**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

**FORM 10-K**

 

**ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For thefiscal year ended December 31, 2005**

**Commissionfile number 0-15010**

 

**MARTEN TRANSPORT, LTD.**

(Exact name of registrant as specified in itscharter)

 

| **DELAWARE**                              |   |           |   | **39-1140809**                        |   |
|-------------------------------------------|--------|----------------|--------|---------------------------------------|--------|
| (State of  incorporation)                 |   |           |   | (I.R.S.  employer identification no.) |   |
|                                      |   |           |   |                                  |   |
| **129  MARTEN STREET**                    |   |           |   | ** **                            |   |
| **MONDOVI,  WISCONSIN**                   |   | **54755**      |   | **(715) 926-4216**                    |   |
| (Address of  principal executive offices) |   | **(Zip code)** |   | (Registrant’s  telephone number) |   |

 

Securities registered pursuant to Section 12(b) ofthe Act:

**NONE**

 

Securities registered pursuant to Section 12(g) ofthe Act:

**COMMON STOCK, PAR VALUE $.01 PERSHARE**

 

Indicateby check mark if the Registrant is a well-known seasoned issuer, (as defined inRule 405 of the Securities Act). Yes  o    No  ý

 

Indicateby check mark if the Registrant is not required to file reports pursuant to Section 13or 15(d) of the Exchange Act. Yes  o    No  ý

 

Indicateby check mark whether the Registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes  ý   No  o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof Registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. ý

 

Indicateby check mark whether the Registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer  o    Accelerated filer  ý    Non-accelerated filer o

 

Indicateby check mark whether the Registrant is a shell company (as defined in ExchangeAct Rule 12b-2). Yes  o   No  ý

 

Asof June 30, 2005 (the last business day of the Registrant’s most recentlycompleted second fiscal quarter), the aggregate market value of the Common Stockof the Registrant (based upon the closing price of the Common Stock at thatdate as reported by the Nasdaq National Market), excluding outstanding sharesbeneficially owned by directors and executive officers, was $209,963,075.

 

Asof March 1, 2006, 21,723,410 shares of Common Stock of the Registrant wereoutstanding.

 

Part IIIof this Annual Report on Form 10-K incorporates by reference information(to the extent specific sections are referred to in this Report) from theRegistrant’s Proxy Statement for the annual meeting to be held May 4,2006, or 2006 Proxy Statement.

 

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** **

**Table ofContents**

** **
| ** **        | **Page**                                                                                                            |
|-------------------|---------------------------------------------------------------------------------------------------------------------|
| **PART I**   | ** **                                                                                                          |
|              |                                                                                                                |
| Item 1.           | Business                                                                                                            | 1 |
| Item 1A.          | Risk  Factors                                                                                                       | 5 |
| Item 1B.          | Unresolved Staff  Comments                                                                                          | 9 |
| Item 2.           | Properties                                                                                                          | 9 |
| Item 3.           | Legal Proceedings                                                                                                   | 9 |
| Item 4.           | Submission Of  Matters To A Vote Of Security Holders                                                                | 9 |
| Item 4A.          | Executive  Officers Of The Registrant                                                                               | 10 |
|              |                                                                                                                |   |
| **PART II**  | ** **                                                                                                          |
| ** **        | ** **                                                                                                          | ** ** |
| Item 5.           | Market For  Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases  Of Equity Securities | 11 |
| Item 6.           | Selected Financial Data                                                                                             | 12 |
| Item 7.           | Management’s Discussion And Analysis Of  Financial Condition And Results of Operations                         | 13 |
| Item 7A.          | Quantitative And Qualitative  Disclosures About Market Risk                                                         | 25 |
| Item  8.          | Financial  Statements And Supplementary Data                                                                        | 26 |
| Item  9.          | Changes  In And Disagreements With Accountants On Accounting And Financial Disclosure                               | 44 |
| Item  9A.         | Controls  And Procedures                                                                                            | 44 |
| Item 9B.          | Other  Information                                                                                                  | 44 |
|              |                                                                                                                |   |
| **PART III** | ** **                                                                                                          |
| ** **        | ** **                                                                                                          | ** ** |
| Item  10.         | Directors  And Executive Officers Of The Registrant                                                                 | 45 |
| Item  11.         | Executive  Compensation                                                                                             | 46 |
| Item  12.         | Security  Ownership Of Certain Beneficial Owners And Management And Related Stockholder  Matters                    | 46 |
| Item  13.         | Certain  Relationships And Related Transactions                                                                     | 46 |
| Item  14.         | Principal  Accountant Fees And Services                                                                             | 46 |
|              |                                                                                                                |   |
| **PART IV**  | ** **                                                                                                          |
| ** **        | ** **                                                                                                          | ** ** |
| Item  15.         | Exhibits  And Financial Statement Schedules                                                                         | 47 |
|              |                                                                                                                |   |
| **OTHER**         |                                                                                                                |
|              | ** **                                                                                                          |   |
|              | Signature Page                                                                                                      | 48 |
|              |                                                                                                                |   |
|              | Exhibit Index                                                                                                  | 50 |

 

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**FORWARD-LOOKINGINFORMATION**

** **

*This Annual Report on Form 10-Kcontains certain forward-looking statements. Such statements are made pursuantto the safe harbor provisions of the Private Securities Litigation Reform Actof 1995. Any statements not of historical fact may be consideredforward-looking statements. Written words such as “may,” “expect,” “believe,” “anticipate,”“plan,” “goal,” or “estimate,” or other variations of these or similar words,identify such statements. These statements by their nature involve substantialrisks and uncertainties, and actual results may differ materially fromthose expressed in such forward-looking statements. Important factors known tous that could cause such material differences are identified in this AnnualReport on Form 10-K under the heading “Risk Factors” beginning on page 5.We undertake no obligation to correct or update any forward-looking statements,whether as a result of new information, future events, or otherwise. You areadvised, however, to consult any future disclosures we make on related subjectsin future filings with the Securities and Exchange Commission.*

 

*Referencesin this Annual Report to “we,” “us,” “our,” or the “Company” or similar termsrefer to Marten Transport, Ltd. unless the context otherwise requires.*

 

**PART I**

 

**ITEM 1.          *BUSINESS***

# *** ***

**Overview**

 

We are one of the leadingtemperature-sensitive truckload carriers in the United States. We specialize intransporting food and other consumer packaged goods that require atemperature-controlled or insulated environment. In 2005, we generated $460.2 millionin operating revenue. The primary source of our operating revenue is freight revenue, whichwe generate by transporting freight for our customers. Generally, we are paidby the mile for our services. We also derive freight revenue from loading andunloading activities, equipment detention and other accessorial services. Ouroperating revenue also includes revenue from fuel surcharges and non-freightrevenue, primarily logistics services. Approximately 79% of our freightrevenue resulted from hauling temperature-sensitive products and 21% fromhauling dry freight. We operate throughout the United States and in parts ofCanada, with substantially all of our revenue generated from within the UnitedStates. Our primary traffic lanes are between the Midwest and the West Coast,Southwest, Southeast, and the East Coast, as well as from California to thePacific Northwest. In 2005, our average length of haul was approximately950 miles.

 

Our growth strategy is to expand our businessinternally by offering shippers a high level of service and significant freightcapacity. We market primarily to large shippers that offer consistent volumesof freight in the lanes we prefer and are willing to compensate us for a highlevel of service. With our fleet of 2,618 company and independent contractortractors, we are able to offer service levels that include up to 99% on-timeperformance and delivery within the narrow time windows often required whenshipping perishable commodities.

 

Organized under Wisconsin law in 1970, we area successor to a sole proprietorship Roger R. Marten founded in 1946. In 1988,we reincorporated under Delaware law. Our executive offices are located at 129Marten Street, Mondovi, Wisconsin 54755. Our telephone number is (715)926-4216.

 

We maintain a website at *www.marten.com.*We are not including the information contained on our website as a part of,nor incorporating it by reference into, this Annual Report on Form 10-K. Wepost on our website, free of charge, documents that we file with or furnish tothe Securities and Exchange Commission, including our Annual Reports on Form 10-K,Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and proxystatements, as soon as reasonably practicable after we electronically file suchmaterial with, or furnish such material to, the Securities and ExchangeCommission. We also provide a link on our website to Forms 3, 4 and 5 that ourofficers, directors and 10% stockholders file with the Securities and ExchangeCommission pursuant to Section 16(a) of the Securities Exchange Actof 1934.

