance Coverage and Accrued Claims Payable The Company acts as a self-insurer for auto liability, workers' compensation, tractor physical damage, trailer physical damage, and cargo damage claims up to $100,000, $100,000, $25,000, $10,000 and $10,000, respectively, per single occurrence. Effective November 1, 1998, the Company's equipment and cargo loss is insured subject to a "basket deductible" of $250,000 per occurrence. Liability in excess of these amounts is assumed by the insurance underwriter up to applicable policy limits of $1,000,000 per occurrence. The Company maintains loss prevention programs in an effort to minimize this risk. The Company estimates and accrues a liability for its share of ultimate settlements using all available information including the services of a third-party insurance risk claims administrator to assist in establishing reserve levels for each occurrence based on the facts and circumstances of the occurrence coupled with the Company's past history of such claims. The Company accrues for workers' compensation and automobile liabilities when reported, typically the same day as the occurrence. Additionally, the Company accrues an estimated liability for incurred but not reported claims. Expense depends upon actual loss experience and changes in estimates of settlement amounts for open claims which have not been fully resolved. The Company provides for adverse loss developments in the period when new information so dictates. The Company had outstanding letters of credit related to insurance coverage totaling $950,000 at September 30, 1998. These letters of credit mature at various times through November 1998 and renew annually unless terminated by either party. Income Taxes The Company recognizes a liability or asset for the deferred tax consequences of all temporary differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years when the reported amounts of the assets and liabilities are recovered or settled. Net Earnings Per Common Share Basic net earnings per common share (Basic EPS) excludes dilution and is computed by dividing net earnings by the weighted average number of common shares outstanding during the fiscal year. Diluted net earnings per common share (Diluted EPS) reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into common stock. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an antidilutive effect on net earnings per common share. Net earnings per common share amounts and share data have been restated for all periods presented to reflect Basic and Diluted EPS. Following is a reconciliation of the numerator and denominator of Basic EPS to the numerator and denominator of Diluted EPS for fiscal years 1998, 1997 and 1996: 1998 1997 1996 =============== ============================== Numerator: Pro forma net earnings $ 338,144 $ 7,778,664 $ 3,867,469 =============== ============================== Denominator: Weighted average common shares outstanding 6,270,734 5,707,642 4,417,643 Effect of options -- 156,401 47,194 =============== ============================== 6,270,734 5,864,043 4,464,837 =============== ============================== Basic EPS $ 0.05 $ 1.36 $ 0.88 Diluted EPS $ 0.05 $ 1.33 $ 0.87
Options to purchase 717,130 shares of common stock at a weighted average exercise price of $18.05 as of September 30, 1998 were not included in the computation of Diluted EPS for fiscal year 1998. The inclusion of the options would have been antidilutive, thereby increasing net earnings per common share. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income" and No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components and SFAS No. 131 establishes new standards for public companies to report information about their operating segments, products and services, geographic areas and major customers. Both statements are effective for financial statements issued for periods beginning after December 15, 1997. Accordingly, the Company will adopt SFAS No. 130 and SFAS No. 131 in its fiscal year 1999 consolidated financial statements. Management believes the adoption of SFAS Nos. 130 and 131 will not have a material impact on the consolidated financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". The statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at fair value and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. Accordingly, the Company will adopt SFAS No. 133 in its fiscal year 2000 consolidated financial statements. Management believes the adoption of SFAS No. 133 will not have a material impact on the consolidated financial statements. (3) INCOME TAXES Effective October 1, 1990, Dick Simon Trucking, Inc. elected for federal and state income tax purposes to include its taxable earnings with that of its stockholders (an S corporation election). Accordingly, from that date to November 16, 1995, the Company made no provision for income taxes in its financial statements. The Company's policy was to make distributions to its stockholders in amounts at least equal to the stockholders' income taxes that were attributable to the net earnings of the Company. The Company recorded such distributions when they were declared to the stockholders. Concurrently with the acquisition of all of the capital stock of Dick Simon Trucking, Inc. by Simon Transportation Services Inc. (see Note 