-----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, BHrGk47TjYNluG+GnhJeRkIaCMBT9GcgNYF9P2TDBa2Pe+ErgruALz2P+hQAFCb5 WZXpei/Zz6w+6Hpq9LPeZg== 0000793074-05-000107.txt : 20051031 0000793074-05-000107.hdr.sgml : 20051031 20051031171750 ACCESSION NUMBER: 0000793074-05-000107 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051031 DATE AS OF CHANGE: 20051031 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WERNER ENTERPRISES INC CENTRAL INDEX KEY: 0000793074 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 470648386 STATE OF INCORPORATION: NE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14690 FILM NUMBER: 051167212 BUSINESS ADDRESS: STREET 1: 14507 FRONTIER ROAD STREET 2: P O BOX 45308 CITY: OMAHA STATE: NE ZIP: 68145 BUSINESS PHONE: 4028956640 10-Q 1 wern10q3q05.txt WERNER ENTERPRISES, INC. 10-Q 9/30/05 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [Mark one] [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-14690 WERNER ENTERPRISES, INC. (Exact name of registrant as specified in its charter) NEBRASKA 47-0648386 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 14507 FRONTIER ROAD 68145-0308 POST OFFICE BOX 45308 (Zip Code) OMAHA, NEBRASKA (Address of principal executive offices) Registrant's telephone number, including area code: (402) 895-6640 _________________________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No --- --- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- As of October 28, 2005, 79,388,688 shares of the registrant's common stock, par value $.01 per share, were outstanding. INDEX TO FORM 10-Q PAGE ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Income for the Three Months Ended September 30, 2005 and 2004 3 Consolidated Statements of Income for the Nine Months Ended September 30, 2005 and 2004 4 Consolidated Condensed Balance Sheets as of September 30, 2005 and December 31, 2004 5 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005 and 2004 6 Notes to Consolidated Financial Statements as of September 30, 2005 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 26 Item 4. Controls and Procedures 26 PART II - OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28 Item 5. Other Information 28 Item 6. Exhibits 29 PART I FINANCIAL INFORMATION Item 1. Financial Statements. The interim consolidated financial statements contained herein reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the financial condition, results of operations, and cash flows for the periods presented. The interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Operating results for the three-month and nine-month periods ended September 30, 2005, are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. In the opinion of management, the information set forth in the accompanying consolidated condensed balance sheets is fairly stated in all material respects in relation to the consolidated balance sheets from which it has been derived. These interim consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2004. 2 WERNER ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended (In thousands, except per share amounts) September 30 - --------------------------------------------------------------------------- 2005 2004 - --------------------------------------------------------------------------- (Unaudited) Operating revenues $ 504,520 $ 425,409 --------------------------- Operating expenses: Salaries, wages and benefits 147,043 136,977 Fuel 92,904 55,245 Supplies and maintenance 40,450 33,564 Taxes and licenses 29,814 26,699 Insurance and claims 19,777 17,663 Depreciation 41,204 36,514 Rent and purchased transportation 88,596 74,617 Communications and utilities 5,080 4,863 Other (1,486) (243) --------------------------- Total operating expenses 463,382 385,899 --------------------------- Operating income 41,138 39,510 --------------------------- Other expense (income): Interest expense 250 5 Interest income (813) (710) Other 184 45 --------------------------- Total other expense (income) (379) (660) --------------------------- Income before income taxes 41,517 40,170 Income taxes 17,026 15,871 --------------------------- Net income $ 24,491 $ 24,299 =========================== Earnings per share: Basic $ .31 $ .31 =========================== Diluted $ .30 $ .30 =========================== Dividends declared per share $ .040 $ .035 =========================== Weighted-average common shares outstanding: Basic 79,409 79,044 =========================== Diluted 80,626 80,573 ===========================
3 WERNER ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended (In thousands, except per share amounts) September 30 - ----------------------------------------------------------------------------- 2005 2004 - ----------------------------------------------------------------------------- (Unaudited) Operating revenues $ 1,445,571 $ 1,222,804 ----------------------------- Operating expenses: Salaries, wages and benefits 428,597 404,585 Fuel 238,596 151,102 Supplies and maintenance 117,125 101,260 Taxes and licenses 88,057 81,639 Insurance and claims 64,815 57,192 Depreciation 121,380 107,143 Rent and purchased transportation 261,505 208,968 Communications and utilities 15,656 13,861 Other (6,263) (2,306) ----------------------------- Total operating expenses 1,329,468 1,123,444 ----------------------------- Operating income 116,103 99,360 ----------------------------- Other expense (income): Interest expense 256 11 Interest income (2,600) (1,796) Other 257 139 ----------------------------- Total other expense (income) (2,087) (1,646) ----------------------------- Income before income taxes 118,190 101,006 Income taxes 48,483 39,519 ----------------------------- Net income $ 69,707 $ 61,487 ============================= Earnings per share: Basic $ .88 $ .78 ============================= Diluted $ .86 $ .76 ============================= Dividends declared per share $ .115 $ .095 ============================= Weighted-average common shares outstanding: Basic 79,392 79,290 ============================= Diluted 80,713 80,939 =============================
4 WERNER ENTERPRISES, INC. CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share amounts) September 30 December 31 - --------------------------------------------------------------------------- 2005 2004 - --------------------------------------------------------------------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 20,462 $ 108,807 Accounts receivable, trade, less allowance of $8,324 and $8,189, respectively 222,771 186,771 Other receivables 16,386 11,832 Inventories and supplies 11,027 9,658 Prepaid taxes, licenses and permits 8,044 15,292 Current deferred income taxes 23,718 - Other current assets 22,062 18,896 --------------------------- Total current assets 324,470 351,256 --------------------------- Property and equipment 1,512,601 1,374,649 Less - accumulated depreciation 547,249 511,651 --------------------------- Property and equipment, net 965,352 862,998 --------------------------- Other non-current assets 15,325 11,521 --------------------------- $1,305,147 $1,225,775 =========================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 56,880 $ 49,618 Insurance and claims accruals 66,090 55,095 Accrued payroll 22,033 19,579 Income taxes payable 3,211 475 Current deferred income taxes - 15,569 Other current liabilities 18,210 17,230 --------------------------- Total current liabilities 166,424 157,566 --------------------------- Insurance and claims accruals, net of current portion 92,301 84,301 Deferred income taxes 210,177 210,739 Commitments and contingencies Stockholders' equity: Common stock, $.01 par value, 200,000,000 shares authorized; 80,533,536 shares issued; 79,382,754 and 79,197,747 shares outstanding, respectively 805 805 Paid-in capital 105,318 106,695 Retained earnings 751,610 691,035 Accumulated other comprehensive loss (350) (861) Treasury stock, at cost; 1,150,782 and 1,335,789 shares, respectively (21,138) (24,505) --------------------------- Total stockholders' equity 836,245 773,169 --------------------------- $1,305,147 $1,225,775 ===========================
5 WERNER ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended (In thousands) September 30 - --------------------------------------------------------------------------- 2005 2004 - --------------------------------------------------------------------------- (Unaudited) Cash flows from operating activities: Net income $ 69,707 $ 61,487 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 121,380 107,143 Deferred income taxes (39,849) 5,791 Gain on disposal of property and equipment (8,586) (7,067) Tax benefit from exercise of stock options 1,436 1,368 Other long-term assets (216) 453 Insurance claims accruals, net of current portion 8,000 10,000 Changes in certain working capital items: Accounts receivable, net (36,000) (29,553) Other current assets (1,841) (220) Accounts payable 7,262 3,890 Other current liabilities 16,761 8,377 --------------------------- Net cash provided by operating activities 138,054 161,669 --------------------------- Cash flows from investing activities: Additions to property and equipment (306,340) (206,143) Retirements of property and equipment 84,073 71,949 Decrease in notes receivable 3,531 2,471 --------------------------- Net cash used in investing activities (218,736) (131,723) --------------------------- Cash flows from financing activities: Dividends on common stock (8,728) (6,746) Repurchases of common stock (1,573) (21,591) Stock options exercised 2,127 2,662 --------------------------- Net cash used in financing activities (8,174) (25,675) --------------------------- Effect of exchange rate fluctuations on cash 511 (191) Net increase (decrease) in cash and cash equivalents (88,345) 4,080 Cash and cash equivalents, beginning of period 108,807 101,409 --------------------------- Cash and cash equivalents, end of period $ 20,462 $ 105,489 =========================== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 12 $ 11 Income taxes $ 83,108 $ 33,854 Supplemental schedule of non-cash investing activities: Notes receivable issued upon sale of revenue equipment $ 7,119 $ 3,210
6 WERNER ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Comprehensive Income Other than its net income, the Company's only other source of comprehensive income (loss) is foreign currency translation adjustments. Other comprehensive income (loss) from foreign currency translation adjustments was $11 and ($13) (in thousands) for the three-month periods and $511 and ($191) (in thousands) for the nine-month periods ended September 30, 2005 and 2004, respectively. (2) Long-Term Debt As of September 30, 2005, the Company has two credit facilities with banks totaling $75.0 million which expire May 16, 2007 and October 22, 2007 and bear variable interest based on the London Interbank Offered Rate ("LIBOR"), on which no borrowings were outstanding. As of September 30, 2005, the credit available pursuant to these bank credit facilities is reduced by $37.2 million in letters of credit the Company maintains. Subsequent to September 30, 2005, the Company borrowed $35.0 million under these credit facilities. Each of the debt agreements require, among other things, that the Company maintain a minimum consolidated tangible net worth and not exceed a maximum ratio of total funded debt to earnings before interest, income taxes, depreciation, amortization and rentals payable as defined in the credit facility. Although the Company had no borrowings outstanding under these credit facilities as of September 30, 2005, the Company remained in compliance with these covenants at September 30, 2005. On August 17, 2005, the Company renewed the $25.0 million bank credit facility, extending the maturity date from October 22, 2005 to October 22, 2007 and increasing the amount of the minimum consolidated tangible net worth requirement to $500.0 million plus 50% of annual net income. On October 25, 2005, the Company's $50.0 million bank credit facility was amended to increase the amount of the facility to $75.0 million. (3) Commitments As of September 30, 2005, the Company has commitments for net capital expenditures of approximately $102.5 million. 7 (4) Earnings Per Share Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. The difference between basic and diluted earnings per share for all periods presented is due to the common stock equivalents that are assumed to be issued upon the exercise of stock options. The computation of basic and diluted earnings per share is shown below (in thousands, except per share amounts).
Three Months Ended Nine Months Ended September 30 September 30 ---------------------- ---------------------- 2005 2004 2005 2004 ---------------------- ---------------------- Net income $ 24,491 $ 24,299 $ 69,707 $ 61,487 ====================== ====================== Weighted-average common shares outstanding 79,409 79,044 79,392 79,290 Common stock equivalents 1,217 1,529 1,321 1,649 ---------------------- ---------------------- Shares used in computing diluted earnings per share 80,626 80,573 80,713 80,939 ====================== ====================== Basic earnings per share $ .31 $ .31 $ .88 $ .78 ====================== ====================== Diluted earnings per share $ .30 $ .30 $ .86 $ .76 ====================== ======================
Options to purchase shares of common stock which were outstanding during the periods indicated above, but were excluded from the computation of diluted earnings per share because the option purchase price was greater than the average market price of the common shares, were:
Three Months Ended Nine Months Ended September 30 September 30 ---------------------- ---------------------- 2005 2004 2005 2004 ---------------------- ---------------------- Number of shares under option 815,000 - 19,500 - Range of option purchase prices $18.33-$19.84 - $19.84 -
(5) Stock Based Compensation At September 30, 2005, the Company has a nonqualified stock option plan. The Company did not grant any stock options during the three-month periods ended September 30, 2005 and 2004. The Company granted 39,500 and 787,000 options during the nine-month periods ended September 30, 2005 and 2004, respectively. Subsequent to September 30, 2005, the Company granted 376,000 options. The Company applies the intrinsic value based method of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock option plan. No stock-based employee compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The Company's pro forma net income and earnings per share (in thousands, except per share amounts) would have been as indicated below had the fair value of all option grants been charged to salaries, wages, and benefits expense in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation. 8
Three Months Ended Nine Months Ended September 30 September 30 ---------------------- ---------------------- 2005 2004 2005 2004 ---------------------- ---------------------- Net income, as reported $ 24,491 $ 24,299 $ 69,707 $ 61,487 Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects 429 595 1,334 1,506 ---------------------- ---------------------- Net income, pro forma $ 24,062 $ 23,704 $ 68,373 $ 59,981 ====================== ====================== Earnings per share: Basic - as reported $ .31 $ .31 $ .88 $ .78 ====================== ====================== Basic - pro forma $ .30 $ .30 $ .86 $ .76 ====================== ====================== Diluted - as reported $ .30 $ .30 $ .86 $ .76 ====================== ====================== Diluted - pro forma $ .30 $ .29 $ .85 $ .74 ====================== ======================
The maximum number of shares of common stock that may be optioned under the Stock Option Plan is 20,000,000 shares, and the maximum aggregate number of options that may be granted to any one person is 2,562,500 options. (6) Segment Information The Company has two reportable segments - Truckload Transportation Services and Value Added Services. The Truckload Transportation Services segment consists of five operating fleets that have been aggregated since they have similar economic characteristics and meet the other aggregation criteria of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. The medium-to-long haul Van fleet transports a variety of consumer, non-durable products and other commodities in truckload quantities over irregular routes using dry van trailers. The Regional short-haul fleet provides comparable truckload van service within five geographic areas. The Dedicated Services fleet provides truckload services required by a specific company, plant, or distribution center. The Flatbed and Temperature-Controlled fleets provide truckload services for products with specialized trailers. Revenues for the Truckload Transportation Services segment include non-trucking revenues of $3.0 million and $3.9 million for the three-month periods and $10.1 million and $10.4 million for the nine-month periods ended September 30, 2005 and 2004, respectively, representing the portion of shipments delivered to or from Mexico where the Company utilizes a third-party carrier and revenues generated in a few dedicated accounts where the services of third-party carriers are used to meet customer capacity requirements. The Value Added Services segment, which generates the majority of the Company's non- trucking revenues, provides freight brokerage, intermodal and multimodal services, and freight transportation management. The Company generates other revenues related to third-party equipment maintenance, equipment leasing, and other business activities. None of these operations meet the quantitative threshold reporting requirements of SFAS No. 131. As a result, these operations are grouped in "Other" in the tables below. "Corporate" includes revenues and expenses that are incidental to the activities of the Company and are not attributable to any of its operating segments. The Company does not prepare separate balance sheets by segment and, as a result, assets are not separately identifiable by segment. The Company has no significant intersegment sales or expense transactions that would result in adjustments necessary to eliminate amounts between the Company's segments. 9 The following tables summarize the Company's segment information (in thousands of dollars):
Revenues -------- Three Months Ended Nine Months Ended September 30 September 30 ---------------------- ---------------------- 2005 2004 2005 2004 ---------------------- ---------------------- Truckload Transportation Services $ 448,786 $ 381,620 $1,278,285 $1,101,844 Value Added Services 52,859 41,174 158,574 113,527 Other 1,959 1,624 5,777 4,684 Corporate 916 991 2,935 2,749 ---------------------- ---------------------- Total $ 504,520 $ 425,409 $1,445,571 $1,222,804 ====================== ====================== Operating Income ---------------- Three Months Ended Nine Months Ended September 30 September 30 ---------------------- ---------------------- 2005 2004 2005 2004 ---------------------- ---------------------- Truckload Transportation Services $ 38,854 $ 38,059 $ 109,841 $ 96,393 Value Added Services 1,859 1,310 5,768 3,408 Other 746 572 2,417 1,821 Corporate (321) (431) (1,923) (2,262) ---------------------- ---------------------- Total $ 41,138 $ 39,510 $ 116,103 $ 99,360 ====================== ======================