 

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Since our inception, our revenue, operatingprofits and assets have been related to one business segment—long-haultruckload carriage providing protective service transportation andtime-sensitive transportation.

 

**Marketing and Operations**

 

We approach our business as an integratedeffort of marketing and operations. Our emphasis in marketing is directed tothe temperature-sensitive truckload market, which is generallyservice-sensitive, as opposed to being solely price competitive. We targetlarge food and consumer packaged goods companies whose products requiretemperature-sensitive services and who ship multiple truckloads per week. Byemphasizing high-quality service, we seek to become a core carrier for ourcustomers. In 2005, our two largest customers were General Mills and Kraft.

 

Our marketing efforts are conducted by astaff of approximately 85 sales, customer service and support personnelunder the supervision of our senior management team. Marketing personnel travelwithin their regions to solicit new customers and maintain contact withexisting customers. Customer service managers regularly contact customers tosolicit additional business on a load-by-load basis.

 

Our operations and sales personnel strive toimprove our asset productivity by seeking freight that allows for rapidturnaround times, minimizes non-revenue miles between loads, and carries afavorable rate structure. Once we have established a customer relationship,customer service managers work closely with our fleet managers to matchcustomer needs with our capacity and the location of revenue equipment. Fleetmanagers use our optimization system to assign loads and meet the routing needsof our drivers while satisfying customer and operational requirements. Weattempt to route most of our trucks over selected operating lanes, which webelieve assists us in meeting customer requirements, balancing traffic,reducing non-revenue miles, and improving the reliability of deliveryschedules.

 

We employ technology in our operations whenwe believe that it will allow us to operate more efficiently and the investmentis cost-justified. Examples of the technologies we employ include:

 

•                  Satellite-based tracking and messaging that allows us to communicatewith our drivers, obtain load position updates, provide our customers withfreight visibility, and download engine operating information such as fuelmileage and idling time.

 

•                  Freight optimization software that assists us in selecting loads thatmatch our overall criteria, including profitability, repositioning, identifyingcapacity for expedited loads, driver availability and home time, and otherfactors.

 

•                  Electronic data interchange and internet communication with customersconcerning freight tendering, invoices, shipment status, and other information.

 

•                  Fuel-routing software that optimizes the fuel stops for each trip to takeadvantage of volume discounts available in our fuel network.

 

We believe this integrated approach to ourmarketing and operations, coupled with our use of technology, has allowed us toprovide our customers with a high level of service and support our revenuegrowth in an efficient manner. For example, we had a non-revenue milepercentage of 7.2% during 2005, and a tractor to non-driver employee ratio of5.7-to-1 as of December 31, 2005. Both of these statistics, which haveremained steady over the last several years, point to the efficiency of ouroperations and we believe compare favorably to other temperature-sensitive anddry van trucking companies.

 

In addition to our traditional truckloadservices, we now offer our customers additional transportation options throughour logistics operations, which include the third-party brokerage services ofMW Logistics, LLC, or MWL, along with brokerage services we initiated in thesecond quarter of 2005 and intermodal services we initiated in the fourthquarter of 2005.

 

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**Major Customers**

 

An important part of our growth strategyis to increase our business with large customers. Accordingly, a significantamount of our business is concentrated with a relatively small number ofcustomers. In 2005, our top 30 customers accounted for approximately 76% of ourrevenue, and our top ten customers accounted for 51% of our revenue. Each ofour top ten customers has been a significant customer of ours for over tenyears. We believe we are the largest or second largest temperature-sensitivecarrier for seven of our top ten customers. General Mills accounted for 15% ofour revenue in 2005. We believe our relationship with this key customer issound, but we are dependent upon them and the loss of some or all of theirbusiness could have a materially adverse effect on our results.

 

**Drivers and Other Personnel**

 

We believe that maintaining a safe andproductive professional driver group is essential to providing excellentcustomer service and achieving profitability. Approximately 213 of our driversas of December 31, 2005 have driven more than one million miles for uswithout a preventable accident. Our turnover for all drivers, includingcompany-employed and independent contractor drivers, was 71% for 2005, comparedto an industry average that is estimated at 135% by the American TruckingAssociations.

 

We select drivers, including independentcontractors, using our specific guidelines for safety records, drivingexperience, and personal evaluations. We maintain stringent screening,training, and testing procedures for our drivers to reduce the potential foraccidents and the corresponding costs of insurance and claims. We train newdrivers at our Wisconsin, Georgia, Oregon and Indiana terminals in all phasesof our policies and operations, as well as in safety techniques andfuel-efficient operation of the equipment. All new drivers also must pass DOTrequired tests prior to assignment to a vehicle.

 

We primarily pay company-employed drivers afixed rate per mile. The rate increases based on length of service. Driversalso are eligible for bonuses based upon safe, efficient driving. We payindependent contractors on a fixed rate per mile. Independent contractors payfor their own fuel, insurance, maintenance, and repairs.

 

Competition in the trucking industry forqualified drivers is intense. Our operations have been impacted, and fromtime-to-time we have experienced under-utilization and increased expense, as aresult of the shortage of qualified drivers. We place a high priority on therecruitment and retention of an adequate supply of qualified drivers.

 

As of December 31, 2005, we hadapproximately 2,440 employees. This total consists of approximately 1,979drivers, 162 mechanics and maintenance personnel, and 299 support personnel,which includes management and administration. As of that date, we alsocontracted with 423 independent contractors. None of our employees arerepresented by a collective bargaining unit. We consider relations with ouremployees to be good.

 

**Revenue Equipment**

 

Our revenue equipment programs are animportant part of our overall goal of profitable growth. We evaluate ourequipment decisions based on factors such as initial cost, useful life,warranty terms, expected maintenance costs, fuel economy, driver comfort,customer needs, manufacturer support, and resale value. We generally operatenewer, well-maintained equipment with uniform specifications to minimize ourspare parts inventory, streamline our maintenance program, and simplify drivertraining.

 

As of December 31, 2005, we operated afleet of 2,618 tractors, including 2,195 company-owned tractors and 423tractors supplied by independent contractors. The average age of ourcompany-owned tractor fleet at December 31, 2005 was approximately 1.2 years.In 2005, we replaced most of our company-owned tractors within 3.5 years afterpurchase. Based on our current operating performance, the market for usedtractors, our liquidity and our expectations concerning tractors manufacturedin 2007, we decided to accelerate

 

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our tractor fleet replacement during 2005 and 2006 to allow us greaterflexibility in our decisions to purchase tractors in 2007 when the next roundof diesel emissions reduction directives of the Environmental ProtectionAgency, or EPA, go into effect. This will allow us the opportunity to evaluatethe new engine technology before adopting it on a larger scale.

 

Freightliner and Peterbilt manufacture mostof our company-owned tractors. Maintaining a relatively new and standardizedfleet allows us to operate most miles while the tractors are under warranty tominimize repair and maintenance costs. It also enhances our ability to attractdrivers, increases fuel economy, and improves customer acceptance by minimizingservice interruptions caused by breakdowns. We adhere to a comprehensivemaintenance program during the life of our equipment. We perform mostroutine servicing and repairs at our terminal facilities to reduce costlyon-road repairs and out-of-route trips. We do not have any agreements withtractor manufacturers pursuant to which they agree to repurchase the tractorsor guarantee a residual value, and we therefore could incur losses upon dispositionif resale values of used tractors decline.

 

We historically have contracted withindependent contractors to provide and operate a portion of our tractor fleet.Independent contractors own their own tractors and are responsible for allassociated expenses, including financing costs, fuel, maintenance, insurance,and taxes. We believe that a combined fleet complements our recruiting effortsand offers greater flexibility in responding to fluctuations in shipper demand.The percentage of our fleet provided by independent contractors was 16% as of December 31,2005.

 

As of December 31, 2005, we operated afleet of 3,438 trailers. Most of our trailers are equipped with Thermo-Kingrefrigeration units, air ride suspensions, and anti-lock brakes. Most of oursingle van trailers are refrigerated, 53 feet long, and 102 inches wide. Theaverage age of our trailer fleet at December 31, 2005 was approximately2.9 years. In 2005, we replaced most of our company-owned trailers withinseven years after purchase.