1), the S corporation status of the Company terminated and the Company became subject to federal and state income taxes. Upon termination of the Company's S corporation status, the Company recognized deferred income tax assets and liabilities in accordance with SFAS No. 109, "Accounting for Income Taxes." The Company recorded, in accordance with SFAS No. 109, a net deferred income tax liability and the related deferred income tax expense in the quarter in which the change occurred. Additionally, in connection with the termination of the S corporation election, the Company reclassified its retained earnings to additional paid-in capital. The provision for income taxes includes the following components for the years ended September 30, 1998, 1997 and 1996: 1998 1997 1996 -------------------------------------- ------------------ Current income tax (benefit) provision: Federal $ (2,100,924) $ 1,993,941 $ 1,758,933 State (377,502) 366,638 442,467 -------------------------------------- ------------------ (2,478,426) 2,360,579 2,201,400 -------------------------------------- ------------------ Deferred income tax provision: Federal 2,352,293 2,062,976 254,592 State 422,669 303,672 18,063 Net deferred tax liability upon termination of S corporation status -- -- 2,980,115 -------------------------------------- ------------------ 2,774,962 2,366,648 3,252,770 -------------------------------------- ------------------ Provision for income taxes $ 296,536 $ 4,727,227 $ 5,454,170 ====================================== ==================
The following is a reconciliation between the statutory Federal income tax rate of 34 percent and the effective rate which is derived by dividing the provision for income taxes by earnings before provision for income taxes for the years ended September 30, 1998, 1997 and 1996: 1998 1997 1996 -------------------------------------- ------------------ Computed "expected" provision for income taxes at the statutory rate $ 215,791 $ 4,252,003 $ 2,177,053 Increase (decrease) in income taxes resulting from: Net deferred tax liability upon termination of S corporation status -- -- 2,980,115 State income taxes, net of federal income tax benefit 24,118 479,466 303,950 Other, net 56,627 (4,242) (6,948) -------------------------------------- ------------------ Provision for income taxes $ 296,536 $ 4,727,227 $ 5,454,170 ====================================== ==================
The significant components of the net deferred income tax assets and liabilities as of September 30, 1998 and 1997 are as follows: 1998 1997 ------------------ ------------------ Deferred income tax assets: Accrued claims payable $ 279,270 $ 278,834 Other reserves and accruals 483,193 356,193 ------------------ ------------------ Total deferred income tax assets 762,463 635,027 Deferred income tax liability: Difference between book and tax basis of property and equipment (9,156,843) (6,254,445) ------------------ ------------------ Net deferred income tax liability $ (8,394,380) $ (5,619,418) ================== ==================
(4) LONG-TERM DEBT Long-term debt consists of the following as of September 30, 1998 and 1997: 1998 1997 -------------------------------------- Notes payable to a bank, interest ranging from 6.24 percent to 7.20 percent, $ 7,281,476 $ 9,871,320 payable in monthly installments through April 2001, secured by revenue equipment Note payable to a bank, interest at Eurodollar rate (6.63 percent at 8,410,101 9,722,222 September 30, 1998), payable in monthly installments through August 2000, unsecured Note payable to a bank, interest at LIBOR plus 1.1 percent (6.75 percent at 1,038,214 1,427,544 September 30, 1998), payable in monthly installments through May 2001, secured by revenue equipment -------------------------------------- 16,729,791 21,021,086 Less current portion (7,627,142) (6,382,697) -------------------------------------- $ 9,102,649 $ 14,638,389 ======================================
Scheduled principal payments of long-term debt as of September 30, 1998 are as follows: Years Ending September 30, Amount - ------------------------------------------------------ ------------------- 1999 $ 7,627,142 2000 7,384 069 2001 1,718,580 ------------------- $ 16,729,791 =================== The Company's unsecured long-term debt agreement contains various restrictive covenants including maximum debt to tangible net worth and minimum tangible net worth requirements. As of September 30, 1998, the Company was in compliance with all covenants under the loan agreement. The Company has an unsecured line of credit for $10,000,000. As of September 30, 1998, the Company had no outstanding draws on this line of credit. (5) CAPITALIZED LEASE OBLIGATIONS Certain revenue equipment is leased under capitalized lease obligations. The following is a summary of assets held under capital lease agreements: September 30, ---------------------------------------------- 1998 1997 ---------------------------------------------- Revenue equipment $ 9,114,812 $ 20,098,048 Less accumulated amortization (3,884,564) (6,276,894) ---------------------------------------------- $ 5,230,248 $ 13,821,154 ============================================== The following is a schedule by year of future minimum lease payments under capitalized leases together with the present value of the