10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This report contains historical information, as well as forward- looking statements that are based on information currently available to the Company's management. The forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company believes the assumptions underlying these forward- looking statements are reasonable based on information currently available; however, any of the assumptions could be inaccurate, and therefore, actual results may differ materially from those anticipated in the forward-looking statements as a result of certain risks and uncertainties. These risks include, but are not limited to, those discussed in the section of this Item entitled "Forward-Looking Statements and Risk Factors" and in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", of the Company's Annual Report on Form 10-K for the year ended December 31, 2004. Caution should be taken not to place undue reliance on forward-looking statements made herein, since the statements speak only as of the date they are made. The Company undertakes no obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. Overview: The Company operates in the truckload sector of the trucking industry, with a focus on transporting consumer nondurable products that ship more consistently throughout the year. The Company's success depends on its ability to efficiently manage its resources in the delivery of truckload transportation and logistics services to its customers. Resource requirements vary with customer demand, which may be subject to seasonal or general economic conditions. The Company's ability to adapt to changes in customer transportation requirements is a key element in efficiently deploying resources and in making capital investments in tractors and trailers. Although the Company's business volume is not highly concentrated, the Company may also be affected by the financial failure of its customers or a loss of a customer's business from time-to-time. Operating revenues consist of trucking revenues generated by the five operating fleets in the Truckload Transportation Services segment (medium/long-haul van, dedicated, regional short-haul, flatbed, and temperature-controlled) and non-trucking revenues generated primarily by the Company's Value Added Services ("VAS") segment. The Company's Truckload Transportation Services segment ("truckload segment") also includes a small amount of non-trucking revenues for the portion of shipments delivered to or from Mexico where it utilizes third-party carriers, and for a few of its dedicated accounts where the services of third-party carriers are used to meet customer capacity requirements. Non- trucking revenues reported in the operating statistics table include those revenues generated by the VAS segment, as well as the non-trucking revenues generated by the truckload segment. Trucking revenues accounted for 88% of total operating revenues in third quarter 2005, and non-trucking and other operating revenues accounted for 12%. Trucking services typically generate revenue on a per-mile basis. Other sources of trucking revenue include fuel surcharges and accessorial revenue such as stop charges, loading/unloading charges, and equipment detention charges. Because fuel surcharge revenues fluctuate in response to changes in the cost of fuel, these revenues are identified separately within the operating statistics table and are excluded from the statistics to provide a more meaningful comparison between periods. Non-trucking revenues generated by a fleet whose operations are part of the truckload segment are included in non-trucking revenue in the operating statistics table so that the revenue statistics in the table are calculated using only the revenues generated by company-owned and owner-operator trucks. The key statistics used to evaluate trucking revenues, excluding fuel surcharges, are average revenues per tractor per week, the per-mile rates charged to customers, the average monthly miles generated per tractor, the average percentage of empty miles, the average trip length, and the average number of tractors in service. General economic conditions, seasonal freight patterns in the trucking industry, and industry capacity are key factors that impact these statistics. 11 The Company's most significant resource requirements are qualified drivers, tractors, trailers, and related costs of operating its equipment (such as fuel and related fuel taxes, driver pay, insurance, and supplies and maintenance). The Company has historically been successful mitigating its risk to increases in fuel prices by recovering additional fuel surcharges from its customers that recoup a majority of the increased fuel costs; however, there is no assurance that current recovery levels will continue in future periods. The Company's financial results are also affected by availability of drivers and the market for new and used revenue equipment. Because the Company is self-insured for cargo, personal injury, and property damage claims on its revenue equipment and for workers' compensation benefits for its employees (supplemented by premium-based coverage above certain dollar levels), financial results may also be affected by driver safety, medical costs, the weather, the legal and regulatory environment, and the costs of insurance coverage to protect against catastrophic losses. A common industry measure used to evaluate the profitability of the Company and its trucking operating fleets is the operating ratio (operating expenses expressed as a percentage of operating revenues). The most significant variable expenses that impact the trucking operation are driver salaries and benefits, payments to owner-operators (included in rent and purchased transportation expense), fuel, fuel taxes (included in taxes and licenses expense), supplies and maintenance, and insurance and claims. Generally, these expenses vary based on the number of miles generated. As such, the Company also evaluates these costs on a per-mile basis to adjust for the impact on the percentage of total operating revenues caused by changes in fuel surcharge revenues, per-mile rates charged to customers, and non-trucking revenues. As discussed further in the comparison of operating results for third quarter 2005 to third quarter 2004, several industry-wide issues, including high fuel prices and a challenging driver recruiting market could cause costs to increase in future periods. The Company's main fixed costs include depreciation expense for tractors and trailers and equipment licensing fees (included in taxes and licenses expense). Depreciation expense has been affected by the new engine emission standards that became effective in October 2002 for all newly purchased trucks, which have increased truck purchase costs. The trucking operations require substantial cash expenditures for tractors and trailers. The Company has maintained a three-year replacement cycle for company-owned tractors. These purchases have been funded by net cash from operations. Non-trucking services provided by the Company, primarily through its VAS division, include freight brokerage, intermodal, multimodal, freight transportation management, and other services. Unlike the Company's trucking operations, the non-trucking operations are less asset-intensive and are instead dependent upon information systems, qualified employees, and the services of other third-party providers. The most significant expense item related to these non-trucking services is the cost of transportation paid by the Company to third-party providers, which is recorded as rent and purchased transportation expense. Other expenses include salaries, wages and benefits and computer hardware and software depreciation. The Company evaluates the non-trucking operations by reviewing the gross margin percentage (revenues less rent and purchased transportation expense expressed as a percentage of revenues) and the operating margin. The operating margins for the non-trucking business are generally lower than those of the trucking operations, but the returns on assets are substantially higher. 12 Results of Operations: The following table sets forth certain industry data regarding the freight revenues and operations of the Company for the periods indicated.
Three Months Ended Nine Months Ended September 30 % September 30 % -------------------- ----------------------- 2005 2004 Change 2005 2004 Change ------------------------------------------------------------- Trucking revenues, net of fuel surcharge (1) $380,320 $348,408 9.2% $1,109,798 $1,020,107 8.8% Trucking fuel surcharge revenues (1) 65,490 29,625 121.1% 158,393 71,612 121.2% Non-trucking revenues, including VAS (1) 55,906 45,051 24.1% 168,648 123,944 36.1% Other operating revenues (1) 2,804 2,325 20.6% 8,732 7,141 22.3% --------- --------- ----------- ----------- Operating revenues (1) $504,520 $425,409 18.6% $1,445,571 $1,222,804 18.2% ========= ========= =========== =========== Operating ratio (consolidated) (2) 91.8% 90.7% 1.2% 92.0% 91.9% 0.1% Average monthly miles per tractor 10,123 10,186 -0.6% 10,085 10,158 -0.7% Average revenues per total mile (3) $1.423 $1.357 4.9% $1.402 $1.325 5.8% Average revenues per loaded mile (3) $1.621 $1.528 6.1% $1.593 $1.494 6.6% Average percentage of empty miles 12.21% 11.20% 9.0% 11.99% 11.30% 6.1% Average trip length in miles (loaded) 564 580 -2.8% 567 583 -2.7% Total miles (loaded and empty) (1) 267,305 256,726 4.1% 791,697 770,063 2.8% Average tractors in service 8,802 8,401 4.8% 8,722 8,423 3.5% Average revenues per tractor per week (3) $3,324 $3,190 4.2% $3,263 $3,105 5.1% Total tractors (at quarter end) Company 7,960 7,535 7,960 7,535 Owner-operator 890 940 890 940 --------- --------- ----------- ----------- Total tractors 8,850 8,475 8,850 8,475 Total trailers (at quarter end) 24,700 22,950 24,700 22,950 (1) Amounts in thousands. (2) Operating expenses expressed as a percentage of operating revenues. Operating ratio is a common measure in the trucking industry used to evaluate profitability. (3) Net of fuel surcharge revenues.
The following table sets forth the revenues, operating expenses, and operating income for the truckload segment. Revenues for the truckload segment include non-trucking revenues of $3.0 million and $3.9 million for the three-month periods and $10.1 million and $10.4 million for the nine- month periods ended September 30, 2005 and 2004, respectively, as described on page 11.
Three Months Ended Nine Months Ended September 30 September 30 ----------------------------- --------------------------------- Truckload Transportation Services 2005 2004 2005 2004 -------------- -------------- ---------------- ---------------- (amounts in 000's) $ % $ % $ % $ % - ------------------ -------------- -------------- ---------------- ---------------- Revenues $448,786 100.0 $381,620 100.0 $1,278,285 100.0 $1,101,844 100.0 Operating expenses 409,932 91.3 343,561 90.0 1,168,444 91.4 1,005,451 91.3 -------- -------- ---------- ---------- Operating income $ 38,854 8.7 $ 38,059 10.0 $ 109,841 8.6 $ 96,393 8.7 ======== ======== ========== ==========
Higher fuel prices and higher fuel surcharge collections have the effect of increasing the Company's consolidated operating ratio and the truckload segment's operating ratio. Eliminating this sometimes volatile 13 source of revenue provides a more consistent basis for comparing the results of operations from period to period. The following table calculates the truckload segment's operating ratio using total operating expenses, net of fuel surcharge revenues, as a percentage of revenues, excluding fuel surcharges.
Three Months Ended Nine Months Ended September 30 September 30 ----------------------------- --------------------------------- Truckload Transportation Services 2005 2004 2005 2004 -------------- -------------- ---------------- ---------------- (amounts in 000's) $ % $ % $ % $ % - ------------------ -------------- -------------- ---------------- ---------------- Revenues $448,786 $381,620 $1,278,285 $1,101,844 Less: trucking fuel surcharge revenues 65,490 29,625 158,393 71,612 -------- -------- ---------- ---------- Revenues, net of fuel surcharge 383,296 100.0 351,995 100.0 1,119,892 100.0 1,030,232 100.0 -------- -------- ---------- ---------- Operating expenses 409,932 343,561 1,168,444 1,005,451 Less: trucking fuel surcharge revenues 65,490 29,625 158,393 71,612 -------- -------- ---------- ---------- Operating expenses, net of fuel surcharge 344,442 89.9 313,936 89.2 1,010,051 90.2 933,839 90.6 -------- -------- ---------- ---------- Operating income $ 38,854 10.1 $ 38,059 10.8 $ 109,841 9.8 $ 96,393 9.4 ======== ======== ========== ==========
The following table sets forth the non-trucking revenues, operating expenses, and operating income for the VAS segment. Other operating expenses for the VAS segment primarily consist of salaries, wages and benefits expense. VAS also incurs smaller expense amounts in the supplies and maintenance, depreciation, rent and purchased transportation (excluding third-party transportation costs), communications and utilities, and other operating expense categories.
Three Months Ended Nine Months Ended September 30 September 30 ----------------------------- --------------------------------- Value Added Services 2005 2004 2005 2004 -------------- -------------- ---------------- ---------------- (amounts in 000's) $ % $ % $ % $ % - ------------------ -------------- -------------- ---------------- ---------------- Revenues $ 52,859 100.0 $ 41,174 100.0 $ 158,574 100.0 $ 113,527 100.0 Rent and purchased transportation expense 47,659 90.2 37,318 90.6 143,230 90.3 102,877 90.6 -------- -------- ---------- ---------- Gross margin 5,200 9.8 3,856 9.4 15,344 9.7 10,650 9.4 Other operating expenses 3,341 6.3 2,546 6.2 9,576 6.1 7,242 6.4 -------- -------- ---------- ---------- Operating income $ 1,859 3.5 $ 1,310 3.2 $ 5,768 3.6 $ 3,408 3.0 ======== ======== ========== ==========
Three Months Ended September 30, 2005 Compared to Three Months Ended - --------------------------------------------------------------------------- September 30, 2004 - ------------------ Operating Revenues Operating revenues increased 18.6% for the three months ended September 30, 2005, compared to the same period of the prior year. Excluding fuel surcharge revenues, trucking revenues increased 9.2% due primarily to a 4.9% increase in average revenues per total mile, excluding fuel surcharges, and a 4.8% increase in the average number of tractors in service, offset by a 0.6% decrease in average monthly miles per tractor. The average percentage of empty miles increased to 12.2% in third quarter 2005 from 11.2% in third quarter 2004. Empty miles in the Company's dedicated fleet operation (approximately 40% of the total truck fleet) are generally billable to customers. Average revenues per total mile, excluding fuel surcharges, increased due to customer rate increases secured during late 2004 and early 2005 and, to a lesser extent, a 2.8% decrease in the average loaded trip length. In the third and fourth quarter of 2004, the Company's sales and marketing team met with customers to negotiate annual rate increases to recoup the significant cost increases in fuel, driver pay, equipment, and insurance and to improve the Company's operating margin. Most of the 14 Company's non-dedicated contractual business renews in the latter part of third quarter and fourth quarter, and these contractual rate increases, many of which did not become effective until late 2004 and early 2005, contributed to the pricing improvement in third quarter 2005 compared to third quarter 2004. There are several inflationary cost pressures impacting truckload carriers, including driver pay and benefits, truck engine emissions costs, and tolls. While the Company has taken several actions to limit or delay these cost increases, management began the process of renewing customer contracts during third and fourth quarter 2005 and is seeking freight rate increases during this renewal period to recoup unavoidable cost increases with the goal of improving the Company's operating income percentage. There is no assurance that management will be successful in achieving this objective. Freight demand was solid in July and August 2005, but not as strong as the strong freight market of July and August 2004. Freight demand improved beginning the first week in September 2005 through the date of this filing, and was approximately the same as the strong freight demand during the same period in 2004. While freight demand improved from July to August 2005, as anticipated due to the seasonal patterns in the trucking industry, the overall demand during third quarter 2005 was not as strong as that of third quarter 2004. This caused an increase in empty miles from 73 miles per trip to 78 miles per trip. Fuel surcharge revenues, which represent collections from customers for the higher cost of fuel, increased to $65.5 million in third quarter 2005 from $29.6 million in third quarter 2004 in response to higher average fuel prices in third quarter 2005. The Company's fuel surcharge programs are designed to recoup the higher cost of fuel from customers when fuel prices rise and provide customers with the benefit of lower costs when fuel prices decline. These programs have historically enabled the Company to recover a significant portion of the fuel price increases. However, with higher fuel prices, the Company is now in an untenable position with many customer fuel surcharge programs. The recent September hurricanes caused a shortage of refined product that escalated diesel fuel prices at the same time that crude oil prices did not increase significantly. This, in turn, showed a weakness in the truckload industry's fuel surcharge standard of a one-cent per mile increase in rate for every five-cent per gallon increase in the Department of Energy ("DOE") weekly retail on-highway diesel prices that are used for most fuel surcharge programs. This weakness is due to the fact that five-cent per gallon brackets only recoup about 80% to 85% of the actual increase in the cost of fuel. As discussed further under the "Operating Expenses" heading, the strength of the Company's fuel surcharge programs helped to limit the impact of higher fuel costs, including higher owner-operator fuel reimbursements and the effect of fuel mile per gallon ("mpg") degradation for trucks with post October-2002 engines, to four cents per share in third quarter 2005. Historically, in slower rising fuel price markets, the Company works hard to recover this 15% to 20% fuel surcharge shortfall by pricing the shortfall into the base rate per mile during the annual rate increase process. With rapidly escalating fuel prices, similar to those experienced in third quarter 2005, this is not possible. If fuel prices do not decline to lower price levels, it may be necessary for the Company to either lower the fuel surcharge price-per-gallon brackets or change the base rate per mile more frequently than once a year. The Company's marketing team is currently meeting with customers to discuss the deficiency in the current five-cent bracket surcharge program, explain how it negatively affects the Company's earnings and those of the truckload industry, and the need to make improvements to the fuel surcharge program. The Company believes that cost-savings generated by declining fuel prices should be passed on to its customers through lower fuel surcharges. If the higher price of fuel is priced in the base rate per mile, the customer does not realize a savings when fuel prices decline. Thus, the Company's objective is to neutralize fuel as much as possible through a fair and accurate fuel surcharge program, by addressing the current industry standard of five-cent per gallon brackets. VAS revenues increased 28.4% to $52.9 million for the three months ended September 30, 2005 from $41.2 million for the three months ended September 30, 2004 due to the Company's continued focus on growing the volume of business generated by this segment. VAS revenues consist 15 primarily of freight brokerage, intermodal, freight transportation management, and other services. The Company expects to continue to capitalize on the sophisticated service, management, and technology advantages of its logistics service offerings. During 2005, VAS began offering multimodal services, which provide for the movement of freight using a combination of truck and rail intermodal services. Operating Expenses Operating expenses, expressed as a percentage of operating revenues, were 91.8% for the three months ended September 30, 2005, compared to 90.7% for the three months ended September 30, 2004. As explained above, the significant increase in fuel expense and related fuel surcharge revenues had the effect of increasing the operating ratio. Because the Company's VAS business operates with a lower operating margin and a higher return on assets than the trucking business, the growth in VAS business in third quarter 2005 compared to third quarter 2004 also increased the Company's overall operating ratio. The tables on pages 13 and 14 show the operating ratios and operating margins for the Company's two reportable segments, Truckload Transportation Services and Value Added Services. The following table sets forth the cost per total mile of operating expense items for the truckload segment for the periods indicated. The Company evaluates operating costs for this segment on a per-mile basis to adjust for the impact on the percentage of total operating revenues caused by changes in fuel surcharge revenues, which provides a more consistent basis for comparing the results of operations from period to period.