 

**Insurance and Claims**

 

We self-insure for a portion of our claimsexposure resulting from workers’ compensation, auto liability, generalliability, cargo and property damage claims, as well as employees’ healthinsurance. We are responsible for our proportionate share of the legal expensesrelating to such claims as well. We reserve currently for anticipated lossesand expenses. We periodically evaluate and adjust our insurance and claimsreserves to reflect our experience. We are responsible for the first $1.0million on each auto liability claim and as of June 1, 2005, we also areresponsible for up to $1.0 million in the aggregate for all auto liabilityclaims between $1.0 million and $2.0 million. We are also responsible for thefirst $750,000 on each workers’ compensation claim. We have $3.6 million instandby letters of credit to guarantee settlement of claims under agreementswith our insurance carriers and regulatory authorities. We maintain insuranceabove the amounts for which we self-insure up to specified policy limits withlicensed insurance carriers. Insurance carriers have raised premiums for manybusinesses, including trucking companies. As a result, our insurance and claimsexpense could increase, or we could raise our self-insured retention when ourpolicies are renewed. We believe that our policy of self-insuring up to setlimits, together with our safety and loss prevention programs, are effectivemeans of managing insurance costs.

 

**Fuel**

 

Our operations are heavily dependent upon theuse of diesel fuel. The price and availability of diesel fuel can vary and aresubject to political, economic, and market factors that are beyond our control.Fuel pricesfluctuated dramatically and quickly at various times during the last threeyears and they remain high based on historical standards. We actively manageour fuel costs by purchasing fuel in bulk in Mondovi and at our othermaintenance facilities throughout the country and have volume purchasingarrangements with national fuel centers that allow our drivers to purchase fuelat a discount while in transit. During 2005, 97% of our fuel purchases weremade at these designated locations.

 

Wefurther manage our exposure to changes in fuel prices through fuel surchargeprograms with our customers and other measures that we have implemented. Wehave historically been able to pass through most long-term increases in fuelprices and related taxes to customers in the form of fuel surcharges. Thesefuel

 

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surcharges, which adjust with the cost of fuel, enable us to recover asubstantial portion of the higher cost of fuel as prices increase, except fornon-revenue miles, out-of-route miles or fuel used while the tractor is idling.As of December 31, 2005, we had no derivative financial instruments toreduce our exposure to fuel price fluctuations.

 

**Competition**

 

We operate primarily in thetemperature-sensitive segment of the truckload market. This market is highlycompetitive and fragmented. We compete with many other truckload carriers that providetemperature-sensitive service of varying sizes and, to a lesser extent, withless-than-truckload carriers, railroads, and other transportation companies,many of which have more equipment, a wider range of services, and greatercapital resources than we do or have other competitive advantages. Inparticular, several of the largest truckload carriers that offer primarilydry-van service also offer temperature-sensitive service, and these carrierscould attempt to increase their business in the temperature-sensitive market. Wealso compete with other motor carriers for the services of drivers, independentcontractors, and management employees. We believe that the principalcompetitive factors in our business are service, freight rates, capacity, andfinancial stability. As one of the largest and best-capitalized carriersfocused on the temperature-sensitive segment, we believe we are well positionedto compete in that segment.

 

**Regulation**

 

The United StatesDepartment of Transportation, or DOT, and various state and local agenciesexercise broad powers over our business, generally governing such activities asauthorization to engage in motor carrier operations, safety and insurancerequirements. Our company drivers and independent contractors also must complywith the safety and fitness regulations promulgated by the DOT, including thoserelating to drug and alcohol testing and hours-of-service. The DOT adoptedrevised hours-of-service regulations effective in January 2004. In response,we negotiated delay time charges with the majority of our customers. In July 2004,the United States Court of Appeals for the District of Columbia vacated the newhours-of-service regulations in their entirety and remanded the matter to theFederal Motor Carriers Safety Administration, or FMCSA, for reconsideration. InAugust 2005, in response to the Surface Transportation Extension Act of2004 (Part V) temporarily extending the hours-of-service regulations, theFMCSA issued a revised set of hours-of-service regulations effective October 1,2005.

 

We believe that weare well equipped to minimize the economic impact of the currenthours-of-service rules on our business. We have negotiated delay timecharges with the majority of our customers. Prior to the effectiveness of thecurrent rules, we also initiated discussions with many of our customersregarding steps that they can take to assist us in managing our drivers’non-driving activities, such as loading, unloading, or waiting, and we plan tocontinue to actively communicate with our customers regarding these matters inthe future. In situations where shippers are unable or unwilling to take thesesteps, we assess detention and other charges to offset losses in productivityresulting from the current hours-of-service regulations. The regulations didnot have a significant impact on our operations or financial results in 2005.

 

**ITEM 1A.****                                           *****RISKFACTORS***

 

The following factors are important andshould be considered carefully in connection with any evaluation of ourbusiness, financial condition, results of operations, prospects, or aninvestment in our common stock. The risks and uncertainties described below arethose that we currently believe may materially affect our company or ourfinancial results. Additional risks and uncertainties not presently known to usor that we currently deem immaterial may also impair our businessoperations or affect our financial results.

 

*Our business is subject to general economic and business factors thatare largely out of our control, any of which could have a materially adverseeffect on our operating results.*Our business is dependent on a number ofgeneral economic and business factors that may have a materially adverseeffect on our results of operations, many of which are beyond our control. Thesefactors include excess capacity in the trucking industry, strikes or other workstoppages, and significant increases or fluctuations in interest rates, fueltaxes, and license and registration fees. We are affected by recessionaryeconomic cycles and downturns in

 

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customers’ business cycles,particularly in market segments and industries where we have a significantconcentration of customers. Economic conditions may adversely affect ourcustomers and their ability to pay for our services.

 

It isnot possible to predict the effects of actual or threatened armed conflicts orterrorist attacks, efforts to combat terrorism, military action against anyforeign state, heightened security requirements, or other related events andthe subsequent effects on the economy or on consumer confidence in the UnitedStates, or the impact, if any, on our future results of operations.

 

*We operate in a highly competitive and fragmented industry, andnumerous competitive factors could impair our ability to maintain our currentprofitability.*We compete with many other truckload carriers that providetemperature-sensitive service of varying sizes and, to a lesser extent, withless-than-truckload carriers, railroads and other transportation companies,many of which have more equipment, a wider range of services and greatercapital resources than we do or have other competitive advantages. Inparticular, several of the largest truckload carriers that offer primarilydry-van service also offer temperature-sensitive service, and these carrierscould attempt to increase their business in the temperature-sensitive market.Many of our competitors periodically reduce their freight rates to gainbusiness, especially during times of reduced growth rates in the economy, whichmay limit our ability to maintain or increase freight rates or maintainsignificant growth in our business. In addition, many customers reduce thenumber of carriers they use by selecting so-called “core carriers” as approvedservice providers, or conduct bids from multiple carriers for their shippingneeds, and in some instances we may not be selected as a core carrier orto provide service under such bids.

 

Inaddition, the trend toward consolidation in the trucking industry may createother large carriers with greater financial resources and other competitiveadvantages relating to their size. Competition from freight logistics andbrokerage companies may negatively impact our customer relationships andfreight rates. Furthermore, economies of scale that may be passed on tosmaller carriers by procurement aggregation providers may improve suchcarriers’ ability to compete with us.

 

*We derive a significant portion of our revenue from our majorcustomers, the loss of one or more of which could have a materially adverseeffect on our business.*A significant portion of our revenue is generated from our majorcustomers. For 2005, our top 30 customers, based on revenue, accounted forapproximately 76% of our revenue; our top ten customers accounted forapproximately 51% of our revenue; our top five customers accounted forapproximately 40% of our revenue; and our top two customers accounted forapproximately 24% of our revenue. Generally, we enter into one-year contractswith our major customers, the majority of which do not contain any firmobligations to ship with us. We cannot assure you that, upon expiration ofexisting contracts, these customers will continue to use our services or that,if they do, they will continue at the same levels. Many of our customersperiodically solicit bids from multiple carriers for their shipping needs, andthis process may depress freight rates or result in loss of business toour competitors. Some of our customers also operate their own private truckingfleets, and they may decide to transport more of their own freight. Areduction in or termination of our services by one or more of our majorcustomers could have a materially adverse effect on our business and operatingresults.