minimum lease payments at September 30, 1998: Years Ending September 30, Amount - --------------------------------------------------- -------------------- 1999 $ 2,208,242 2000 1,999,424 2001 596,850 -------------------- Total minimum lease payments 4,804,516 Less amount representing interest (328,672) -------------------- Present value of minimum lease payments 4,475,844 Less current portion (2,030,988) -------------------- $ 2,444,856 ==================== (6) COMMITMENTS Operating Leases The Company is committed under noncancelable operating leases involving certain revenue equipment. Rent expense for noncancelable operating leases was $25,343,111, $15,595,123, and $3,997,352 for fiscal years 1998, 1997, and 1996, respectively. Aggregate future lease commitments are $28,364,459, $20,452,949, $13,581,485, $6,811,800, and $1,883,456 for the years ending September 30, 1999, 2000, 2001, 2002, and 2003, respectively. Orders for Revenue Equipment As of September 30, 1998, the Company had placed orders for fiscal years 1999 and 2000 to purchase revenue equipment at an estimated total purchase price of $109.3 million. The revenue equipment is to be delivered during fiscal years 1999 and 2000. Approximately $77.9 million of the new revenue equipment will be used to replace older revenue equipment and the balance represents incremental additions to the Company's fleet. These orders may be canceled by the Company without penalty upon written notification any time prior to 85 days before the revenue equipment's scheduled delivery. Legal Proceedings The Company from time to time is a party to litigation arising in the ordinary course of its business, substantially all of which involves claims for personal injury and property damage incurred in the transportation of freight. The Company presently is not a party to any legal proceeding other than litigation arising from vehicle accidents, and management is not aware of any claims or threatened claims that reasonably would be expected to exceed insurance limits or have a materially adverse effect upon the Company's operations or financial position. (7) CAPITAL TRANSACTIONS AND STOCK PLANS Preferred Stock The Company is authorized to issue 5,000,000 shares of preferred stock from time to time in one or more series without stockholder approval. No shares of preferred stock are presently outstanding. The Board of Directors is authorized, without any further action by the stockholders of the Company, to (a) divide the preferred stock into series, (b) designate each such series, (c) fix and determine dividend rights, (d) determine the price, terms and conditions on which shares of preferred stock may be redeemed, (e) determine the amount payable to holders of preferred stock in the event of voluntary or involuntary liquidation, (f) determine any sinking fund provisions, and (g) establish any conversion privileges. Treasury Stock The Company's Board of Directors has authorized a stock repurchase program under which management may reacquire up to 500,000 shares of the Company's Class A Common Stock. During fiscal year 1998, the Company repurchased 81,100 shares of Class A Common Stock at an average price of $6.55 per share, for a total cash outlay of $531,547. Incentive Stock Plan On May 31, 1995, the Company's Board of Directors and stockholders approved and adopted the Dick Simon Trucking, Inc. Incentive Stock Plan (the "Plan"). The Plan reserves 1,000,000 shares of Class A Common Stock for issuance thereunder. The Board of Directors or its designated committee administers the Plan and has the discretion to determine the employees and officers who will receive awards, the type of awards (incentive stock options, non-statutory stock options, restricted stock awards, reload options, other stock based awards, and other benefits) to be granted and the term, vesting provisions and exercise prices. Outside Director Stock Plan On August 16, 1995, the Company adopted an Outside Director Stock Plan, under which each director who is not an employee of the Company will receive an annual option to purchase 1,000 shares of the Company's Class A Common Stock at 85% of the market price at the grant date. The Company has reserved 25,000 shares of Class A Common Stock for issuance under the Outside Director Stock Plan. The following table summarizes the combined stock option activity for both plans for fiscal years 1996, 1997 and 1998: Weighted Average Number of Options Exercise Price Per Share --------------------- ------------------------- Outstanding at September 30, 1995 230,900 9.00 Granted 3,000 9.00 Exercised (700) 9.00 Forfeited (5,500) 9.00 --------------------- ------------------------- Outstanding at September 30, 1996 227,700 9.00 Granted 141,000 15.97 Exercised (5,306) 9.00 Forfeited (14,160) 9.00 --------------------- ------------------------- Outstanding at September 30, 1997 349,234 11.79 Granted 386,500 23.26 Exercised (3,460) 9.00 Forfeited (15,144) 9.18 --------------------- ------------------------- Outstanding at September 30, 1998 717,130 $18.05 ===================== =========================