Three Months Ended Increase Nine Months Ended Increase September 30 (Decrease) September 30 (Decrease) ---------------------- --------------------- 2005 2004 per Mile 2005 2004 Per Mile --------------------------------- -------------------------------- Salaries, wages and benefits $.538 $.523 $.015 $.530 $.515 $.015 Fuel .347 .214 .133 .300 .195 .105 Supplies and maintenance .148 .126 .022 .144 .126 .018 Taxes and licenses .111 .104 .007 .111 .106 .005 Insurance and claims .074 .069 .005 .082 .074 .008 Depreciation .150 .140 .010 .148 .136 .012 Rent and purchased transportation .153 .145 .008 .149 .138 .011 Communications and utilities .018 .019 (.001) .019 .018 .001 Other (.005) .000 (.005) (.007) (.002) (.005)
Owner-operator costs are included in rent and purchased transportation expense. Owner-operator miles as a percentage of total miles were 12.5% in third quarter 2005 compared to 13.2% in third quarter 2004. Owner- operators are independent contractors who supply their own tractor and driver and are responsible for their operating expenses including fuel, supplies and maintenance, and fuel taxes. This decrease in owner-operator miles as a percentage of total miles shifted costs from the rent and purchased transportation category to other expense categories. The Company estimates that rent and purchased transportation expense for the truckload segment was lower by approximately 0.7 cents per total mile due to this decrease, and other expense categories had offsetting increases on a total- mile basis, as follows: salaries, wages and benefits (0.2 cents), fuel (0.2 cents), depreciation (0.1 cent), supplies and maintenance (0.1 cent), and taxes and licenses (0.1 cent). Attracting and retaining owner-operator drivers has continued to be difficult due to the challenging operating conditions. Salaries, wages and benefits for non-drivers increased in third quarter 2005 compared to third quarter 2004 to support the growth in the VAS segment. The increase in salaries, wages and benefits per mile of 1.5 cents for the truckload segment is primarily the result of increased student driver pay, higher driver pay per mile, and an increase in the number of maintenance employees, offset by lower group health insurance 16 and, to a lesser extent, lower workers' compensation. Because of the challenging driver recruiting market, discussed below, the Company is training more student drivers as an alternative source of drivers. On August 1, 2004, the Company's previously announced two cent per mile pay raise became effective for company solo drivers in its medium-to-long-haul van division, representing approximately 25% of total company drivers. The Company recovered this pay raise through its customer rate increase negotiations, which occurred in third and fourth quarter 2004. The driver recruiting market remains extremely challenging. The supply of qualified truck drivers continues to be constrained due to alternative jobs to truck driving that are available in today's economy and inadequate demographic growth for the industry's targeted driver base over the next several years. The Company continues to focus on driver quality of life issues such as developing more driving jobs with more frequent home time, providing drivers with newer trucks, and maximizing mileage productivity within the federal hours of service regulations. The Company has also placed more emphasis on training drivers. Improved driver recruiting continues to offset higher driver turnover, however, the Company expects the tight driver market will make it very difficult to add meaningful truck capacity in the near future. The Company instituted an optional per diem reimbursement program for eligible company drivers beginning in April 2004. This program increases a company driver's net pay per mile, after taxes. As a result of more drivers electing to participate in the per diem program, driver pay per mile was slightly lower before considering the factors above that increased driver pay per mile, and the Company's effective income tax rate was higher in third quarter 2005 compared to third quarter 2004. The Company expects the cost of the per diem program to be neutral, because the combined driver pay rate per mile and per diem reimbursement under the per diem program is about one cent per mile lower than mileage pay without per diem reimbursement, which offsets the Company's increased income taxes caused by the nondeductible portion of the per diem. The per diem program increases driver satisfaction through higher net pay per mile. The Company anticipates that the competition for qualified drivers will continue to be high and cannot predict whether it will experience shortages in the future. If such a shortage were to occur and additional increases in driver pay rates were necessary to attract and retain drivers, the Company's results of operations would be negatively impacted to the extent that corresponding freight rate increases were not obtained. Fuel increased 13.3 cents per mile for the truckload segment due to higher average diesel fuel prices and more trucks with post-October 2002 engines. Fuel prices rose sequentially for the ninth consecutive quarter during third quarter 2005. Average fuel prices in third quarter 2005 were $0.69 per gallon, or 55%, higher than in third quarter 2004. At the end of the quarter, diesel fuel prices were over $1.10 a gallon higher than at the end of third quarter 2004. Fuel prices were more volatile during third quarter 2005 due to the impact of Hurricane Katrina in early September and Hurricane Rita in mid-September. Fuel expense had a four cent negative impact on earnings per share in third quarter 2005 compared to third quarter 2004, after considering fuel surcharge collections and the cost impact of owner-operator fuel reimbursements (which is included in rent and purchased transportation expense) and lower miles per gallon due to truck engine emissions changes. The actual quarterly earnings impact was less than the six to seven cents per share that the Company estimated in its news release on September 20, 2005 as a result of factors in September 2005 that were better than anticipated, including assumptions for fuel surcharge recovery, fuel stop pricing arrangements, empty miles, and fuel mile per gallon. Company data continues to indicate that for trucks with post- October 2002 engines (76% of the Company fleet as of September 30, 2005 compared to 35% as of September 30, 2004) fuel mpg has decreased approximately 5%. As the Company continues to replace older trucks in its fleet with trucks with the post-October 2002 engines, fuel cost per mile is expected to increase further due to the lower mpg. Shortages of fuel, increases in fuel prices, or rationing of petroleum products can have a materially adverse effect on the operations and profitability of the Company. The Company is unable to predict whether fuel price levels will continue to increase or decrease in the future or the extent to which fuel 17 surcharges will be collected from customers. As of September 30, 2005, the Company had no derivative financial instruments to reduce its exposure to fuel price fluctuations. Diesel fuel for the month of October averaged $0.89 per gallon, or 57%, higher than October 2004. Assuming fuel prices remain at price levels at the date of this filing throughout the remainder of fourth quarter 2005, the negative impact of fuel expense on earnings for fourth quarter 2005 compared to fourth quarter 2004 is estimated to be in the range of six cents to nine cents per share, which would be nearly as much or more than the impact of fuel for the first nine months of 2005 compared to the same period of 2004. Average fuel prices for fourth quarter 2005, assuming fuel prices remain at current levels throughout the remainder of the quarter, are estimated to be approximately $0.79 per gallon higher than the average fuel price in fourth quarter 2004, which is higher than the price increase of $0.69 per gallon in third quarter 2005 compared to third quarter 2004. The larger estimated negative earnings impact in fourth quarter 2005 compared to fourth quarter 2004 is also due to the decline in fuel prices that occurred in November and December 2004. Declining fuel prices in the last two weeks of October 2005 have helped to lessen the estimated fourth quarter 2005 impact as compared to preliminary estimates provided in the Company's third quarter 2005 earnings announcement on October 17. It is difficult to estimate the impact of changing fuel expense on earnings because of changing fuel pricing trends and other factors. The actual impact of fuel expense on earnings could be higher or lower than estimated due to those factors. Supplies and maintenance for the truckload segment increased 2.2 cents on a per-mile basis in third quarter 2005 due primarily to increases in repair expenses for an increased number of trucks sold by the Company's Fleet Truck Sales subsidiary and higher costs to maintain the Company's aging trailer fleet. Higher driver recruiting costs (including driver travel and lodging and driver physicals) and higher toll expense related to state toll rate increases also contributed to a smaller portion of the increase. Taxes and licenses for the truckload segment increased 0.7 cents per total mile due primarily to the effect of the 5% fuel mpg degradation for company-owned trucks with post-October 2002 engines on the per-mile cost of federal and state diesel fuel taxes, as well as increases in some state tax rates. Insurance and claims for the truckload segment increased 0.5 cents on a per-mile basis due primarily to negative development on existing liability insurance claims. For the policy year that began August 1, 2004, the Company was responsible for the first $2.0 million per claim with an annual aggregate of $3.0 million for claims between $2.0 million and $3.0 million, and the Company was fully insured (i.e., no aggregate) for claims between $3.0 million and $5.0 million. For claims in excess of $5.0 million and less than $10.0 million, the Company was responsible for the first $5.0 million of claims. The Company maintains liability insurance coverage with reputable insurance carriers substantially in excess of the $10.0 million per claim. Effective August 1, 2005, the Company's self- insured aggregate for claims between $2.0 million and $3.0 million decreased to $2.0 million, and there were no changes to other coverage levels. The Company's liability insurance premiums for the policy year beginning August 1, 2005 were approximately the same as the previous policy year. Depreciation expense for the truckload segment increased 1.0 cent on a per-mile basis in third quarter 2005 due primarily to higher costs of new tractors with the post-October 2002 engines. As of September 30, 2005, approximately 76% of the company-owned truck fleet consisted of trucks with the post-October 2002 engines compared to 35% at September 30, 2004. As the Company continues to replace older trucks in its fleet with trucks with the post-October 2002 engines, depreciation expense is expected to increase. Rent and purchased transportation consists mainly of payments to third- party carriers in the VAS and other non-trucking operations and payments to owner-operators in the trucking operations. As shown in the VAS statistics table on page 14, rent and purchased transportation expense for the VAS 18 segment increased in response to higher VAS revenues. These expenses generally vary depending on changes in the volume of services generated by the segment. As a percentage of VAS revenues, VAS rent and purchased transportation expense decreased to 90.2% in third quarter 2005 compared to 90.6% in third quarter 2004. Rent and purchased transportation for the truckload segment increased 0.8 cents per total mile in third quarter 2005. Higher fuel prices necessitated higher reimbursements to owner-operators for fuel, which resulted in an increase of 1.2 cents per total mile. The Company's customer fuel surcharge programs do not differentiate between miles generated by Company-owned trucks and miles generated by owner-operator trucks; thus, the increase in owner-operator fuel reimbursements is included with Company fuel expenses in calculating the per-share impact of higher fuel prices on earnings. The Company has experienced difficulty recruiting and retaining owner-operators for over two years because of challenging operating conditions. However, the Company has historically been able to add company-owned tractors and recruit additional company drivers to offset any decreases in owner-operators. If a shortage of owner- operators and company drivers were to occur and increases in per mile settlement rates became necessary to attract and retain owner-operators, the Company's results of operations would be negatively impacted to the extent that corresponding freight rate increases were not obtained. Payments to third-party carriers used for portions of shipments delivered to or from Mexico and by a few dedicated fleets in the truckload segment decreased by 0.4 cents per mile, partially offsetting the overall increase for the truckload segment. Other operating expenses for the truckload segment decreased 0.5 cents per mile in third quarter 2005. Gains on sales of assets, primarily trucks, are reflected as a reduction of other operating expenses and are reported net of sales-related expenses, including costs to prepare the equipment for sale. Gains on sales of assets increased to $2.5 million in third quarter 2005 from $1.7 million in third quarter 2004 due to increased unit sales of trucks as the Company is attempting to keep its fleet as new as possible and a slightly higher average gain per truck. Beginning in September 2005 after the rapid rise in fuel prices, the Company experienced a decline in unit sales of trucks due to third-party finance companies not approving financing for prospective truck buyers and due to some truck buyers canceling orders. If fuel prices remain high and this trend continues, this will likely result in lower gains on sales of equipment beginning in fourth quarter 2005. The Company's wholly-owned subsidiary, Fleet Truck Sales, is one of the largest domestic class 8 used truck sales companies in the United States. Other operating expenses also include bad debt expense and professional services fees. The remaining decrease in other operating expenses in third quarter 2005 is due primarily to a reduction in computer consulting fees as consultants were hired by the Company, resulting in a reduction in other operating expenses, but an increase in salaries, wages and benefits expense. The Company's professional fees have also declined slightly due to higher costs in third quarter 2004 associated with the implementation of Section 404 of the Sarbanes-Oxley Act of 2002. The Company's effective income tax rate (income taxes expressed as a percentage of income before income taxes) increased to 41.0% for the three- month period ended September 30, 2005 from 39.5% for the three-month period ended September 30, 2004 due primarily to an increase in non-deductible expenses for tax purposes related to the implementation of a per diem pay program for student drivers in fourth quarter 2003 and a per diem pay program for eligible company drivers in April 2004. Nine Months Ended September 30, 2005 Compared to Nine Months Ended - --------------------------------------------------------------------------- September 30, 2004 - ------------------ Operating Revenues Operating revenues increased by 18.2% for the nine months ended September 30, 2005, compared to the same period of the previous year. Excluding fuel surcharge revenues, trucking revenues increased 8.8%, due primarily to a 5.8% increase in average revenues per total mile, excluding fuel surcharges, and a 3.5% increase in the average number of tractors in service, offset by a 0.7% decrease in average monthly miles per tractor. 19 Average revenues per total mile, excluding fuel surcharges, increased primarily due to customer rate increases secured during late 2004 and early 2005. VAS revenues increased by $45.0 million (39.7%) due to ongoing growth in the segment, and fuel surcharge revenues increased by $86.8 million (121.2%) due to higher average diesel fuel prices for the first nine months of 2005 as compared to the same period of 2004. Operating Expenses Operating expenses, expressed as a percentage of operating revenues, were 92.0% for the nine months ended September 30, 2005, compared to 91.9% for the same period of the previous year. As explained in the previous pages, the significant increase in fuel expense and related fuel surcharge revenues had the effect of increasing the operating ratio. Because the Company's VAS business operates with a lower operating margin and a higher return on assets than the trucking business, the growth in VAS business in the first nine months of 2005 compared to the first nine months of 2004 also increased the Company's overall operating ratio. The tables on pages 13 and 14 show the operating ratios and operating margins for the Company's two reportable segments, Truckload Transportation Services and Value Added Services. Owner-operator miles as a percentage of total miles were 12.7% for both the nine-month periods ended September 30, 2005 and 2004. Because there was no change in owner-operator miles as a percentage of total miles, there was essentially no shift in costs between the rent and purchased transportation category and other expense categories. Salaries, wages and benefits for non-drivers increased to support the growth in the VAS segment. Salaries, wages and benefits for the truckload segment increased 1.5 cents on a per-mile basis due to higher driver pay per mile, increased student driver pay, and an increase in the number of maintenance employees. Fuel increased 10.5 cents per total mile due to higher fuel prices. Average fuel prices for the first nine months of 2005 were $0.55 per gallon, or 48%, higher than the first nine months of 2004. Supplies and maintenance increased 1.8 cents per total mile due to increases in the cost of over-the-road repairs, repairs on trucks sold by the Company's Fleet Truck Sales subsidiary, and repairs on an aging trailer fleet; higher driver recruiting costs, including driver travel and lodging, driver advertising, and driver physicals; and higher toll costs due to state toll rate increases. Taxes and licenses increased 0.5 cents per total mile due primarily to the effect of the 5% fuel mpg degradation for trucks with post-October 2002 engines on the per-mile cost of federal and state diesel fuel taxes, as well as increases in some state tax rates. Insurance increased 0.8 cents on a per-mile basis due primarily to negative development on existing liability insurance claims. Depreciation