 

*Increasedprices, reduced productivity, and restricted availability of new revenueequipment could cause our financial condition, results of operations and cashflows to suffer.*We have experienced higher prices for new tractors over the past fewyears, primarily as a result of higher commodity prices, better pricing poweramong equipment manufacturers, and government regulations applicable to newlymanufactured tractors and diesel engines. We expect to continue to payincreased prices for revenue equipment and incur additional expenses andrelated financing costs for the foreseeable future. Our business could beharmed if we are unable to continue to obtain an adequate supply of newtractors and trailers or if we have to pay increased prices for new revenueequipment.

 

The EPAadopted revised emissions control regulations, which require progressivereductions in exhaust emissions from diesel engines through 2010, for enginesmanufactured in October 2002, and thereafter. The revised regulations decreasethe amount of emissions that can be released by tractor engines and affecttractors produced after the effective date of the regulations. Compliance withthese regulations has increased the cost of our new tractors, lowered fuelmileage and increased our operating expenses. Some 

 

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manufacturers havesignificantly increased new equipment prices, in part to meet new enginedesign requirements imposed by the EPA, and eliminated or sharply reduced the priceof repurchase commitments. These adverse effects combined with the uncertaintyas to the reliability of the vehicles equipped with the newly designed dieselengines and the residual values that will be realized from the disposition ofthese vehicles could increase our costs or otherwise adversely affect ourbusiness or operations. The next round of restrictions will take effect in 2007.Compliance with the 2007 EPA standards is expected to result in furtherdeclines in fuel economy, and may result in further increases in the costof new tractors.

 

*We havesignificant ongoing capital requirements that could harm our financialcondition, results of operations and cash flows if we are unable to generatesufficient cash from our operations.*The truckload industry is capitalintensive, and our policy of operating newer equipment requires us to expendsignificant amounts annually. If we elect to expand our fleet in futureperiods, our capital needs would increase. We expect to pay for projectedcapital expenditures with cash flows from operations and borrowings under ourrevolving credit facility. If we are unable to generate sufficient cash fromoperations and obtain financing on favorable terms in the future, we may haveto limit our growth, enter into less favorable financing arrangements, oroperate our revenue equipment for longer periods, any of which could have amaterially adverse effect on our profitability.

 

*Ongoing insurance and claims expenses could significantly affect ourearnings.*Ourfuture insurance and claims expense might exceed historical levels, which couldreduce our earnings. We self-insure for a portion of our claims exposureresulting from workers’ compensation, auto liability, general liability, cargoand property damage claims, as well as employees’ health insurance. We also areresponsible for our legal expenses relating to such claims. We reservecurrently for anticipated losses and expenses. We periodically evaluate andadjust our claims reserves to reflect our experience. However, ultimate resultsmay differ from our estimates, which could result in losses over ourreserved amounts.

 

Wemaintain insurance above the amounts for which we self-insure with licensedinsurance carriers. Although we believe the aggregate insurance limits shouldbe sufficient to cover reasonably expected claims, it is possible that one ormore claims could exceed our aggregate coverage limits. Insurance carriers haveraised premiums for many businesses, including trucking companies. As a result,our insurance and claims expense could increase, or we could raise ourself-insured retention when our policies are renewed. If these expensesincrease, or if we experience a claim in excess of our coverage limits, or weexperience a claim for which coverage is not provided, results of ouroperations and financial condition could be materially and adversely affected.

 

*Increases in compensation or difficulty in attracting drivers couldaffect our profitability and ability to grow.*In recent years the transportation industryhas experienced substantial difficulty in attracting and retaining qualifieddrivers, including independent contractors, with competition for drivers beingincreasingly intense. With the increased competition for drivers, we haveexperienced greater difficulty in attracting sufficient numbers of qualifieddrivers. In addition, due in part to current economic conditions,including the cost of fuel and insurance, the available pool of independentcontractor drivers is smaller than it has been historically. Accordingly, we may facedifficulty in attracting and retaining drivers for all of our current tractorsand for those we may add. Additionally, we may face difficulty inincreasing the number of our independent contractor drivers. In addition, ourindustry suffers from high turnover rates of drivers. Our turnover raterequires us to recruit a substantial number of drivers. Moreover, our turnoverrate could increase. If we are unable to continue to attract drivers andcontract with independent contractors, we could be required to continueadjusting our driver compensation package beyond the norm or let trucks sitidle. Effective January 1, 2005, we increased the amount paid to companydrivers by 1 cent per mile and increased the incentives paid to independentcontractors. We also instituted a second pay increase of 2 cents per mile forcompany drivers effective April 1, 2005. Our compensation of drivers andindependent contractors is subject to market forces, and we may increasetheir compensation further in future periods. An increase in our expenses or inthe number of tractors without drivers could materially and adversely affectour growth and profitability.

 

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*Fluctuations in the price or availability of fuel may increase ourcost of operation, which could materially and adversely affect ourprofitability.*We require large amounts of diesel fuel to operate our tractors and topower the temperature-control units on our trailers. Fuel is one of our largestoperating expenses. Fuel prices tend to fluctuate, and prices and availabilityof all petroleum products are subject to political, economic and market factorsthat are beyond our control. We depend primarily on fuel surcharges, volumepurchasing arrangements with truck stop chains and bulk purchases of fuel atour terminals to control our fuel expenses. There can be no assurance that wewill be able to collect fuel surcharges, enter into volume purchase agreements,or execute successful hedges in the future. The absence of meaningful fuelprice protection through these measures, fluctuations in fuel prices, or ashortage of diesel fuel, could materially and adversely affect our results ofoperations.

 

*Seasonality and the impact of weather can affect our profitability.*Our tractor productivity generallydecreases during the winter season because inclement weather impedes operationsand some shippers reduce their shipments. At the same time, operating expensesgenerally increase, with fuel efficiency declining because of engine idling andharsh weather creating higher accident frequency, increased claims and moreequipment repairs. We can also suffer short-term impacts from weather-relatedevents such as hurricanes, blizzards, ice-storms, and floods that could harmour results or make our results more volatile.

 

*We operate in a highly regulated industry and increased costs ofcompliance with, or liability for violation of, existing or future regulationscould have a materially adverse effect on our business.*The DOT and various state and localagencies exercise broad powers over our business, generally governing suchactivities as authorization to engage in motor carrier operations, safety andinsurance requirements. Our company drivers and independent contractors alsomust comply with the safety and fitness regulations promulgated by the DOT,including those relating to drug and alcohol testing and hours-of-service. TheDOT adopted revised hours-of-service regulations effective in January 2004.In response, we negotiated delay time charges with the majority of ourcustomers. In July 2004, the United States Court of Appeals for theDistrict of Columbia vacated the new hours-of-service regulations in theirentirety and remanded the matter to the Federal Motor Carriers SafetyAdministration, or FMCSA, for reconsideration. In August 2005, in responseto the Surface Transportation Extension Act of 2004 (Part V) temporarilyextending the hours-of-service regulations, the FMCSA issued a revised set ofhours-of-service regulations effective October 1, 2005. The regulationsdid not have a significant impact on our operations or financial results for2005 or 2004. However, uncompensated shortfalls in our utilization due tocompliance with the regulations could adversely impact our profitability.

 

*Service instability in the railroad industrycould increase our operating costs and reduce our ability to offer intermodalservices, which could adversely affect our revenue, results of operations, andcustomer relationships.*In the future, our dependence on railroads may increase if weexpand our intermodal services. In most markets, rail service is limited to afew railroads or even a single railroad. Any reduction in service by therailroads with which we have, or in the future may have, relationships islikely to increase the cost of the rail-based services we provide and reducethe reliability, timeliness, and overall attractiveness of our rail-basedservices. Furthermore, railroads are relatively free to adjust shipping ratesup or down as market conditions permit. Price increases could result in highercosts to our customers and reduce or eliminate our ability to offer intermodalservices. In addition, we cannot assure you that we will be able to negotiateadditional contracts with railroads to expand our capacity, add additionalroutes, or obtain multiple providers, which could limit our ability to providethis service.