The outstanding options range in exercise price from $9.00 to $23.50, and have a weighted average remaining contractual life of approximately 8.3 years. As of September 30, 1998, approximately 142,970 options are exercisable. Stock-Based Compensation The Company has elected to continue to apply Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans as they relate to employees and directors. SFAS No. 123, "Accounting for Stock-Based Compensation," requires pro forma information regarding net earnings as if the Company had accounted for its stock options granted to employees and directors subsequent to September 30, 1995 under the fair value method of SFAS No. 123. The fair value of these stock options was estimated at the grant date using the Black-Scholes option pricing model with the following assumptions: average risk-free interest rates of 5.77%, 6.15% and 5.07% in fiscal years 1998, 1997 and 1996, respectively, a dividend yield of 0%, weighted average volatility factors of the expected common stock price of 24.6% for fiscal year 1998 and 25.4% for fiscal years 1997 and 1996, and weighted average expected lives for the stock options of approximately 7.4 years for fiscal year 1998 and 9.7 years for fiscal years 1997 and 1996. For purposes of pro forma disclosures, the estimated fair value of the stock options is amortized over the vesting period of the respective stock options. Under the fair value method of SFAS No. 123, pro forma net (loss) earnings would have been ($170,195), $7,679,248, and $3,859,555, and pro forma diluted net (loss) earnings per share would have been ($0.03), $1.31, and $0.86 for the fiscal years ended September 30, 1998, 1997, and 1996, respectively. (8) EMPLOYEE BENEFIT PLAN The Company has adopted a defined contribution plan, the Dick Simon Trucking, Inc. 401(k) Profit Sharing Plan (the "401(k) Plan"). All employees who have completed one year of service and have reached age 21 are eligible to participate in the 401(k) Plan. Under the 401(k) Plan, employees are allowed to make contributions of up to 15 percent of their annual compensation; the Company may make matching contributions equal to a discretionary percentage, to be determined by the Company, of the employee's salary reductions. The Company may also make additional discretionary contributions to the 401(k) Plan. All amounts contributed by a participant are fully vested at all times. The participant becomes 20 percent vested in any matching or discretionary contributions after two years of service. This vesting percentage increases to 100 percent after six years of service. During fiscal years 1998, 1997, and 1996, the Company contributed $351,829, $301,078, and $192,389, respectively, to the 401(k) Plan. (9) PRO FORMA INFORMATION (UNAUDITED) Pro Forma Provision for Income Taxes Contemporaneously with the November 17, 1995 effective date of the Company's initial public offering, the S corporation stockholders terminated their S corporation election. Accordingly, the pro forma provision for income taxes for fiscal year 1996 has been determined in accordance with SFAS No. 109, assuming the Company had been taxed as a C corporation for federal and state income tax purposes using an effective income tax rate of 39.6 percent. The pro forma provision for income taxes for fiscal year 1996 does not reflect a $2,980,115 one-time, non-cash charge to earnings for deferred taxes the Company recorded upon termination of its S corporation status. (10) QUARTERLY FINANCIAL DATA (UNAUDITED) Fourth Third Second First Quarter Quarter Quarter Quarter 1998 1998 1998 1998 ------------------ ---------------- ------------------- ---------------- Revenue $50,296 $50,055 $46,149 $47,006 Operating earnings (loss) 945 (90) (2,105) 3,386 Earnings (loss) before income taxes 608 (435) (2,536) 2,997 Provision (benefit) for income taxes 286 (165) (959) 1,132 Net earnings (loss) 322 (270) (1,577) 1,864 Diluted net earnings (loss) per share $ 0.05 $ (0.04) $ (0.25) $ 0.29 Fourth Third Second First Quarter Quarter Quarter Quarter 1997 1997 1997 1997 ------------------ ---------------- ------------------- ---------------- Revenue $44,175 $41,191 $35,765 $34,166 Operating earnings 3,571 3,278 2,462 2,433 Earnings before income taxes 3,375 4,919 2,225 1,987 Provision for income taxes 1,276 1,859 841 751 Net earnings 2,099 3,060 1,384 1,236 Diluted net earnings per share $ 0.33 $ 0.48 $ 0.25 $ 0.26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Simon Transportation Services Inc.: We have audited the accompanying consolidated statements of financial position of Simon Transportation Services Inc. (a Nevada corporation) and subsidiary as of September 30, 1998 and 1997, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Simon Transportation Services Inc. and subsidiary as of September 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1998 in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Salt Lake City, Utah October 15, 1998 EX-23 2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated October 15, 1998 included in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8, file numbers 33-80389, 33-80391, and 33-80409. /s/ Arthur Andersen LLP Salt Lake City, Utah November 11, 1998 EX-27 3 FINANCIAL DATA SCHEDULE
5 YEAR SEP-30-1998 SEP-30-1998 7,826,365 0 20,440,308 (189,377) 662,534 34,683,939 83,216,158 (18,598,221) 99,525,699 19,122,410 0 0 0 62,864 59,636,076 99,525,699 0 193,506,902 0 191,371,766 0 0 1,818,100 634,680 296,536 0 0 0 0 338,144 0.05 0.05
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