increased 1.2 cents per total mile due to higher costs of new tractors as the Company replaced tractors with pre-October 2002 engines with tractors that have the new EPA-compliant engines at a higher cost. Rent and purchased transportation for the truckload segment increased 1.1 cents per total mile as higher fuel prices necessitated higher reimbursements to owner-operators for fuel. Rent and purchased transportation expense for the VAS segment increased in response to higher VAS revenues. Other operating expenses decreased 0.5 cents per total mile due to the Company selling more used trucks to third parties and recognizing additional gains, net of sales- related expenses, including costs to prepare the equipment for sale. The Company's effective income tax rate was 39.1% for the nine months ended September 30, 2004 (38.5% for first quarter 2004, 39.1% for second quarter 2004, and 39.5% for third quarter 2004). The rate increased to 41.0% for the nine months ended September 30, 2005, primarily related to the implementation of per diem pay programs for student drivers and eligible company drivers. Liquidity and Capital Resources: During the nine months ended September 30, 2005, the Company generated cash flow from operations of $138.1 million, a 14.6% decrease ($23.6 million) in cash flow compared to the same nine-month period a year ago. The decrease in cash flow from operations is due primarily to larger 20 federal income tax payments in the first nine months of 2005 compared to the same period of 2004, offset by higher net income and higher depreciation expense for financial reporting purposes related to the higher cost of the post-October 2002 engines. Income taxes paid during the nine months ended September 30, 2005 totaled $83.1 million compared to $33.9 million for the nine months ended September 30, 2004, resulting primarily from a decrease in deferred taxes of $39.8 million. This decrease in deferred taxes was related to recent tax law changes resulting in the reversal of certain tax strategies implemented in 2001 and lower income tax depreciation in 2005 due to the bonus depreciation provision that expired on December 31, 2004. The cash flow from operations and existing cash balances enabled the Company to make net property additions, primarily revenue equipment, of $222.3 million, pay common stock dividends of $8.7 million, and repurchase common stock of $1.6 million. Based on the Company's strong financial position, management foresees no significant barriers to obtaining sufficient financing, if necessary. Net cash used in investing activities for the nine-month period ended September 30, 2005 increased by $87.0 million, from $131.7 million for the nine-month period ended September 30, 2004 to $218.7 million for the nine- month period ended September 30, 2005. The large increase was due primarily to the Company purchasing more tractors in the first nine months of 2005. As of September 30, 2005, the Company has committed to property and equipment purchases, net of trades, of approximately $102.5 million. The average age of the Company's truck fleet is 1.34 years at September 30, 2005 compared to 1.65 years as of September 30, 2004. The Company intends to continue to keep its truck fleet as new as possible in advance of the federally mandated engine emission standards that are required for all newly-manufactured trucks beginning in January 2007. As such, net capital expenditures are expected to be higher throughout the remainder of 2005 as compared to 2004 and to be approximately $300 million for 2005. Net capital expenditures in 2006 are expected to be substantially lower and return to more normal levels. The Company intends to fund these net capital expenditures through cash flow from operations and through financing available under its existing credit facilities, as management deems necessary. Subsequent to September 30, 2005, the Company borrowed $35.0 million under these credit facilities. Net financing activities used $8.2 million and $25.7 million during the nine months ended September 30, 2005 and 2004, respectively. The Company paid dividends of $8.7 million in the nine-month period ended September 30, 2005 and $6.7 million in the nine-month period ended September 30, 2004. The Company increased its quarterly dividend rate by $.01 per share beginning with the dividend paid in July 2004 and by $.005 per share beginning with the dividend paid in July 2005. Financing activities also included common stock repurchases of $1.6 million and $21.6 million in the nine-month periods ended September 30, 2005 and 2004, respectively. From time to time, the Company has repurchased, and may continue to repurchase, shares of its common stock. The timing and amount of such purchases depends on market and other factors. The Company's Board of Directors has authorized the repurchase of up to 3,965,838 shares. As of September 30, 2005, the Company had purchased 257,038 shares pursuant to this authorization and had 3,708,800 shares remaining available for repurchase. Management believes the Company's financial position at September 30, 2005 is strong. As of September 30, 2005, the Company has $20.5 million of cash and cash equivalents, no debt, and $836.2 million of stockholders' equity. As of September 30, 2005, the Company has no equipment operating leases, and, therefore has no off-balance sheet equipment debt. The Company maintains $37.2 million in letters of credit as of September 30, 2005. These letters of credit are primarily required as security for insurance policies. As of September 30, 2005, the Company has $75.0 million of credit pursuant to credit facilities, on which no borrowings were outstanding. The credit available under these facilities is reduced by the $37.2 million in letters of credit. On October 25, 2005, the Company amended one of its credit facilities to increase the available credit by $25.0 million. 21 Off-Balance Sheet Arrangements: The Company does not have arrangements that meet the definition of an off-balance sheet arrangement. Regulations: The Federal Motor Carrier Safety Administration ("FMCSA") of the U.S. Department of Transportation issued a final rule on April 24, 2003, that made several changes to the regulations that govern truck drivers' hours of service ("HOS"). The new rules became effective on January 4, 2004. On July 16, 2004, the U.S. Circuit Court of Appeals for the District of Columbia rejected the new hours of service rules for truck drivers, because it said the FMCSA had failed to address the impact of the rules on the health of drivers as required by Congress. In addition, the judge's ruling noted other areas of concern including the increase in driving hours from 10 hours to 11 hours, the exception that allows drivers to split their required rest periods, the new rule allowing drivers to reset their 70-hour clock to 0 hours after 34 consecutive hours off duty, and the decision by the FMCSA not to require the use of electronic onboard recorders to monitor driver compliance. On September 30, 2004, the extension of the federal highway bill signed into law by the President extended the previously vacated 2003 hours of service rules, effective immediately, for one year or whenever the FMCSA develops a new set of regulations, whichever comes first. Effective October 1, 2005, all truckload carriers became subject to revised HOS regulations. The only significant change from the previous regulations is that a driver using the sleeper berth provision must take at least eight consecutive hours in the sleeper berth during their ten hours off-duty. Previously, drivers were allowed to split their ten hour off- duty time in the sleeper berth into two periods, provided neither period was less than two hours. This more restrictive sleeper berth provision is requiring some drivers to plan their time better and may have a negative impact on mileage productivity. It is expected that the greatest impact will be for multiple-stop shipments or those shipments with pickup or delivery delays. Beginning in January 2007, a new set of more stringent engine emissions standards mandated by the Environmental Protection Agency ("EPA") will become effective for all newly manufactured trucks. The Company intends to continue to keep its fleet as new as possible in advance of the new standards. The Company expects that the engines produced under the 2007 standards will be less fuel-efficient and have a higher cost than the current engines. When truckload carriers are required to use new ultra-low sulfur fuel for all of their existing trucks, the Company estimates an additional 1% to 3% decrease in fuel mpg because of the new fuel. In October 2005, the Company began a limited test of two January 2007 compliant test engines using the new ultra-low sulfur fuel. The Company will continue its testing in fourth quarter 2005. Critical Accounting Policies: The most significant accounting policies and estimates that affect our financial statements include the following: * Selections of estimated useful lives and salvage values for purposes of depreciating tractors and trailers. Depreciable lives of tractors and trailers range from 5 to 12 years. Estimates of salvage value at the expected date of trade-in or sale (for example, three years for tractors) are based on the expected market values of equipment at the time of disposal. Although the Company's current replacement cycle for tractors is three years, the Company calculates depreciation expense for financial reporting purposes using a five-year life and 25% salvage value. Depreciation expense calculated in this manner continues at the same straight-line rate, which approximates the continuing declining market value of the tractors, in those instances in which a tractor is held beyond the normal three-year age. Calculating depreciation expense using a five-year life and 25% 22 salvage value results in the same annual depreciation rate (15% of cost per year) and the same net book value at the normal three-year replacement date (55% of cost) as using a three-year life and 55% salvage value. The Company continually monitors the adequacy of the lives and salvage values used in calculating depreciation expense and adjusts these assumptions appropriately when warranted. * The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. An impairment loss would be recognized if the carrying amount of the long-lived asset is not recoverable, and it exceeds its fair value. For long-lived assets classified as held and used, if the carrying value of the long-lived asset exceeds the sum of the future net cash flows, it is not recoverable. The Company does not separately identify assets by operating segment, as tractors and trailers are routinely transferred from one operating fleet to another. As a result, none of the Company's long-lived assets have identifiable cash flows from use that are largely independent of the cash flows of other assets and liabilities. Thus, the asset group used to assess impairment would include all assets and liabilities of the Company. Long-lived assets classified as held for sale are reported at the lower of their carrying amount or fair value less costs to sell. * Estimates of accrued liabilities for insurance and claims for liability and physical damage losses and workers' compensation. The insurance and claims accruals (current and long-term) are recorded at the estimated ultimate payment amounts and are based upon individual case estimates, including negative development, and estimates of incurred-but-not-reported losses based upon past experience. The Company's self-insurance reserves are reviewed by an actuary every six months. * Policies for revenue recognition. Operating revenues (including fuel surcharge revenues) and related direct costs are recorded when the shipment is delivered. For shipments where a third-party provider is utilized to provide some or all of the service and the Company is the primary obligor in regards to the delivery of the shipment, establishes customer pricing separately from carrier rate negotiations, generally has discretion in carrier selection, and/or has credit risk on the shipment, the Company records both revenues for the dollar value of services billed by the Company to the customer and rent and purchased transportation expense for the costs of transportation paid by the Company to the third-party provider upon delivery of the shipment. In the absence of the conditions listed above, the Company records revenues net of expenses related to third- party providers. * Accounting for income taxes. Significant management judgment is required to determine the provision for income taxes and to determine whether deferred income taxes will be realized in full or in part. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. When it is more likely that all or some portion of specific deferred income tax assets will not be realized, a valuation allowance must be established for the amount of deferred income tax assets that are determined not to be realizable. A valuation allowance for deferred income tax assets has not been deemed to be necessary due to the Company's profitable operations. Accordingly, if the facts or financial circumstances were to change, thereby impacting the likelihood of realizing the deferred income tax assets, judgment would need to be applied to determine the amount of valuation allowance required in any given period. Management periodically evaluates these estimates and policies as events and circumstances change. There have been no changes to these policies that occurred during the Company's most recent fiscal quarter. Together with the effects of the matters discussed above, these factors may significantly impact the Company's results of operations from period to period. 23 Accounting Standards: In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 153, Exchanges of Nonmonetary Assets. This Statement amends the guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions. APB Opinion No. 29 provided an exception to the basic measurement principle (fair value) for exchanges of similar assets, requiring that some nonmonetary exchanges be recorded on a carryover basis. SFAS No. 153 eliminates the exception to fair value for exchanges of similar productive assets and replaces it with a general exception for exchange transactions that do not have commercial substance, that is, transactions that are not expected to result in significant changes in the cash flows of the reporting entity. The provisions of SFAS No. 153 are effective for exchanges of nonmonetary assets occurring in fiscal periods beginning after June 15, 2005. Management has determined that adoption of this standard did not have any material effect on the financial position, results of operations, and cash flows of the Company. In December 2004, the FASB revised SFAS No. 123 (revised 2004), Share- Based Payments. SFAS No. 123(R) eliminates the alternative to use APB Opinion No. 25's intrinsic value method of accounting (generally resulting in recognition of no compensation cost) and instead requires a company to recognize in its financial statements the cost of employee services received in exchange for valuable equity instruments issued, and liabilities incurred, to employees in share-based payment transactions (e.g., stock options). The cost will be based on the grant-date fair value of the award and will be recognized over the period for which an employee is required to provide service in exchange for the award. In April 2005, the Securities and Exchange Commission ("SEC") adopted a rule amending the compliance dates for SFAS No. 123(R). Under the new SEC rule, the provisions of the revised statement are to be applied prospectively by the Company for awards that are granted, modified, or settled in the first fiscal year beginning after June 15, 2005. Additionally, the Company would recognize compensation cost for any portion of awards granted or modified after December 15, 1994, that is not yet vested at the date the standard is adopted, based on the grant-date fair value of those awards calculated under SFAS No. 123 (as originally issued) for either recognition or pro forma disclosures. When the Company adopts the standard on January 1, 2006, it will be required to report in its financial statements the share- based compensation expense for reporting periods in 2006. As of the date of this filing, management believes that adopting the new statement will have a negative impact of approximately two cents per share for the year ending December 31, 2006, representing the expense to be recognized for the unvested portion of awards granted to date, and cannot predict the earnings impact of awards that may be granted in the future. (See Note 5 of the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q, which shows the pro forma effect of SFAS No. 123, as originally issued.) In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. This Statement replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of all voluntary changes in accounting principle and changes required by an accounting pronouncement when the pronouncement does not include specific transition provisions. This Statement requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to do so. The provisions of SFAS No. 154 are effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. As of September 30, 2005, management believes that SFAS No. 154 will have no significant effect on the financial position, results of operations, and cash flows of the Company. Forward-Looking Statements and Risk Factors: The following risks and uncertainties, as well as those listed in Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2004, may cause actual results to differ materially from those anticipated in the forward-looking statements included in this Form 10-Q: 24 The Company is sensitive to changes in overall economic conditions and seasonality that impact customer shipping volumes. Future weakness in the economy and consumer demand could result in reduced freight demand, which, in turn, would impact the Company's growth opportunities, revenues, and profitability. Other economic conditions that may affect the Company include employment levels, business conditions, fuel and energy costs, weather, interest rates, and tax rates. At times, there have been shortages of drivers and owner-operators in the trucking industry. Improvement in the general unemployment rate can lead to further difficulty in recruiting and retention. The market for recruiting drivers became more difficult in fourth quarter 2003 and continued through third quarter 2005. The Company anticipates that the competition for company drivers and owner-operators will continue to be high and cannot predict whether it will experience shortages in the future. If such a shortage were to occur and additional increases in driver pay rates and owner-operator settlement rates became necessary to attract and retain drivers and owner-operators, the Company's results of operations would be negatively impacted to the extent that corresponding freight rate increases were not obtained. Diesel fuel prices have increased nine consecutive quarters and high prices continue in October 2005. To the extent the Company cannot recover the higher cost of fuel through general customer fuel surcharge programs, the Company's results would be negatively impacted. Shortages of fuel, further increases in fuel prices, or rationing of petroleum products could have a materially adverse impact on the operations and profitability of the Company. As discussed above, new hours of service regulations became effective on October 1, 2005. Although the new regulations are only somewhat more restrictive than the previously vacated 2003 rules, the Company is unable to predict the ultimate impact of the new regulations on its operations and profitability. The Company self-insures for liability resulting from cargo loss, personal injury, and property damage as well as workers' compensation. This is supplemented by premium-based insurance with licensed insurance companies above the Company's self-insurance level for each type of coverage. To the extent that the Company were to experience a significant increase in the number of claims, the cost per claim, or the costs of insurance premiums for coverage in excess of its retention amounts, the Company's operating results would be negatively affected. Effective October 1, 2002, all newly manufactured truck engines must comply with the engine emission standards mandated by the EPA. As of September 30, 2005, approximately 76% of the company-owned truck fleet consisted of trucks with post-October 2002 engines. The Company has experienced an approximate 5% reduction in fuel efficiency to date and increased depreciation expense due to the higher cost of the new engines. The Company anticipates continued increases in these expense categories as regular tractor replacements increase the percentage of company-owned trucks with post-October 2002 engines. As discussed above, a new set of more stringent emissions standards mandated by the EPA will become effective for newly manufactured trucks beginning in January 2007. The Company is unable to predict the ultimate impact these new standards will have on its operations, financial position, results of operations, and cash flows. 