 

*Ouroperations are subject to various environmental laws and regulations, theviolation of which could result in substantial fines or penalties.*We are subject to various environmentallaws and regulations dealing with the handling of hazardous materials, fuelstorage tanks, air emissions from our vehicles and facilities, engine idling,and discharge and retention of storm water. We operate in industrial areas,where truck terminals and other industrial activities are located, and wheregroundwater or other forms of environmental contamination have occurred. Ouroperations involve the risks of fuel spillage or seepage, environmental damage,and hazardous waste disposal, among others. Although we have institutedprograms to monitor and control environmental risks and promote compliance withapplicable environmental laws and regulations, if we are involved in a spill orother accident involving hazardous substances or if we are found to be inviolation of applicable laws or regulations, we could be subject toliabilities, including substantial fines or penalties or civil

 

8

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and criminal liability, any ofwhich could have a materially adverse effect on our business and operatingresults.

 

*Our management informationsystems may prove inadequate.*We depend upon our managementinformation systems for many aspects of our business. Some of our key softwarehas been developed internally by our programmers or by adapting purchasedsoftware to our needs and this software may not be easily modified orintegrated with other software and systems. Our business will be materially andadversely affected if our management information systems are disrupted or if weare unable to improve, upgrade, integrate or expand our systems as we continueto execute our growth strategy, including our new logistics and intermodalservices.

 

**ITEM1B.****                                           *****UNRESOLVEDSTAFF COMMENTS***

 

None.

 

# ***ITEM 2.***                             PROPERTIES

# *** ***

Our executive offices and principal terminalare located on approximately seven acres in Mondovi, Wisconsin. This facilityconsists of 39,000 square feet of office space and 21,000 square feet ofequipment repair and maintenance space. In addition to our executive officesand terminal located in Mondovi, Wisconsin, we own and operate facilities in ornear the following cities at which we perform the following designatedoperating activities:

 
| ** **                 | ** ** | **Fueling and** | ** ** | **Driver**      | ** ** | **Driver**   | ** ** | ** **   | ** ** | ** ** | ** ** |
|----------------------------|------------|----------------------|------------|-----------------|------------|--------------|------------|--------------|------------|------------|------------|
| **Company Locations** | ** ** | **Maintenance**      | ** ** | **Recruitment** | ** ** | **Training** | ** ** | **Dispatch** | ** ** | **Sales**  | ** ** |
|                       |       |                 |       |            |       |         |       |         |       |       |       |
| Mondovi,  Wisconsin        |       | X                    |       | X               |       | X            |       | X            |       | X          |       |
| Ontario,  California       |       | X                    |       |            |       |         |       |         |       |       |       |
| Atlanta,  Georgia          |       | X                    |       | X               |       | X            |       | X            |       |       |       |
| Portland,  Oregon          |       | X                    |       | X               |       | X            |       |         |       |       |       |
| Indianapolis,  Indiana     |       | X                    |       | X               |       | X            |       | X            |       | X          |       |

 

# ***ITEM 3.***                             LEGAL PROCEEDINGS

# *** ***

We are involved inlitigation incidental to our operations. These lawsuits primarily involveclaims for workers’ compensation, personal injury, or property damage incurredin the transportation of freight.

 

# ***ITEM 4.***                             SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS

# *** ***

No matters weresubmitted to a vote of security holders during the fourth quarter of the yearended December 31, 2005.

 

9

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**ITEM 4A.****                                            *EXECUTIVE OFFICERS OF THE REGISTRANT***

 

Our executiveofficers, with their ages and the offices held as of March 1, 2006, are asfollows:

 

| **Name**            | ** ** | **Age**    | ** ** | **Position**                                                            |
|---------------------|------------|------------|------------|-------------------------------------------------------------------------|
| ** **          | ** ** | ** ** | ** ** | ** **                                                              |
| Randolph L. Marten  |       | 53         |       | Chairman of the Board, President,  Chief Executive Officer and Director |
|                |       |       |       |                                                                    |
| Robert G. Smith     |       | 62         |       | Chief Operating Officer                                                 |
|                |       |       |       |                                                                    |
| Timothy P. Nash     |       | 54         |       | Executive Vice President of Sales and  Marketing                        |
|                |       |       |       |                                                                    |
| James J. Hinnendael |       | 42         |       | Chief Financial Officer                                                 |
|                |       |       |       |                                                                    |
| Donald J. Hinson    |       | 46         |       | Vice President of Operations                                            |

 

**RandolphL. Marten** hasbeen a full-time employee of ours since 1974. Mr. Marten has been aDirector since October 1980, our President since June 1986, ourChairman of the Board since August 1993 and our Chief Executive Officersince January 2005. Mr. Marten also served as our Chief OperatingOfficer from June 1986 until August 1998 and as a Vice President fromOctober 1980 to June 1986.

 

**RobertG. Smith** has beenour Chief Operating Officer since August 1998. Mr. Smith also servedas our Vice President of Operations from June 1993 until May 1999 andas our Director of Operations from September 1989 to June 1993. Mr. Smithserved as director of operations for Transport Corporation of America, anirregular-route truckload carrier, from January 1985 to September 1989.

 

**TimothyP. Nash** has beenour Executive Vice President of Sales and Marketing since November 2000. Mr. Nashalso served as our Vice President of Sales from November 1990 to November 2000and as our Regional Sales Manager from July 1987 to November 1990. Mr. Nashserved as a regional sales manager for Overland Express, Inc., a  long-haul truckload carrier, from August 1986 to July 1987.

 

**James J.Hinnendael** hasbeen our Chief Financial Officer since January 2006 and served as ourController from January 1992 to December 2005. Mr. Hinnendael servedin various professional capacities with Ernst & Young LLP, a publicaccounting firm, from January 1987 to December 1991. Mr. Hinnendaelis a certified public accountant.

 

**DonaldJ. Hinson** hasbeen our Vice President of Operations since June 1999 and an executiveofficer since November 2000. Mr. Hinson also served as our Directorof Operations from November 1996 to May 1999 and in variousprofessional capacities in our operations area from April 1988 to November 1996.Previously, Mr. Hinson served in various professional capacities in theoperations area of Burlington Motor Carriers, Inc., a dry-van truckloadcarrier, from October 1984 to March 1988.

 

10

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**PART II**

 

# ***ITEM 5.***                             MARKET FOR REGISTRANT’SCOMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER   PURCHASES OF EQUITY SECURITIES

# *** ***

Our common stock islisted on the Nasdaq National Market under the symbol “MRTN.”  The table below shows the range of high andlow bid prices on the Nasdaq National Market for the quarters indicated. Suchquotations reflect inter-dealer prices, without retail markups, markdowns orcommissions and, therefore, may not necessarily represent actualtransactions.

 
| ** **                                           | ** ** | **Common Stock Price** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **High**                         | ** ** | **Low** | ** ** |
| **Year ended December 31, 2005** | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Fourth  Quarter                                      | ** ** | **$**                            | **19.56**  | ** ** | **$** | **14.83** | ** ** |
| Third  Quarter                                       | ** ** | **17.15**                        | ** ** | **13.91** | ** ** |
| Second  Quarter                                      | ** ** | **14.51**                        | ** ** | **11.33** | ** ** |
| First  Quarter                                       | ** ** | **16.65**                        | ** ** | **13.24** | ** ** |
| **Year  ended December 31, 2004**               |       |                             |       |   |   |
| Fourth  Quarter                                      |       | $                                | 15.89      |   | $ | 11.05 |   |
| Third  Quarter                                       |       | 13.45                            |       | 10.99 |   |
| Second  Quarter                                      |       | 13.23                            |       | 10.93 |   |
| First  Quarter                                       |       | 13.91                            |       | 10.18 |   |

 

The prices do notinclude adjustments for retail mark-ups, mark-downs or commissions. On March 1,2006, we had 265 record stockholders, and approximately 2,337 beneficial stockholdersof our common stock. On December 12, 2005, we effected athree-for-two stock split in the form of a 50% stock dividend. Theforegoing stock prices have been adjusted to give retroactive effect to thestock split for all periods presented.

 

We have not paid acash dividend on our common stock since we became publicly traded in September 1986,and we do not expect to make or declare any cash dividends in the foreseeablefuture. We currently intend to continue to retain earnings to finance the growthof our business and reduce our indebtedness. Our ability to pay cash dividendsis currently  limited by restrictionscontained in our revolving credit facility. Our revolving credit facilityprohibits us from paying, in any fiscal year, dividends in excess of 25% of ournet income from the prior fiscal year. Future payments of cash dividends willdepend on our financial condition, results of operations, capital commitments,restrictions under then-existing agreements, and other factors our Board ofDirectors deems relevant.

 

We had nounregistered sales of equity securities during the fourth quarter of the yearended December 31, 2005.

 

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# ***ITEM 6.***                             SELECTED FINANCIALDATA

# *** ***

The following selected financial data should be read in conjunctionwith the consolidated financial statements and notes under Item 8 of this Form 10-K.

 
| **(Dollars in thousands, except per share amounts)** | ** ** | **2005**    | ** **  | **2004**   | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------|-------------|------------|------------|----------|------------|----------|------------|----------|------------|
| **FOR THE  YEAR**                                                                  |       |        | ** **  |       |       |     |       |     |       |     |       |
| Operating  revenue                                                                 | ** ** | **$**       | **460,202** | ** ** | $          | 380,048  |       | $        | 334,667    |     | $          | 293,096 |   | $ | 282,764 |   |
| Operating  income                                                                  | ** ** | **42,867**  | ** **  | 31,345     |       | 20,336   |       | 11,861   |       | 15,107   |       |
| Net income                                                                         | ** ** | **25,061**  | ** **  | 17,536     |       | 11,842   |       | 5,973    |       | 6,514    |       |
| Operating  ratio                                                                   | ** ** | **90.7**    | **%**       | 91.8       | %          | 93.9     | %          | 96.0     | %          | 94.7     | %          |
|                                                                               | ** ** | ** **  | ** **  |       |       |     |       |     |       |     |       |
| **PER-SHARE  DATA (1)**                                                            |       |        | ** **  |       |       |     |       |     |       |     |       |
| Basic  earnings per common share                                                   | ** ** | **$**       | **1.16**    | ** ** | $          | 0.83     |       | $        | 0.71       |     | $          | 0.42 |   | $ | 0.46 |   |
| Diluted  earnings per common share                                                 | ** ** | **1.14**    | ** **  | 0.81       |       | 0.68     |       | 0.41     |       | 0.46     |       |
| Book value                                                                         | ** ** | **8.99**    | ** **  | 7.82       |       | 7.00     |       | 5.53     |       | 5.10     |       |
|                                                                               | ** ** | ** **  | ** **  |       |       |     |       |     |       |     |       |
| **AT YEAR  END**                                                                   |       |        | ** **  |       |       |     |       |     |       |     |       |
| Total assets                                                                       | ** ** | **$**       | **349,733** | ** ** | $          | 288,929  |       | $        | 249,595    |     | $          | 216,018 |   | $ | 210,293 |   |
| Long-term  debt                                                                    | ** ** | **48,300**  | ** **  | 30,257     |       | 27,857   |       | 63,629   |       | 75,116   |       |
| Stockholders’  equity                                                         | ** ** | **193,917** | ** **  | 167,921    |       | 144,534  |       | 79,220   |       | 72,399   |       |

 

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(1)   Restated to reflect the three-for-two stocksplits in the form of 50% stock dividends on December 12, 2005, December 5,2003 and July 24, 2003.

 

12

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# ***ITEM 7***.                MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS

 

*The following discussion and analysis of our financial condition andresults of operations should be read together with the selected consolidatedfinancial data and our consolidated financial statements and the related notesappearing elsewhere in this report. This discussion and analysis containsforward-looking statements that involve risks, uncertainties and assumptions.Our actual results may differ materially from those anticipated in theseforward-looking statements as a result of many factors, including but notlimited to those under the heading “Risk Factors.”*

 

**Overview**

 

The primary source ofour operating revenue is freight revenue, which we generate by transportingfreight for our customers. Generally, we are paid by the mile for our services.We also derive freight revenue from loading and unloading activities, equipmentdetention and other accessorial services. Our operating revenue also includesrevenue from fuel surcharges and non-freight revenue, primarily logisticsservices. The main factors that affect our freight revenue are the rate permile we receive from our customers, the percentage of miles for which we arecompensated and the number of miles we generate with our equipment. Thesefactors relate, among other things, to the United States economy, inventorylevels, the level of truck capacity in the temperature-sensitive market andspecific customer demand. We monitor our revenue production primarily throughrevenue per tractor per week. We also analyze our rate per total mile,non-revenue miles percentage, the miles per tractor we generate, ouraccessorial revenue and our other sources of operating revenue.

 

Indiscussing our results of operations, we have included in certain instances adiscussion of freight revenue, which excludes fuel surcharge and non-freightrevenue. We do this because we believe that eliminating these sources ofrevenue provides a more consistent basis for comparing our results ofoperations from period to period.

 

In2005, we increased our operating revenue by $80.2 million, or 21.1%, andincreased our freight revenue by $40.0 million, or 11.5%, compared with 2004. Ournet income increased $7.5 million or 42.9% over 2004. Our operating results for2005 reflect improved average freight revenue per total mile compared with 2004.The improvement in asset productivity helped us overcome the continuingchallenges of a tight driver market and high fuel prices. In 2005, we increasedour operating revenue 21.1% and our freight revenue 11.5% compared with 2004.We were able to increase our freight revenue by increasing our freight rates,the size of our fleet, our detention charges and our business with existing andnew customers. We increased our average operating revenue per tractor per week12.1% in 2005. Our average freight revenue per tractor per week increased 3.2%,due to a 7.7% improvement in average freight revenue per total mile, partiallyoffset by a 4.2% decrease in average miles per tractor. Our weighted averagenumber of tractors increased 8.1% in 2005 over 2004.

 

Our profitabilityon the expense side is impacted by variable costs of transporting freight forour customers, fixed costs and expenses containing both fixed and variablecomponents. The variable costs include fuel expense, driver-related expenses,such as wages, benefits, training, and recruitment, and independent contractorcosts, which are recorded under purchased transportation. Expenses that haveboth fixed and variable components include maintenance and tire expense and ourtotal cost of insurance and claims. These expenses generally vary with themiles we travel, but also have a controllable component based on safety, fleetage, efficiency and other factors. Our main fixed costs relate to theacquisition and financing of long-term assets, such as revenue equipment andoperating terminals. Although certain factors affecting our expenses are beyondour control, we monitor them closely and attempt to anticipate changes in thesefactors in managing our business. For example, fuel prices fluctuateddramatically and quickly at various times during the past three years. Wemanage our exposure to changes in fuel prices primarily through fuel surchargeprograms with our customers, as well as volume fuel purchasing arrangementswith national fuel centers and bulk purchases of fuel at our terminals. Thetransportation industry has experienced in the last several years substantialdifficulty in attracting and retaining qualified drivers. Effective January 1,2005, we increased the amount paid to company drivers by 1 cent per mile andincreased the incentives paid to independent contractors. We also instituted asecond pay increase of 2 cents per mile for company drivers effective April 1,2005. We continue to offer driver compensation that we believe ranks near thetop of the industry. Like other 

 

13

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companies in our industry, ourinsurance costs have increased dramatically over the last few years. In orderto control increases in insurance premiums, we have increased our self-insuredretention levels periodically during the last several years. We are responsiblefor the first $1.0 million on each auto liability claim and as of June 1,2005, we also are responsible for up to $1.0 million in the aggregate for allauto liability claims between $1.0 million and $2.0 million. We are alsoresponsible for the first $750,000 on each workers’ compensation claim.

 

By increasing ourrevenue and controlling our expenses, we improved our operating ratio(operating expenses as a percentage of operating revenue) to 90.7% in 2005 from91.8% in 2004. We increased our earnings per diluted share to $1.14 in 2005from $0.81 in 2004.

 

Ourbusiness requires substantial, ongoing capital investments, particularly fornew tractors and trailers. At December 31, 2005, we had approximately$48.3 million of long-term debt, including current maturities, and $193.9million in stockholders’ equity. In 2005, we spent approximately $84.9 million,net of trade-ins, to purchase 932 tractors and 831 trailers. We recognized again of $3.9 million on the disposition of used equipment in 2005. We estimatethat capital expenditures, net of trade-ins, will be approximately $70 millionfor 2006, primarily for new revenue equipment. This estimate may beimpacted by the timing of tractor and trailer deliveries between 2006 and 2007.We expect to fund these capital expenditures with cash flows from operationsand borrowings under our revolving credit facility. Based on our currentoperating performance, the market for used tractors, our liquidity and ourexpectations concerning tractors manufactured in 2007, we decided to accelerateour tractor fleet replacement during 2005 and 2006 to allow us greaterflexibility in our decisions to purchase tractors in 2007 when the next roundof diesel emissions reduction directives of the EPA go into effect. Thisacceleration of our tractor fleet replacement has not impacted the useful livesof our tractors or caused impairment to the carrying amount reflected in ourconsolidated balance sheet.