25 Item 3. Quantitative and Qualitative Disclosures About Market Risk. The Company is exposed to market risk from changes in commodity prices, foreign exchange rates, and interest rates. Commodity Price Risk The price and availability of diesel fuel are subject to fluctuations due to changes in the level of global oil production, seasonality, weather, and other market factors. Historically, the Company has been able to recover a majority of fuel price increases from customers in the form of fuel surcharges. The Company has implemented customer fuel surcharges programs with most of its revenue base to offset most of the higher fuel cost per gallon. The Company cannot predict the extent to which higher fuel price levels will continue in the future or the extent to which fuel surcharges could be collected to offset such increases. As of September 30, 2005, the Company had no derivative financial instruments to reduce its exposure to fuel price fluctuations. Foreign Exchange Rate Risk The Company conducts business in Mexico and Canada. Foreign currency transaction gains and losses were not material to the Company's results of operations for third quarter 2005 and prior periods. To date, all foreign revenues are denominated in U.S. dollars, and the Company receives payment for freight services performed in Mexico and Canada primarily in U.S. dollars to reduce foreign currency risk. Accordingly, the Company is not currently subject to material foreign currency exchange rate risks from the effects that exchange rate movements of foreign currencies would have on the Company's future costs or on future cash flows. Interest Rate Risk The Company had no debt outstanding at September 30, 2005. Interest rates on the Company's unused credit facilities are based on the London Interbank Offered Rate ("LIBOR"). Increases in interest rates could impact the Company's annual interest expense on future borrowings. Item 4. Controls and Procedures. As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures, as defined in Exchange Act Rule 15d-15(e). Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in enabling the Company to record, process, summarize and report information required to be included in the Company's periodic SEC filings within the required time period. Management, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, concluded that there have been no changes in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 26 The Company has confidence in its internal controls and procedures. Nevertheless, the Company's management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the internal controls or disclosure procedures and controls will prevent all errors or intentional fraud. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be relative to their costs. Because of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. 27 PART II OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. On November 24, 2003, the Company announced that its Board of Directors approved an increase to its authorization for common stock repurchases of 3,965,838 shares. As of September 30, 2005, the Company had purchased 257,038 shares pursuant to this authorization and had 3,708,800 shares remaining available for repurchase. The Company may purchase shares from time to time depending on market, economic, and other factors. The authorization will continue until withdrawn by the Board of Directors. The following table summarizes the Company's common stock repurchases during the third quarter of 2005 made pursuant to this authorization. No shares were purchased during the quarter other than through this program, and all purchases were made by or on behalf of the Company and not by any "affiliated purchaser". Issuer Purchases of Equity Securities
Maximum Number (or Approximate Total Number of Dollar Value) of Shares (or Units) Shares (or Units) that Total Number of Purchased as Part of May Yet Be Shares (or Units) Average Price Paid Publicly Announced Purchased Under the Period Purchased per Share (or Unit) Plans or Programs Plans or Programs ---------------------------------------------------------------------------------------- July 1-31, 2005 - - - 3,783,800 August 1-31, 2005 50,000 $17.4954 50,000 3,733,800 September 1-30, 2005 25,000 $17.4000 25,000 3,708,800 ----------------- -------------------- Total 75,000 $17.4636 75,000 3,708,800 ================= ====================
Item 5. Other Information. The following disclosure is provided pursuant to Item 2.03 of Form 8- K. On October 25, 2005, the Company amended its $50.0 million bank credit facility with Wells Fargo Bank, National Association. This third amendment to the original credit agreement dated May 16, 2003, as amended, increased the credit facility to $75.0 million. Any amounts borrowed pursuant to this facility are due and payable in full on or before May 16, 2007. As of October 25, 2005, the Company had outstanding borrowings of $10.0 million under this facility, and the credit available is further reduced by $37.2 million in letters of credit the Company maintains. 28 Item 6. Exhibits. Exhibit 3(i)(A) Revised and Amended Articles of Incorporation (Incorporated by reference to Exhibit 3 to Registration Statement on Form S-1, Registration No. 33-5245) Exhibit 3(i)(B) Articles of Amendment to Articles of Incorporation (Incorporated by reference to Exhibit 3(i) to the Company's report on Form 10-Q for the quarter ended May 31, 1994) Exhibit 3(i)(C) Articles of Amendment to Articles of Incorporation (Incorporated by reference to Exhibit 3(i) to the Company's report on Form 10-K for the year ended December 31, 1998) Exhibit 3(i)(D) Articles of Amendment to Articles of Incorporation (Incorporated by reference to Exhibit 3(i)(D) to the Company's report on Form 10-Q for the quarter ended June 30, 2005) Exhibit 3(ii) Revised and Restated By-Laws (Incorporated by reference to Exhibit 3(ii) to the Company's report on Form 10-Q for the quarter ended June 30, 2004) Exhibit 10.1 The Executive Nonqualified Excess Plan of Werner Enterprises, Inc. (filed herewith) Exhibit 31(i)(A) Rule 13a-14(a)/15d-14(a) Certification (filed herewith) Exhibit 31(i)(B) Rule 13a-14(a)/15d-14(a) Certification (filed herewith) Exhibit 32.1 Section 1350 Certification (filed herewith) Exhibit 32.2 Section 1350 Certification (filed herewith) 29 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WERNER ENTERPRISES, INC. Date: October 31, 2005 By: /s/ John J. Steele -------------------- ----------------------------------- John J. Steele Executive Vice President, Treasurer and Chief Financial Officer Date: October 31, 2005 By: /s/ James L. Johnson -------------------- ----------------------------------- James L. Johnson Senior Vice President, Controller and Corporate Secretary EX-10.1 2 wernexecplan.txt WERNER ENTERPRISES, INC. EXHIBIT 10.1 THE EXECUTIVE NONQUALIFIED EXCESS PLAN SM PLAN DOCUMENT c 2/2005 Executive Benefit Services, Inc. 4140 ParkLake Avenue, Suite 500 Raleigh, NC 27612 TABLE OF CONTENTS THE EXECUTIVE NONQUALIFIED EXCESS PLAN SM Page ---- Section 1. Purpose: 1 Section 2. Definitions: 1 2.1 "Active Participant" 1 2.2 "Adoption Agreement" 2 2.3 "Beneficiary" 2 2.4 "Board" 2 2.5 "Change in Control" 2 2.6 "Committee" 3 2.7 "Compensation" 3 2.8 "Crediting Date" 3 2.9 "Deferred Compensation Account" 4 2.10 "Disabled" 4 2.11 "Education Account" 4 2.12 "Effective Date" 4 2.13 "Employee" 5 2.14 "Employer" 5 2.15 "Employer Credits" 5 2.16 "Independent Contractor" 5 2.17 "In-Service Account" 5 2.18 "Normal Retirement Age" 6 2.19 "Participant 6 2.20 "Participating Employer" 6 2.21 "Performance-Based Compensation" 6 2.22 "Plan" 6 2.23 "Plan Administrator" 6 2.24 "Plan-Approved Domestic Relations Order" 6 2.25 "Plan Year" 8 2.26 "Provider" 8 2.27 "Qualifying Distribution Event" 8 2.28 "Salary Deferral Agreement" 8 2.29 "Salary Deferral Credits" 8 2.30 "Service" 9 2.31 "Service Bonus" 9 2.32 "Spouse" or "Surviving Spouse" 9 2.33 "Student" 9 2.34 "Trust" 9 2.35 "Trustee" 9 2.36 "Unforeseeable Emergency" 9 2.37 "Years of Service" 9 i Section 3. Participation: 10 Section 4. Credits to Deferred Compensation Account: 10 4.1 Salary Deferral Credits 10 4.2 Employer Credits 11 4.3 Deferred Compensation Account 12 Section 5. Qualifying Distribution Events: 12 5.1 Separation from Service 12 5.2 Disability 12 5.3 Death 12 5.4 In-Service Distributions 12 5.5 Education Withdrawals 13 5.6 Unforeseeable Emergency 14 Section 6. Qualifying Distribution Events Payment Options: 15 6.1 Payment Options 15 6.2 De Minimis Amounts 16 6.3 Subsequent Elections 16 6.4 Acceleration Prohibited 17 Section 7. Vesting: 17 Section 8. Accounts; Deemed Investment; Adjustments to Account: 17 8.1 Accounts 17 8.2 Deemed Investments 18 8.3 Adjustments to Deferred Compensation Account 18 Section 9. Administration by Committee: 18 9.1 Membership of Committee 18 9.2 Committee Officers; Subcommittee 19 9.3 Committee Meetings 19 9.4 Transaction of Business 19 9.5 Committee Records 19 9.6 Establishment of Rules 20 9.7 Conflicts of Interest 20 9.8 Correction of Errors 20 9.9 Authority to Interpret Plan 20 9.10 Third Party Advisors 20 9.11 Compensation of Members 21 9.12 Expense Reimbursement 21 9.13 Indemnification 21 ii Section 10. Contractual Liability; Trust: 21 10.1 Contractual Liability 21 10.2 Trust 22 Section 11. Allocation of Responsibilities: 22 11.1 Board. 22 11.2 Committee. 22 11.3 Plan Administrator. 23 Section 12. Benefits Not Assignable; Facility of Payments: 23 12.1 Benefits not Assignable 23 12.2 Plan-Approved Domestic Relations Orders 23 12.3 Payments to Minors and Others 24 Section 13. Beneficiary: 24 Section 14. Amendment and Termination of Plan: 25 14.1 Termination Upon Change in Control 25 14.2 Termination On or Before December 31, 2005 26 14.3 No Financial Triggers 26 Section 15. Communication to Participants: 26 Section 16. Claims Procedure: 26 16.1 Filing of a Claim for Benefits 26 16.2 Notification to Claimant of Decision 26 16.3 Procedure for Review 27 16.4 Decision on Review 27 16.5 Action by Authorized Representative of Claimant 28 Section 17. Miscellaneous Provisions: 28 17.1 Set off 28 17.2 Notices 28 17.3 Lost Distributees 29 17.4 Reliance on Data 29 17.5 Receipt and Release for Payments 29 17.6 Headings 29 17.7 Continuation of Employment 30 17.8 Merger or Consolidation; Assumption of Plan 30 17.9 Construction 30 iii THE EXECUTIVE NONQUALIFIED EXCESS PLAN SM Section 1. Purpose: ---------- -------- By execution of the Adoption Agreement, the Employer has adopted the Plan set forth herein to provide a means by which certain management Employees and Independent Contractors of the Employer may elect to defer receipt of current Compensation from the Employer in order to provide retirement and other benefits on behalf of such Employees and Independent Contractors of the Employer, as selected in the Adoption Agreement. The Plan is intended to be a nonqualified deferred compensation plan that complies with the provisions of Section 409A of the Internal Revenue Code (the "Code"). The Plan is intended to be an unfunded plan maintained primarily for the purpose of providing deferred compensation benefits for a select group of management or highly compensated employees under Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974 and independent contractors. Section 2. Definitions: ---------- ------------ As used in the Plan, including this Section 2, references to one gender shall include the other and, unless otherwise indicated by the context: 2.1 "Active Participant" means, with respect to any day or date, a Participant who is in Service on such day or date; provided, that a Participant shall cease to be an Active Participant immediately upon a determination by the Committee that the Participant has ceased to be an Employee or Independent Contractor, or that the Participant no longer meets the eligibility requirements of the Plan. 2.2 "Adoption Agreement" means the written agreement pursuant to which the Employer adopts the Plan. The Adoption Agreement is a part of the Plan as applied to the Employer. 2.3 "Beneficiary" means the person, persons, entity or entities designated or determined pursuant to the provisions of Section 13 of the Plan. 2.4 "Board" means the Board of Directors of the Employer, if the Employer is a corporation. If the Employer is not a corporation, "Board" shall mean the Employer. 2.5 "Change in Control" of a corporation shall occur on the earliest of the following events: 2.5.1 Change in Ownership: A change in ownership of a corporation occurs on the date that any one person, or more than one person acting as a group, acquires ownership of stock of the corporation that, together with stock held by such person or group, constitutes more than 50% of the total fair market value or total voting power of the stock of the corporation, excluding the acquisition of additional stock by a person or more than one person acting as a group who is considered to own more than 50% of the total fair market value or total voting power of the stock of the corporation. 2.5.2 Change in Effective Control: A change in effective control of a corporation occurs on the date that either: (i) Any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the corporation possessing 35% or more of the total voting power of the stock of the corporation; or (ii) A majority of the members of the board of directors of the corporation is replaced during any 12- month period by directors whose appointment or election is not endorsed by a majority of the members of the board of directors prior to the date of the appointment or election; provided, that this paragraph (ii) shall apply only to a corporation for which no other corporation is a majority shareholder. 2.5.3 Change in Ownership of Substantial Assets: A change in the ownership of a substantial portion of a corporation's assets occurs on the date that any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent 2 acquisition by such person or persons) assets from the corporation that have a total gross fair market value equal to or more than 40% of the total gross fair market value of the assets of the corporation immediately prior to such acquisition or acquisitions. For this purpose, gross fair market value means the value of the assets of the corporation, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets. For this purpose, the Change in Control must relate to (i) a corporation that is the Employer of the Participant; (ii) a corporation that is liable for the payment of benefits under this Plan; (iii) a corporation that is a majority shareholder of the corporation described in (i) or (ii); or (iv) any corporation in a chain of corporations in which each corporation is a majority shareholder of another corporation in the chain, ending with the corporation described in (i) or (ii). A Change in Control shall not be deemed to have occurred until a majority of the members of the Board receive written certification from the Committee that one of the events set forth in this Section 2.5 has occurred. The occurrence of an event described in this Section 2.5 must be objectively determinable by the Committee and, if made in good faith on the basis of information available at the time, such determination shall be conclusive and binding on the Committee, the Employer, the Participants and their Beneficiaries for all purposes of the Plan. 2.6 "Committee" means the person designated in the Adoption Agreement. If the Committee designated in the Adoption Agreement is unable to serve, the Employer shall satisfy the duties of the Committee provided for in Section 9. 2.7 "Compensation" shall have the meaning designated in the Adoption Agreement. 2.8 "Crediting Date" means the date designated in the Adoption Agreement for crediting the amount of any Salary Deferral Credits to the Deferred Compensation Account of a Participant. Employer Credits may be credited to the Deferred Compensation Account of a Participant on any day that securities are traded on a national securities exchange. 3 2.9 "Deferred Compensation Account" means the account maintained with respect to each Participant under the Plan. The Deferred Compensation Account shall be credited with Salary Deferral Credits and Employer Credits, credited or debited for deemed investment gains or losses, and adjusted for payments in accordance with the rules and elections in effect under Section 8. The Deferred Compensation Account of a Participant shall include any In-Service Account or Education Account of the Participant, if applicable. 2.10 "Disabled" means a Participant who is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than three months under an accident and health plan covering Employees of the Employer. 2.11 "Education Account" means a separate account to be kept for each Participant that has elected to take education distributions as described in Section 5.5. The Education Account shall be adjusted in the same manner and at the same time as the Deferred Compensation Account under Section 8 and in accordance with the rules and elections in effect under Section 8. 2.12 "Effective Date" shall be the date designated in the Adoption Agreement as of which the Plan first becomes effective. Notwithstanding the foregoing, any amounts credited to the account of a Participant pursuant to the terms of a predecessor plan of the Employer which are not earned and vested before January 1, 2005, shall be subject to the terms of this Plan. 4 2.13 "Employee" means an individual in the Service of the Employer if the relationship between the individual and the Employer is the legal relationship of employer and employee and if the individual is a highly compensated or management employee of the Employer. An individual shall cease to be an Employee upon the Employee's termination of Service. 2.14 "Employer" means the Employer identified in the Adoption Agreement, and any Participating Employer which adopts this Plan. The Employer may be a corporation, a limited liability company, a partnership or sole proprietorship. All references herein to the Employer shall include each trade or business (whether or not incorporated) that is required to be aggregated with the Employer under rules similar to subsections (b) and (c) of Section 414 of the Code. 2.15 "Employer Credits" means the amounts credited to the Participant's Deferred Compensation Account by the Employer pursuant to the provisions of Section 4.2. 2.16 "Independent Contractor" means an individual in the Service of the Employer if the relationship between the individual and the Employer is not the legal relationship of employer and employee. An individual shall cease to be an Independent Contractor upon the termination of the Independent Contractor's Service. An Independent Contractor shall include a director of the Employer who is not an Employee. 2.17 "In-Service Account" means a separate account to be kept for each Participant that has elected to take in-service distributions as described in Section 5.4. The In-Service Account shall be adjusted in the same manner and at the same time as the Deferred Compensation Account under Section 8 and in accordance with the rules and elections in effect under Section 8. 5 2.18 "Normal Retirement Age" of a Participant means the age designated in the Adoption Agreement. 2.19 "Participant" means with respect to any Plan Year an Employee or Independent Contractor who has been designated by the Committee as a Participant and who has entered the Plan or who has a Deferred Compensation Account under the Plan. 2.20 "Participating Employer" means any trade or business (whether or not incorporated) which adopts this Plan with the consent of the Employer identified in the Adoption Agreement. 2.21 "Performance-Based Compensation" means any compensation based on services performed over a period of at least twelve months as provided in regulations and administrative guidance promulgated under Section 409A of the Code. 2.22 "Plan" means The Executive Nonqualified Excess PlanT, as herein set out or as duly amended. The name of the Plan as applied to the Employer shall be designated in the Adoption Agreement. 2.23 "Plan Administrator" means the person designated in the Adoption Agreement. If the Plan Administrator designated in the Adoption Agreement is unable to serve, the Employer shall be the Plan Administrator. 2.24 "Plan-Approved Domestic Relations Order" shall mean a court order that is lawfully directed to this Plan and that is served upon the Plan Administrator before the Participant receives a distribution of his benefit that pursuant to a state domestic relations law creates or recognizes the existence of the right of an alternate payee to receive all or a portion of a Participant's benefit and that meets all of the following requirements. An order shall not be a Plan-Approved Domestic Relations Order unless the Plan Administrator determines that the court order on its face and without reference to any other document states all of the following: 6 (a) The court order expressly states that it relates to the provision of child support, alimony, or marital property rights to a spouse, former spouse, or child of a Participant and is made pursuant to State domestic relations law. (b) The court order clearly and unambiguously specifies that it refers to this Plan. (c) The court order clearly and unambiguously specifies the name of the Participant's Employer. (d) The court order clearly specifies: the name, mailing address, and social security number of the Participant; and the name, mailing address, and social security number of each alternate payee. (e) The court order clearly specifies the amount or percentage, or the manner in which the amount or percentage is to be determined, of the Participant's benefit to be paid to or segregated for the separate account of the alternate payee. (f) The court order expressly states that the alternate payee's segregated account shall bear all fees and expenses as though the alternate payee were a Participant. (g) The court order clearly specifies that any distribution to the alternate payee becomes payable only after a Qualifying Distribution Event of the Participant and only upon the alternate payee's written claim made to the Administrator. (h) The court order clearly specifies that any distribution to any alternate payee shall be payable only as a lump sum. (i) The court order expressly states that it does not require this Plan to provide any type or form of benefit or any option not otherwise provided under this Plan. (j) The court order expressly states that the order does not require this Plan to provide increased benefits. (k) The court order expressly states that any provision of it that would have the effect of requiring any distribution to an alternate payee of deferred compensation that is required to be paid to another person under any court order is void. (l) The court order expressly states that nothing in the order shall have any effect concerning any party's tax treatment, and that nothing in the order shall direct any person's tax reporting or withholding. An order shall not be a Plan-approved Domestics Relations Order if it includes any provision that does not relate to this Plan. Without limiting the comprehensive effect of the preceding sentence, an order shall not be a Plan-Approved Domestic Relations Order if the order includes any provision 7 relating to any pension plan, retirement plan, deferred compensation plan, health plan, welfare benefit plan, or employee benefit plan other than this Plan. An order shall not be a Plan-Approved Domestic Relations Order unless the order provides for only one alternate payee. An order shall not be a Plan-Approved Domestic Relations Order if the order includes any provision that would permit the alternate payee to designate any Beneficiary for any purpose. However, an order does not fail to qualify as a Plan-approved Domestic Relations Order because it provides that any rights not paid before the alternate payee's death shall be payable to the duly appointed and then-currently serving personal representative of the alternate payee's estate. The Plan Administrator may assume that the alternate payee named by the court order is a proper payee and need not inquire into whether the person named is a spouse or former spouse or child of the Participant. 2.25 "Plan Year" means the twelve-month period ending on the last day of the month designated in the Adoption Agreement; provided, that the initial Plan Year may have fewer than twelve months. 2.26 "Provider" means Executive Benefit Services, Inc. 2.27 "Qualifying Distribution Event" means (i) the separation from Service of the Participant, (ii) the date the Participant becomes Disabled, (iii) the death of the Participant, (iv) the time specified by the Participant for an in-service or education distribution, or (v) an Unforeseeable Emergency, each to the extent provided in Section 5. 2.28 "Salary Deferral Agreement" means a written agreement entered into between a Participant and the Employer pursuant to the provisions of Section 4.1 2.29 "Salary Deferral Credits" means the amounts credited to the Participant's Deferred Compensation Account by the Employer pursuant to the provisions of Section 4.1. 8 2.30 "Service" means employment by the Employer as an Employee. If the Participant is an Independent Contractor, "Service" shall mean the period during which the contractual relationship exists between the Employer and the Participant. 2.31 "Service Bonus" means any bonus paid to a Participant by the Employer which is not Performance-Based Compensation. 2.32 "Spouse" or "Surviving Spouse" means, except as otherwise provided in the Plan, a person who is the legally married spouse or surviving spouse of a Participant. 2.33 "Student" means the individual designated by the Participant in the Salary Deferral Agreement with respect to whom the Participant will create an Education Account. 2.34 "Trust" means the trust fund established pursuant to Section 10.2, if designated by the Employer in the Adoption Agreement. 2.35 "Trustee" means the trustee, if any, named in the agreement establishing the Trust and such successor or additional trustee as may be named pursuant to the terms of the agreement establishing the Trust. 2.36 "Unforeseeable Emergency" means a severe financial hardship to the Participant resulting from a sudden or unexpected illness or accident of the Participant, the Participant's Spouse or dependent (as defined in Section 152(a) of the Code), loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. 2.37 "Years of Service" means each Plan Year of Service completed by the Participant. For vesting purposes, Years of Service shall be calculated from the date designated in the Adoption Agreement. 9 Section 3. Participation: ---------- -------------- The Committee in its discretion shall designate each Employee or Independent Contractor who is eligible to participate in the Plan. An Employee or Independent Contractor designated by the Committee as a Participant who has not otherwise entered the Plan shall enter the Plan and become a Participant as of the date determined by the Committee. A Participant who separates from Service with the Employer and who later returns to Service will not be an Active Participant under the Plan except upon satisfaction of such terms and conditions as the Committee shall establish upon the Participant's return to Service, whether or not the Participant shall have a balance remaining in the Deferred Compensation Account under the Plan on the date of the return to Service. Section 4. Credits to Deferred Compensation Account: ---------- ----------------------------------------- 4.1 Salary Deferral Credits. To the extent provided in the Adoption Agreement, each Active Participant may elect, by entering into a Salary Deferral Agreement with the Employer, to defer the receipt of Compensation from the Employer by a dollar amount or percentage specified in the Salary Deferral Agreement. The amount of the Participant's Salary Deferral Credit shall be credited by the Employer to the Deferred Compensation Account maintained for the Participant pursuant to Section 8. The following special provisions shall apply with respect to the Salary Deferral Credits of a Participant: 4.1.1 The Employer shall credit to the Participant's Deferred Compensation Account on each Crediting Date an amount equal to the total Salary Deferral Credit for the period ending on such Crediting Date. 4.1.2 An election pursuant to Section 4.1 shall be made by the Participant by executing and delivering a Salary Deferral Agreement to the Committee. The Salary Deferral Agreement shall become effective with respect to such Participant as of the first day of January following the date such Salary Deferral Agreement is received by the Committee; provided, that in the case of the first year in which the Participant becomes eligible to participate in the Plan, the Participant may execute and deliver 10 a Salary Deferral Agreement to the Committee within 30 days after the date the Participant enters the Plan to be effective as of the first payroll period next following the date the Salary Deferral Agreement is received by the Committee. A Participant's election shall continue in effect, unless earlier modified by the Participant, until the Participant separates from Service, or, if earlier, until the Participant ceases to be an Active Participant under the Plan. 4.1.3 A Participant may unilaterally modify a Salary Deferral Agreement (either to terminate, increase or decrease the portion of his future Compensation which is subject to salary deferral within the percentage limits set forth in Section 4.1 of the Adoption Agreement) by providing a written modification of the Salary Deferral Agreement to the Employer. The modification shall become effective as of the first day of January following the date such written modification is received by the Committee. Notwithstanding the foregoing, at any time during the calendar year 2005, a Participant may terminate a Salary Deferral Agreement, or modify a Salary Deferral Agreement to reduce the amount of Compensation subject to the deferral election, so long as the Compensation subject to the terminated or modified Salary Deferral Agreement is includible in the income of the Participant in calendar year 2005 or, if later, in the taxable year in which the amounts are earned and vested. 4.1.4 Notwithstanding Sections 4.1.2 and 4.1.3, a Salary Deferral Agreement relating to the deferral of Performance-Based Compensation must be executed and delivered to the Committee no later than the date which is 6 months prior to the end of the performance period, and may not be modified after such date. 4.1.5 The Committee may from time to time establish policies or rules consistent with the requirements of Section 409A of the Code to govern the manner in which Salary Deferral Credits may be made. 4.1.6 The requirements of Section 4.1.2 relating to the timing of the Salary Deferral Agreement shall not apply to any deferral elections made on or before March 15, 2005, provided that (a) the amounts to which the deferral election relate have not been paid or become payable at the time of the election, (b) the Plan was in existence on or before December 31, 2004, (c) the election to defer compensation is made in accordance with the terms of the Plan as in effect on December 31, 2005 (other than a requirement to make a deferral election after March 15, 2005), (d) the Plan is otherwise operated in accordance with the requirements of Section 409A of the Code, and (e) the Plan is amended to comply with Section 409A in accordance with Q&A 19 of Notice 2005-1. 4.2 Employer Credits. If designated by the Employer in the Adoption Agreement, the Employer shall cause the Committee to credit to the 11 Deferred Compensation Account of each Active Participant an Employer Credit as determined in accordance with the Adoption Agreement. 4.3 Deferred Compensation Account. All Salary Deferral Credits and Employer Credits shall be credited to the Deferred Compensation Account of the Participant. Section 5. Qualifying Distribution Events: ---------- ------------------------------- 5.1 Separation from Service. If the Participant separates from Service with the Employer, the vested balance in the Deferred Compensation Account shall be paid to the Participant by the Employer as provided in Section 6. Notwithstanding the foregoing, no distribution shall be made earlier than six months after the date of separation from Service (or, if earlier, the date of death) with respect to a Participant who is a key employee (as defined in Section 416(i) of the Code without regard to paragraph (5) thereof) of a corporation the stock in which is traded on an established securities market or otherwise. 5.2 Disability. If the Participant becomes Disabled while in Service, the vested balance in the Deferred Compensation Account shall be paid to the Participant by the Employer as provided in Section 6. 5.3 Death. If the Participant dies while in Service, the Employer shall pay a benefit to the Participant's Beneficiary in the amount designated in the Adoption Agreement. Payment of such benefit shall be made by the Employer as provided in Section 6. If a Participant dies following his separation from Service for any reason, and before all payments under the Plan have been made, the vested balance in the Deferred Compensation Account shall be paid by the Employer to the Participant's Beneficiary pursuant to Section 6. 5.4 In-Service Distributions. If the Employer designates in the Adoption Agreement that in-service distributions are permitted under the Plan, a Participant may designate in the Salary Deferral Agreement to have a specified amount credited to the Participant's In-Service Account for in- 12 service distributions at the later of the date specified by the Participant or as specified in the Adoption Agreement. In no event may an in-service distribution be made prior to two years following the establishment of the In-Service Account of the Participant. If the Participant elects to receive in-service distributions in annual installment payments, the payment of each annual installment shall be made on the anniversary of the date of the first installment payment, and the amount of the annual installment shall be adjusted on such anniversary for credits or debits to the Participant's account pursuant to Section 8 of the Plan. Such adjustment shall be made by dividing the balance in the In-Service Account on such date by the number of annual installments remaining to be paid hereunder; provided that the last annual installment due under the Plan shall be the entire amount credited to the Participant's In-Service Account on the date of payment. Notwithstanding the foregoing, if a Participant incurs a Qualifying Distribution Event prior to the date on which the entire balance in the In-Service Account has been distributed, then the balance in the In-Service Account on the date of the Qualifying Distribution Event shall be distributed to the Participant in the same manner and at the same time as the balance in the Deferred Compensation Account is distributed under Section 6 and in accordance with the rules and elections in effect under Section 6. 