 

**StockSplit**

 

On December 12,2005, we effected a three-for-two stock split of our common stock, $.01 parvalue, in the form of a 50% stock dividend. Our consolidated financialstatements, related notes, and other financial data contained in this reporthave been adjusted to give retroactive effect to the stock split for allperiods presented.

 

**Results ofOperations**

 

Thefollowing table sets forth for the years indicated certain operating statisticsregarding our revenue and operations:

 
| ** **                                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Average  operating revenue per total mile                   |       | $        | 1.689      |     | $          | 1.445    |       | $ | 1.279 |   |
| Average  freight revenue per total mile (1)                 |       | $        | 1.417      |     | $          | 1.316    |       | $ | 1.226 |   |
| Average  miles per tractor(2)                               |       | 111,823  |       | 116,668  |       | 120,441  |       |
| Average  operating revenue per tractor per week(2)          |       | $        | 3,622      |     | $          | 3,232    |       | $ | 2,955 |   |
| Average  freight revenue per tractor per week(1) (2)   |       | $        | 3,039      |     | $          | 2,944    |       | $ | 2,831 |   |
| Total miles –  company-employed drivers (in thousands) |       | 206,205  |       | 185,019  |       | 181,254  |       |
| Total miles *–* independent contractors (in thousands) |       | 66,293   |       | 78,054   |       | 80,312   |       |

 

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(1)   Excludes revenue from fuel surcharges andnon-freight revenue.

 

(2)   Includes tractors driven by bothcompany-employed drivers and independent contractors. Independent contractorsprovided 423, 557 and 585 tractors as of December 31, 2005, 2004, and2003, respectively.

 

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*Comparison of YearEnded December 31, 2005 to Year Ended December 31, 2004*

 

The following table sets forthfor the years indicated the components of our operating revenue and the dollarand percentage change for each component:

 
| ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Dollar**        | ** ** | **Percentage**    | ** ** |
|----------------------------|------------|------------|------------|------------|------------|-------------------|------------|-------------------|------------|
| ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Change**        | ** ** | **Change**        | ** ** |
| **(Dollars in thousands)** | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2005 vs. 2004** | ** ** | **2005 vs. 2004** | ** ** |
| ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | ** **        | ** ** |
| Freight revenue            |       | $          | 386,131    |       | $          | 346,160           |       | $                 | 39,971     |   | 11.5 | % |
| Fuel surcharge revenue     |       | 57,127     |       | 26,920     |       | 30,207            |       | 112.2             |       |
| Non-freight revenue        |       | 16,944     |       | 6,968      |       | 9,976             |       | 143.2             |       |
| Operating revenue          |       | $          | 460,202    |       | $          | 380,048           |       | $                 | 80,154     |   | 21.1 | % |

 

The following table sets forthfor the years indicated the dollar and percentage increase or decrease of theitems in our consolidated statements of operations, and those items as apercentage of operating revenue:

 
| ** **                               | ** ** | **Dollar**        | ** ** | **Percentage**    | ** ** | **Percentage of** | ** ** |
|------------------------------------------|------------|-------------------|------------|-------------------|------------|------------------------|------------|
| ** **                               | ** ** | **Change**        | ** ** | **Change**        | ** ** | **Operating Revenue**  | ** ** |
| **(Dollars in thousands)**               | ** ** | **2005 vs. 2004** | ** ** | **2005 vs. 2004** | ** ** | **2005**               | ** ** | **2004** | ** ** |
|                                     |       |              |       |              |       |                   |       |   |   |
| Operating revenue                        |       | $                 | 80,154     |              | 21.1       | %                      | 100.0      | % | 100.0 | % |
| Operating expenses (income):             |       |              |       |              |       |                   |       |   |   |
| Salaries, wages and benefits             |       | 19,270            |       | 18.0              |       | 27.5                   |       | 28.2 |   |
| Purchased transportation                 |       | 4,039             |       | 5.2               |       | 17.8                   |       | 20.5 |   |
| Fuel and fuel taxes                      |       | 36,810            |       | 51.9              |       | 23.4                   |       | 18.7 |   |
| Supplies and maintenance                 |       | 3,090             |       | 12.3              |       | 6.1                    |       | 6.6 |   |
| Depreciation                             |       | 5,472             |       | 16.7              |       | 8.3                    |       | 8.6 |   |
| Operating taxes and licenses             |       | 748               |       | 11.9              |       | 1.5                    |       | 1.7 |   |
| Insurance and claims                     |       | 310               |       | 1.7               |       | 4.1                    |       | 4.9 |   |
| Communications and utilities             |       | 230               |       | 7.3               |       | 0.7                    |       | 0.8 |   |
| Gain on disposition of revenue equipment |       | (1,722            | )          | (77.5             | )          | (0.9                   | )          | (0.6 | ) |
| Other                                    |       | 385               |       | 4.3               |       | 2.0                    |       | 2.3 |   |
| Total operating expenses                 |       | 68,632            |       | 19.7              |       | 90.7                   |       | 91.8 |   |
| Operating income                         |       | 11,522            |       | 36.8              |       | 9.3                    |       | 8.2 |   |
| Other expenses (income):                 |       |              |       |              |       |                   |       |   |   |
| Interest expense                         |       | 287               |       | 13.8              |       | 0.5                    |       | 0.5 |   |
| Interest income and other                |       | (229              | )          | (15.3             | )          | (0.4                   | )          | (0.4 | ) |
| Minority interest                        |       | 690               |       | 1,352.9           |       | 0.2                    |       | — |   |
| Income before income taxes               |       | 10,774            |       | 35.1              |       | 9.0                    |       | 8.1 |   |
| Provision for income taxes               |       | 3,249             |       | 24.7              |       | 3.6                    |       | 3.5 |   |
| Net income                               |       | $                 | 7,525      |              | 42.9       | %                      | 5.4        | % | 4.6 | % |

 

Ouroperating revenue increased $80.2 million, or 21.1%, to $460.2 million in 2005from $380.0 million in 2004. Freight revenue increased $40.0 million, or 11.5%,to $386.1 million in 2005 from $346.2 million in 2004. We were able to increaseour freight revenue by increasing our freight rates, the size of our fleet, ourdetention charges and our business with existing and new customers. Our fuelsurcharge revenue increased $30.2 million, or 112.2%, to $57.1 million in 2005from $26.9 million in 2004 primarily due to significantly higher average fuelprices in 2005 more fully discussed below under “fuel and fuel taxes.”  The increase in non-freight revenue in 2005resulted from increased logistics services provided by MWL, as well as theformation by the Company of a logistics division with brokerage servicesinitiated in April 2005 and intermodal services initiated in October 2005.Our average operating revenue per tractor per week increased 12.1% in 2005 from2004. Our average freight revenue per tractor per week increased 3.2% in 2005from 2004, due to a 7.7% increase in average freight revenue per total milepartially offset by a 4.2% decrease in average miles per tractor. Our weightedaverage number of tractors increased 8.1% in 2005 from 2004.

 

15

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Salaries,wages and benefits consist of compensation for our employees, including bothdriver and non-driver employees, employees’ health insurance, 401(k) plancontributions and other fringe benefits. These expenses vary depending upon theratio of company drivers to independent contractors, our efficiency, ourexperience with employees’ health insurance claims, changes in health carepremiums and other factors. The increase in salaries, wages and benefitsresulted primarily from an increase in the size of our company-owned fleet andincreases in the amount paid to company drivers of 1 cent per mile effective January 1,2005 and 2 cents per mile effective April 1, 2005. This increase waspartially offset by a decrease of $506,000 in compensation expensed for ournon-driver employees under our incentive compensation program in 2005, and adecrease of $222,000 in our employees’ health insurance expense due tofavorable claims experience which decreased our estimated costs of ourself-insured medical claims in 2005.