5.5 Education Withdrawals. If the Employer designates in the Adoption Agreement that education distributions are permitted under the Plan, a Participant may designate in the Salary Deferral Agreement to have a specified amount credited to the Participant's Education Account for education distributions at the later of the date specified by the Participant or the date specified in the Adoption Agreement. If the Participant designates more than one Student, the Education Account will be divided into a separate Education Account for each Student, and the Participant may designate in the Salary Deferral Agreement the percentage or dollar amount to be credited to each Education Account. In the absence 13 of a clear designation, all credits made to the Education Account shall be equally allocated to each Education Account. The Employer shall pay to the Participant the balance in the Education Account with respect to the Student at the time and in the manner designated by the Participant in the Salary Deferral Agreement. If the Participant elects to receive education distributions in annual installment payments, the payment of each annual installment shall be made on the anniversary of the date of the first installment payment, and the amount of the annual installment shall be adjusted on such anniversary for credits or debits to the Participant's Education Account pursuant to Section 8 of the Plan. Such adjustment shall be made by dividing the balance in the Education Account on such date by the number of annual installments remaining to be paid hereunder; provided that the last annual installment due under the Plan shall be the entire amount credited to the Participant's Education Account on the date of payment. Notwithstanding the foregoing, if the Participant incurs a Qualifying Distribution Event prior to the date on which the entire balance of the Education Account has been distributed, then the balance in the Education Account on the date of the Qualifying Distribution Event shall be distributed to the Participant in the same manner and at the same time as the Deferred Compensation Account is distributed under Section 6 and in accordance with the rules and elections in effect under Section 6. 5.6 Unforeseeable Emergency. A distribution from the Deferred Compensation Account may be made to a Participant in the event of an Unforeseeable Emergency, subject to the following provisions: 5.6.1 A Participant may, at any time prior to his separation from Service for any reason, make application to the Committee to receive a distribution in a lump sum of all or a portion of the vested balance in the Deferred Compensation Account (determined as of the date the distribution, if any, is made under this Section 5.6) because of an Unforeseeable Emergency. A distribution because of an Unforeseeable Emergency shall not exceed the amount required to satisfy the Unforeseeable Emergency plus amounts necessary to pay taxes reasonably anticipated as a result of such distribution, after taking into account the extent to which the Unforeseeable Emergency may be relieved through reimbursement or compensation by insurance or 14 otherwise or by liquidation of the Participant's assets (to the extent the liquidation of such assets would not itself cause severe financial hardship). 5.6.2 The Participant's request for a distribution on account of Unforeseeable Emergency must be made in writing to the Committee. The request must specify the nature of the financial hardship, the total amount requested to be distributed from the Deferred Compensation Account, and the total amount of the actual expense incurred or to be incurred on account of the Unforeseeable Emergency. 5.6.3 If a distribution under this Section 5.6 is approved by the Committee, such distribution will be made as soon as practicable following the date it is approved. The processing of the request shall be completed as soon as practicable from the date on which the Committee receives the properly completed written request for a distribution on account of an Unforeseeable Emergency. A distribution due to Unforeseeable Emergency shall not affect any deferral election previously made by the Participant. If a Participant's separation from Service occurs after a request is approved in accordance with this Section 5.6.3, but prior to distribution of the full amount approved, the approval of the request shall be automatically null and void and the benefits which the Participant is entitled to receive under the Plan shall be distributed in accordance with the applicable distribution provisions of the Plan. 5.6.4 The Committee may from time to time adopt additional policies or rules consistent with the requirements of Section 409A of the Code to govern the manner in which such distributions may be made so that the Plan may be conveniently administered. Section 6. Qualifying Distribution Events Payment Options: ---------- ----------------------------------------------- 6.1 Payment Options. The Employer shall designate in the Adoption Agreement the payment options which may be elected by the Participant. The Participant shall elect in the Salary Deferral Agreement the method under which the vested balance in the Deferred Compensation Account will be distributed from among the designated payment options. Payment shall be made in the manner elected by the Participant and shall commence as soon as practicable following the Qualifying Distribution Event. The Participant may elect a different method of payment for each Qualifying Distribution Event as specified in the Adoption Agreement. If the Participant elects the installment payment option, the payment of each 15 annual installment shall be made on the anniversary of the date of the first installment payment, and the amount of the annual installment shall be adjusted on such anniversary for credits or debits to the Participant's account pursuant to Section 8 of the Plan. Such adjustment shall be made by dividing the balance in the Deferred Compensation Account on such date by the number of annual installments remaining to be paid hereunder; provided that the last annual installment due under the Plan shall be the entire amount credited to the Participant's account on the date of payment. In the event the Participant fails to make a valid election of the payment method, the distribution will be made in a single lump sum payment upon the Qualifying Distribution Event. Notwithstanding the provisions of Sections 6.3 or 6.4 of the Plan, a Participant may elect on or before December 31, 2005, the method of payment of amounts deferred prior to the date of such election. 6.2 De Minimis Amounts. Notwithstanding any payment election made by the Participant, the vested balance in the Deferred Compensation Account of the Participant will be distributed in a single lump sum payment if the payment accompanies the termination of the Participant's entire interest in the Plan and the amount of such payment does not exceed $10,000. Such payment shall be made on or before the later of (i) December 31 of the calendar year in which the Participant separates from Service from the Employer, or (ii) the date that is 2-1/2 months after the Participant separates from Service from the Employer. 6.3 Subsequent Elections. With the consent of the Committee, a Participant may delay or change the method of payment of the Deferred Compensation Account subject to the following requirements: 6.3.1 The new election may not take effect until at least 12 months after the date on which the new election is made. 6.3.2 If the new election relates to a payment for a Qualifying Distribution Event other than the death of the 16 Participant, the Participant becoming Disabled, or an Unforeseeable Emergency, the new election must provide for the deferral of the first payment for a period of at least five years from the date such payment would otherwise have been made. 6.3.3 If the new election relates to a payment from the In-Service Account or Education Account, the new election must be made at least 12 months prior to the date of the first scheduled payment from such account. 6.4 Acceleration Prohibited. The acceleration of the time or schedule of any payment due under the Plan is prohibited except as provided in regulations and administrative guidance promulgated under Section 409A of the Code. It is not an acceleration of the time or schedule of payment if the Employer waives or accelerates the vesting requirements applicable to a benefit under the Plan. Section 7. Vesting: ---------- -------- A Participant shall be fully vested in the portion of his Deferred Compensation Account attributable to Salary Deferral Credits, and all income, gains and losses attributable thereto. A Participant shall become fully vested in the portion of his Deferred Compensation Account attributable to Employer Credits, and income, gains and losses attributable thereto, in accordance with the vesting schedule and provisions designated by the Employer in the Adoption Agreement. If a Participant's Deferred Compensation Account is not fully vested upon separation from Service, the portion of the Deferred Compensation Account that is not fully vested shall thereupon be forfeited. Section 8. Accounts; Deemed Investment; Adjustments to Account: ---------- ---------------------------------------------------- 8.1 Accounts. The Committee shall establish a book reserve account, entitled the "Deferred Compensation Account," on behalf of each Participant. The Committee shall also establish an In-Service Account and Education Account as a part of the Deferred Compensation Account of each Participant, if applicable. The amount credited to the Deferred Compensation Account shall be adjusted pursuant to the provisions of Section 8.3. 17 8.2 Deemed Investments. The Deferred Compensation Account of a Participant shall be credited with an investment return determined as if the account were invested in one or more investment funds made available by the Committee. The Participant shall elect the investment funds in which his Deferred Compensation Account shall be deemed to be invested. Such election shall be made in the manner prescribed by the Committee and shall take effect upon the entry of the Participant into the Plan. The investment election of the Participant shall remain in effect until a new election is made by the Participant. In the event the Participant fails for any reason to make an effective election of the investment return to be credited to his account, the investment return shall be determined by the Committee. 8.3 Adjustments to Deferred Compensation Account. With respect to each Participant who has a Deferred Compensation Account under the Plan, the amount credited to such account shall be adjusted by the following debits and credits, at the times and in the order stated: 8.3.1 The Deferred Compensation Account shall be debited each business day with the total amount of any payments made from such account since the last preceding business day to him or for his benefit. 8.3.2 The Deferred Compensation Account shall be credited on each Crediting Date with the total amount of any Salary Deferral Credits and Employer Credits to such account since the last preceding Crediting Date. 8.3.3 The Deferred Compensation Account shall be credited or debited on each day securities are traded on a national stock exchange with the amount of deemed investment gain or loss resulting from the performance of the investment funds elected by the Participant in accordance with Section 8.2. The amount of such deemed investment gain or loss shall be determined by the Committee and such determination shall be final and conclusive upon all concerned. Section 9. Administration by Committee: ---------- ---------------------------- 9.1 Membership of Committee. If elected in the Adoption Agreement, the Committee shall consist of at least three individuals who shall be appointed by the Board to serve at the pleasure of the Board. Any 18 member of the Committee may resign, and his successor, if any, shall be appointed by the Board. The Committee shall be responsible for the general administration and interpretation of the Plan and for carrying out its provisions, except to the extent all or any of such obligations are specifically imposed on the Board. 9.2 Committee Officers; Subcommittee. The members of the Committee may elect Chairman and may elect an acting Chairman. They may also elect a Secretary and may elect an acting Secretary, either of whom may be but need not be a member of the Committee. The Committee may appoint from its membership such subcommittees with such powers as the Committee shall determine, and may authorize one or more of its members or any agent to execute or deliver any instruments or to make any payment on behalf of the Committee. 9.3 Committee Meetings. The Committee shall hold such meetings upon such notice, at such places and at such intervals as it may from time to time determine. Notice of meetings shall not be required if notice is waived in writing by all the members of the Committee at the time in office, or if all such members are present at the meeting. 9.4 Transaction of Business. A majority of the members of the Committee at the time in office shall constitute a quorum for the transaction of business. All resolutions or other actions taken by the Committee at any meeting shall be by vote of a majority of those present at any such meeting and entitled to vote. Resolutions may be adopted or other action taken without a meeting upon written consent thereto signed by all of the members of the Committee. 9.5 Committee Records. The Committee shall maintain full and complete records of its deliberations and decisions. The minutes of its proceedings shall be conclusive proof of the facts of the operation of the Plan. 19 9.6 Establishment of Rules. Subject to the limitations of the Plan, the Committee may from time to time establish rules or by-laws for the administration of the Plan and the transaction of its business. 9.7 Conflicts of Interest. No individual member of the Committee shall have any right to vote or decide upon any matter relating solely to himself or to any of his rights or benefits under the Plan (except that such member may sign unanimous written consent to resolutions adopted or other action taken without a meeting), except relating to the terms of his Salary Deferral Agreement. 9.8 Correction of Errors. The Committee may correct errors and, so far as practicable, may adjust any benefit or credit or payment accordingly. The Committee may in its discretion waive any notice requirements in the Plan; provided, that a waiver of notice in one or more cases shall not be deemed to constitute a waiver of notice in any other case. With respect to any power or authority which the Committee has discretion to exercise under the Plan, such discretion shall be exercised in a nondiscriminatory manner. 9.9 Authority to Interpret Plan. Subject to the claims procedure set forth in Section 16 the Plan Administrator and the Committee shall have the duty and discretionary authority to interpret and construe the provisions of the Plan and to decide any dispute which may arise regarding the rights of Participants hereunder, including the discretionary authority to construe the Plan and to make determinations as to eligibility and benefits under the Plan. Determinations by the Plan Administrator and the Committee shall apply uniformly to all persons similarly situated and shall be binding and conclusive upon all interested persons. 9.10 Third Party Advisors. The Committee may engage an attorney, accountant, actuary or any other technical advisor on matters regarding the operation of the Plan and to perform such other duties as shall be required in connection therewith, and may employ such clerical and related personnel 20 as the Committee shall deem requisite or desirable in carrying out the provisions of the Plan. The Committee shall from time to time, but no less frequently than annually, review the financial condition of the Plan and determine the financial and liquidity needs of the Plan. The Committee shall communicate such needs to the Employer so that its policies may be appropriately coordinated to meet such needs. 9.11 Compensation of Members. No fee or compensation shall be paid to any member of the Committee for his Service as such. 9.12 Expense Reimbursement. The Committee shall be entitled to reimbursement by the Employer for its reasonable expenses properly and actually incurred in the performance of its duties in the administration of the Plan. 9.13 Indemnification. No member of the Committee shall be personally liable by reason of any contract or other instrument executed by him or on his behalf as a member of the Committee nor for any mistake of judgment made in good faith, and the Employer shall indemnify and hold harmless, directly from its own assets (including the proceeds of any insurance policy the premiums for which are paid from the Employer's own assets), each member of the Committee and each other officer, employee, or director of the Employer to whom any duty or power relating to the administration or interpretation of the Plan may be delegated or allocated, against any unreimbursed or uninsured cost or expense (including any sum paid in settlement of a claim with the prior written approval of the Board) arising out of any act or omission to act in connection with the Plan unless arising out of such person's own fraud, bad faith, willful misconduct or gross negligence. Section 10. Contractual Liability; Trust: ----------- ----------------------------- 10.1 Contractual Liability. The obligation of the Employer to make payments hereunder shall constitute a contractual liability of the Employer to the Participant. Such payments shall be made from the general 21 funds of the Employer, and the Employer shall not be required to establish or maintain any special or separate fund, or otherwise to segregate assets to assure that such payments shall be made, and the Participant shall not have any interest in any particular assets of the Employer by reason of its obligations hereunder. To the extent that any person acquires a right to receive payment from the Employer, such right shall be no greater than the right of an unsecured creditor of the Employer. 10.2 Trust. If so designated in the Adoption Agreement, the Employer may establish a Trust with the Trustee, pursuant to such terms and conditions as are set forth in the Trust Agreement. The Trust, if and when established, is intended to be treated as a grantor trust for purposes of the Code and all assets of the Trust shall be held in the United States. The establishment of the Trust is not intended to cause Participants to realize current income on amounts contributed thereto, and the Trust shall be so interpreted and administered. Section 11. Allocation of Responsibilities: ----------- ------------------------------- The persons responsible for the Plan and the duties and responsibilities allocated to each are as follows: 11.1 Board. (i) To amend the Plan; (ii) To appoint and remove members of the Committee; and (iii) To terminate the Plan as permitted in Section 14. 11.2 Committee. (i) To designate Participants; (ii) To interpret the provisions of the Plan and to determine the rights of the Participants under the Plan, except to the extent otherwise provided in Section 16 relating to claims procedure; 22 (iii) To administer the Plan in accordance with its terms, except to the extent powers to administer the Plan are specifically delegated to another person or persons as provided in the Plan; (iv) To account for the amount credited to the Deferred Compensation Account of a Participant; and (v) To direct the Employer in the payment of benefits. 11.3 Plan Administrator. (i) To file such reports as may be required with the United States Department of Labor, the Internal Revenue Service and any other government agency to which reports may be required to be submitted from time to time; and (ii) To administer the claims procedure to the extent provided in Section 16. Section 12. Benefits Not Assignable; Facility of Payments: ----------- ---------------------------------------------- 12.1 Benefits not Assignable. No portion of any benefit credited or paid under the Plan with respect to any Participant shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt so to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge the same shall be void, nor shall any portion of such benefit be in any manner payable to any assignee, receiver or any one trustee, or be liable for his debts, contracts, liabilities, engagements or torts. Notwithstanding the foregoing, in the event that all or any portion of the benefit of a Participant is transferred to the former spouse of the Participant incident to a divorce, the Committee shall maintain such amount for the benefit of the former spouse until distributed in the manner required by an order of any court having jurisdiction over the divorce, and the former spouse shall be entitled to the same rights as the Participant with respect to such benefit. 12.2 Plan-Approved Domestic Relations Orders. The Plan Administrator shall establish written procedures for determining whether an order directed to the Plan is a Plan-Approved Domestic Relations Order. 23 12.2.1 Review by Plan Administrator: The Plan Administrator shall make a determination on each final court order directed to the Plan as to whether the order is a Plan- Approved Domestic Relations Order. The Plan Administrator may delay the commencement of its consideration of any order until the later of the date that is 30 days after the date of the order or the date that the Plan Administrator is satisfied that all rehearing and appeal rights with respect to the order have expired. 12.2.2 Payment to Alternate Payee: If the Plan Administrator determines that an order is a Plan-approved Domestic Relations Order, the Plan Administrator shall cause the payment of amounts pursuant to or segregate a separate account as provided by (and to prevent any payment or act which might be inconsistent with) the Plan-Approved Domestic Relations Order. 12.2.3 Expenses: The Employer and the Plan Administrator shall not be obligated to incur any cost to defend against or set aside any judgment, decree, or order relating to the division, attachment, garnishment, or execution of or levy upon the Participant's account or any distribution, including (but not limited to) any domestic relations proceeding. Notwithstanding the foregoing, if any such person is joined in any proceeding, the party may take such action as it considers necessary or appropriate to protect any and all of its legal rights, and the Participant (or Beneficiary) shall reimburse all actual fees of lawyers and legal assistants and expenses reasonably incurred by such party. 12.3 Payments to Minors and Others. If any individual entitled to receive a payment under the Plan shall be physically, mentally or legally incapable of receiving or acknowledging receipt of such payment, the Committee, upon the receipt of satisfactory evidence of his incapacity and satisfactory evidence that another person or institution is maintaining him and that no guardian or committee has been appointed for him, may cause any payment otherwise payable to him to be made to such person or institution so maintaining him. Payment to such person or institution shall be in full satisfaction of all claims by or through the Participant to the extent of the amount thereof. Section 13. Beneficiary: ----------- ------------ The Participant's Beneficiary shall be the person or persons designated by the Participant on the Beneficiary designation form provided by and filed with the Committee or its designee. If the Participant does not designate a Beneficiary, the Beneficiary shall be his Surviving Spouse. 24 If the Participant does not designate a Beneficiary and has no Surviving Spouse, the Beneficiary shall be the Participant's estate. The designation of a Beneficiary may be changed or revoked only by filing a new Beneficiary designation form with the Committee or its designee. If a Beneficiary (the "primary Beneficiary") is receiving or is entitled to receive payments under the Plan and dies before receiving all of the payments due him, the balance to which he is entitled shall be paid to the contingent Beneficiary, if any, named in the Participant's current Beneficiary designation form. If there is no contingent Beneficiary, the balance shall be paid to the estate of the primary Beneficiary. Any Beneficiary may disclaim all or any part of any benefit to which such Beneficiary shall be entitled hereunder by filing a written disclaimer with the Committee before payment of such benefit is to be made. Such a disclaimer shall be made in a form satisfactory to the Committee and shall be irrevocable when filed. Any benefit disclaimed shall be payable from the Plan in the same manner as if the Beneficiary who filed the disclaimer had predeceased the Participant. Section 14. Amendment and Termination of Plan: ----------- ---------------------------------- The Board may amend any provision of the Plan or terminate the Plan at any time; provided, that in no event shall such amendment or termination reduce the balance in any Participant's Deferred Compensation Account as of the date of such amendment or termination, nor shall any such amendment affect the terms of the Plan relating to the payment of such Deferred Compensation Account. Notwithstanding the foregoing, the following special provisions shall apply: 14.1 Termination Upon Change in Control. If the Employer terminates the Plan within twelve months of a Change in Control, the Deferred Compensation Account of each Participant shall become fully vested and payable to the Participant in a lump sum. 25 14.2 Termination On or Before December 31, 2005. The Employer may terminate the Plan on or before December 31, 2005, and distribute the vested balance in the Deferred Compensation Account to each Participant so long as all amounts deferred under the Plan are included in the income of the Participant in the taxable year in which the termination occurs. 14.3 No Financial Triggers. The Employer may not terminate the Plan and make distributions to a Participant due solely to a change in the financial health of the Employer. Section 15. Communication to Participants: ----------- ------------------------------ The Employer shall make a copy of the Plan available for inspection by Participants and their beneficiaries during reasonable hours at the principal office of the Employer. Section 16. Claims Procedure: ----------- ----------------- The following claims procedure shall apply with respect to the Plan: 16.1 Filing of a Claim for Benefits. If a Participant or Beneficiary (the "claimant") believes that he is entitled to benefits under the Plan which are not being paid to him or which are not being accrued for his benefit, he shall file a written claim therefor with the Plan Administrator. In the event the Plan Administrator shall be the claimant, all actions which are required to be taken by the Plan Administrator pursuant to this Section 16 shall be taken instead by another member of the Committee designated by the Committee. 16.2 Notification to Claimant of Decision. Within 90 days after receipt of a claim by the Plan Administrator (or within 180 days if special circumstances require an extension of time), the Plan Administrator shall notify the claimant of the decision with regard to the claim. In the event of such special circumstances requiring an extension of time, there shall be furnished to the claimant prior to expiration of the initial 90-day 26 period written notice of the extension, which notice shall set forth the special circumstances and the date by which the decision shall be furnished. If such claim shall be wholly or partially denied, notice thereof shall be in writing and worded in a manner calculated to be understood by the claimant, and shall set forth: (i) the specific reason or reasons for the denial; (ii) specific reference to pertinent provisions of the Plan on which the denial is based; (iii) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and (iv) an explanation of the procedure for review of the denial and the time limits applicable to such procedures, including a statement of the claimant's right to bring a civil action under ERISA following an adverse benefit determination on review. Notwithstanding the forgoing, if the claim relates to a Participant who is Disabled, the Plan Administrator shall notify the claimant of the decision within 45 days (which may be extended for an additional 30 days if required by special circumstances). 16.3 Procedure for Review. Within 60 days following receipt by the claimant of notice denying his claim, in whole or in part, or, if such notice shall not be given, within 60 days following the latest date on which such notice could have been timely given, the claimant shall appeal denial of the claim by filing a written application for review with the Committee. Following such request for review, the Committee shall fully and fairly review the decision denying the claim. Prior to the decision of the Committee, the claimant shall be given an opportunity to review pertinent documents and to submit issues and comments in writing. 16.4 Decision on Review. The decision on review of a claim denied in whole or in part by the Plan Administrator shall be made in the following manner: 16.4.1 Within 60 days following receipt by the Committee of the request for review (or within 120 days if special circumstances require an extension of time), the Committee shall notify the claimant in writing of its decision with regard to the claim. In the event of such special circumstances requiring an extension of time, written notice of the extension shall be 27 furnished to the claimant prior to the commencement of the extension. Notwithstanding the forgoing, if the claim relates to a Participant who is Disabled, the Committee shall notify the claimant of the decision within 45 days (which may be extended for an additional 45 days if required by special circumstances). 16.4.2 With respect to a claim that is denied in whole or in part, the decision on review shall set forth specific reasons for the decision, shall be written in a manner calculated to be understood by the claimant, and shall cite specific references to the pertinent Plan provisions on which the decision is based. 16.4.3 The decision of the Committee shall be final and conclusive. 16.5 Action by Authorized Representative of Claimant. All actions set forth in this Section 16 to be taken by the claimant may likewise be taken by a representative of the claimant duly authorized by him to act in his behalf on such matters. The Plan Administrator and the Committee may require such evidence as either may reasonably deem necessary or advisable of the authority to act of any such representative. Section 17. Miscellaneous Provisions: ----------- ------------------------- 17.1 Set off. Notwithstanding any other provision of this Plan, the Employer may reduce the amount of any payment otherwise payable to or on behalf of a Participant hereunder (net of any required withholdings) by the amount of any loan, cash advance, extension of credit or other obligation of the Participant to the Employer that is then due and payable, and the Participant shall be deemed to have consented to such reduction. 17.2 Notices. Each Participant who is not in Service and each Beneficiary shall be responsible for furnishing the Committee or its designee with his current address for the mailing of notices and benefit payments. Any notice required or permitted to be given to such Participant or Beneficiary shall be deemed given if directed to such address and mailed by regular United States mail, first class, postage prepaid. If any check mailed to such address is returned as undeliverable to the addressee, mailing of checks will be suspended until the Participant or Beneficiary furnishes the proper address. This provision shall not be construed as 28 requiring the mailing of any notice or notification otherwise permitted to be given by posting or by other publication. 17.3 Lost Distributees. A benefit shall be deemed forfeited if the Plan Administrator is unable to locate the Participant or Beneficiary to whom payment is due on or before the fifth anniversary of the date payment is to be made or commence; provided, that the deemed investment rate of return pursuant to Section 8.2 shall cease to be applied to the Participant's account following the first anniversary of such date; provided further, however, that such benefit shall be reinstated if a valid claim is made by or on behalf of the Participant or Beneficiary for all or part of the forfeited benefit. 17.4 Reliance on Data. The Employer, the Committee and the Plan Administrator shall have the right to rely on any data provided by the Participant or by any Beneficiary. Representations of such data shall be binding upon any party seeking to claim a benefit through a Participant, and the Employer, the Committee and the Plan Administrator shall have no obligation to inquire into the accuracy of any representation made at any time by a Participant or Beneficiary. 17.5 Receipt and Release for Payments. Subject to the provisions of Section 17.1, any payment made from the Plan to or with respect to any Participant or Beneficiary, or pursuant to a disclaimer by a Beneficiary, shall, to the extent thereof, be in full satisfaction of all claims hereunder against the Plan and the Employer with respect to the Plan. The recipient of any payment from the Plan may be required by the Committee, as a condition precedent to such payment, to execute a receipt and release with respect thereto in such form as shall be acceptable to the Committee. 17.6 Headings. The headings and subheadings of the Plan have been inserted for convenience of reference and are to be ignored in any construction of the provisions hereof. 29 17.7 Continuation of Employment. The establishment of the Plan shall not be construed as conferring any legal or other rights upon any Employee or any persons for continuation of employment, nor shall it interfere with the right of the Employer to discharge any Employee or to deal with him without regard to the effect thereof under the Plan. 17.8 Merger or Consolidation; Assumption of Plan. No Employer shall consolidate or merge into or with another corporation or entity, or transfer all or substantially all of its assets to another corporation, partnership, trust or other entity (a "Successor Entity") unless such Successor Entity shall assume the rights, obligations and liabilities of the Employer under the Plan and upon such assumption, the Successor Entity shall become obligated to perform the terms and conditions of the Plan. Nothing herein shall prohibit the assumption of the obligations and liabilities of the Employer under the Plan by any Successor Entity. 17.9 Construction. The Employer shall designate in the Adoption Agreement the state according to whose laws the provisions of the Plan shall be construed and enforced, except to the extent that such laws are superseded by ERISA and the applicable requirements of the Code. 30 EX-31.1 3 wernexh31ceo3q05.txt WERNER ENTERPRISES, INC. CEO CERTIFICATION 9/30/05 Exhibit 31(i)(A) RULE 13a-14(a)/15d-14(a) CERTIFICATION I, Clarence L. Werner, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Werner Enterprises, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 31, 2005 -------------------------- /s/ Clarence L. Werner - ---------------------------------- Clarence L. Werner Chairman and Chief Executive Officer EX-31.2 4 wernexh31cfo3q05.txt WERNER ENTERPRISES, INC. CFO CERTIFICATION 9/30/05 Exhibit 31(i)(B) RULE 13a-14(a)/15d-14(a) CERTIFICATION I, John J. Steele, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Werner Enterprises, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 31, 2005 -------------------------- /s/ John J. Steele - ---------------------------------- John J. Steele Executive Vice President, Treasurer and Chief Financial Officer EX-32.1 5 wernexh32ceo3q05.txt WERNER ENTERPRISES, INC. CEO CERTIFICATION 9/30/05 Exhibit 32.1 CERTIFICATION BY CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 (SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002) In connection with the Quarterly Report of Werner Enterprises, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2005, (the "Report") filed with the Securities and Exchange Commission, I, Clarence L. Werner, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. October 31, 2005 /s/ Clarence L. Werner ------------------------- Clarence L. Werner Chairman and Chief Executive Officer EX-32.2 6 wernexh32cfo3q05.txt WERNER ENTERPRISES, INC. CFO CERTIFICATION 9/30/05 Exhibit 32.2 CERTIFICATION BY CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 (SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002) In connection with the Quarterly Report of Werner Enterprises, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2005, (the "Report") filed with the Securities and Exchange Commission, I, John J. Steele, Executive Vice President, Treasurer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. October 31, 2005 /s/ John J. Steele ------------------------- John J. Steele Executive Vice President, Treasurer and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----