 

Purchasedtransportation consists of payments to independent contractor providers ofrevenue equipment and to carriers for transportation services arranged by theCompany. This category will vary depending upon the ratio of company driversversus independent contractors, the amount of fuel surcharges passed through toindependent contractors and the amount and rates paid to carriers by theCompany. Purchased transportation expense increased $4.0 million, or 5.2%, in2005 from 2004. This expense, excluding fuel surcharges passed through toindependent contractors and carrier payments by the Company, decreased $8.7million, or 13.1%, in 2005 from 2004. This decrease was primarily due to adecrease in the number of independent contractor-owned tractors in our fleet,partially offset by a 1 cent per mile increase in the amount paid toindependent contractors effective April 1, 2004 and an increase inincentives paid to independent contractors effective January 1, 2005. Paymentsto carriers for transportation services arranged by the Company were $11.9million in 2005 and $4.1 million in 2004. The amount of fuel surcharges passedthrough to independent contractors increased $5.0 million in 2005.

 

Fueland fuel taxes, which we refer to as fuel expense, net of fuel surchargerevenue of $57.1 million in 2005 and $26.9 million in 2004, increased $6.6million, or 15.0%, to $50.6 million in 2005 from $44.0 million in 2004. Theincrease was primarily due to an 11.5% increase in miles, a higher average fuelprice net of surcharges and lower fuel efficiencies associated with newertractors. Our fuel prices, which remain high based on historical standards,significantly increased to an average of $2.29 per gallon in 2005 from anaverage of $1.71 per gallon in 2004. We have fuel surcharge provisions insubstantially all of our transportation contracts and attempt to recover a portionof these increased expenses through fuel surcharges and higher rates. Toillustrate, fuel expense net of fuel surcharge revenue, as a percentage of ourfreight revenue, increased only slightly from 12.7% in 2004 to 13.1% in 2005. Weexpect our fuel expense to increase in the future because we believe thatgovernment mandated emissions standards, which became effective October 1,2002, have resulted in less fuel-efficient engines, and that more restrictiveemissions standards that take effect in 2007 will result in further declines inengine efficiency.

 

Depreciationrelates to owned tractors, trailers, communications units, terminal facilitiesand other assets. Gains or losses on dispositions of revenue equipment are setforth in a separate line item, rather than included in this category. Theincrease in depreciation was due to an increase in revenue equipment and in therelative percentage of company-owned tractors to independent contractor-ownedtractors in 2005. We expect our annual cost of tractor and trailer ownershipwill increase in future periods as a result of our accelerated tractor fleetreplacement and higher prices of new equipment, which is expected to result ingreater depreciation over the useful life.

 

Insuranceand claims consist of the costs of insurance premiums and the accruals we makefor claims within our self-insured retention amounts, primarily for personalinjury, property damage, physical damage to our equipment, cargo claims andworkers’ compensation claims. These expenses will vary primarily based upon thefrequency and severity of our accident experience, our self-insured retentionlevels and the market for insurance. The increase in insurance and claims in2005 was primarily the result of an increase in the cost of self-insuredaccident claims. We are responsible for the first $1.0 million on each autoliability claim and as of June 1, 2005, we also are responsible for up to$1.0 million in the aggregate for all auto liability claims between $1.0million and $2.0 million. We are also responsible for the first $750,000 oneach workers’ compensation claim. Our significant self-insured retention andour risk on the first $1.0 million of auto liability claims in the $1.0 millionto $2.0 million corridor expose us to the possibility of significant

 

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fluctuations in claims expensebetween periods depending on the frequency, severity and timing of claims andto adverse financial results if we incur large or numerous losses. In the eventof an uninsured claim above our insurance coverage, or an increase in thefrequency or severity of claims within our self-insured retention, ourfinancial condition and results of operations could be materially and adverselyaffected.

 

In2005, increases in the market value for used revenue equipment caused our gainon disposition of revenue equipment to increase to $3.9 million from $2.2million in 2004. Future gains or losses on disposition of revenue equipmentwill be impacted by the market for used revenue equipment, which is beyond ourcontrol.

 

As aresult of the foregoing factors, we improved our operating expenses as apercentage of operating revenue, or “operating ratio,” to 90.7% in 2005 from91.8% in 2004. Our operating expenses as a percentage of operating revenue,with both amounts net of fuel surcharge revenue, improved to 89.4% in 2005 from91.1% in 2004.

 

Interestexpense primarily consists of interest on our unsecured committed creditfacility and senior unsecured notes. The increase in interest expense wasprimarily the result of higher average debt balances outstanding in 2005.

 

Theincrease in minority interest expense was the result of increased earnings in2005 by MWL, a 45% owned affiliate.

 

Oureffective income tax rate was 39.6% in 2005 compared with 42.9% in 2004. Thisdecrease resulted primarily from increasing our federal and state deferredincome tax liabilities in 2004 by a total of $1.5 million as a result of anincrease in our statutory federal and state income tax rates based uponprojected future taxable income. We expect our effective income tax rate to bein the range of 39% to 40% in 2006.

 

As aresult of the factors described above, net income increased 42.9%, to $25.1million in 2005 from $17.5 million in 2004. Net earnings per share increased to$1.14 per diluted share in 2005 from $0.81 per diluted share in 2004.

 

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*Comparison of YearEnded December 31, 2004 to Year Ended December 31, 2003*

 

The following table sets forthfor the years indicated the components of our operating revenue and the dollarand percentage change for each component:

 
| ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Dollar**        | ** ** | **Percentage**    | ** ** |
|----------------------------|------------|------------|------------|------------|------------|-------------------|------------|-------------------|------------|
| ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Change**        | ** ** | **Change**        | ** ** |
| **(Dollars in thousands)** | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2004 vs. 2003** | ** ** | **2004 vs. 2003** | ** ** |
| ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | ** **        | ** ** |
| Freight revenue            |       | $          | 346,160    |       | $          | 320,560           |       | $                 | 25,600     |   | 8.0 | % |
| Fuel surcharge revenue     |       | 26,920     |       | 14,107     |       | 12,813            |       | 90.8              |       |
| Non-freight revenue        |       | 6,968      |       | —     |       | 6,968             |       | N/A               |       |
| Operating revenue          |       | $          | 380,048    |       | $          | 334,667           |       | $                 | 45,381     |   | 13.6 | % |

 

The following table sets forthfor the years indicated the dollar and percentage increase or decrease of theitems in our consolidated statements of operations, and those items as apercentage of operating revenue:

 
| ** **                               | ** ** | ** **             | ** ** | ** **                 | ** ** | **Percentage of**     | ** ** |
|------------------------------------------|------------|------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                               | ** ** | **Dollar Change** | ** ** | **Percentage Change** | ** ** | **Operating Revenue** | ** ** |
| **(Dollars in thousands)**               | ** ** | **2004 vs. 2003**      | ** ** | **2004 vs. 2003**          | ** ** | **2004**                   | ** ** | **2003** | ** ** |
| ** **                               | ** ** | ** **             | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Operating revenue                        |       | $                      | 45,381     |                       | 13.6       | %                          | 100.0      | % | 100.0 | % |
| Operating expenses (income):             |       |                   |       |                       |       |                       |       |   |   |
| Salaries, wages and benefits             |       | 6,284                  |       | 6.2                        |       | 28.2                       |       | 30.2 |   |
| Purchased transportation                 |       | 6,725                  |       | 9.5                        |       | 20.5                       |       | 21.3 |   |
| Fuel and fuel taxes                      |       | 14,541                 |       | 25.8                       |       | 18.7                       |       | 16.8 |   |
| Supplies and maintenance                 |       | 264                    |       | 1.1                        |       | 6.6                        |       | 7.4 |   |
| Depreciation                             |       | 2,711                  |       | 9.0                        |       | 8.6                        |       | 9.0 |   |
| Operating taxes and licenses             |       | 606                    |       | 10.6                       |       | 1.7                        |       | 1.7 |   |
| Insurance and claims                     |       | 3,398                  |       | 22.3                       |       | 4.9                        |       | 4.5 |   |
| Communications and utilities             |       | (158                   | )          | (4.8                       | )          | 0.8                        |       | 1.0 |   |
| Gain on disposition of revenue equipment |       | (1,581                 | )          | (247.0                     | )          | (0.6                       | )          | (0.2 | ) |
| Other                                    |       | 1,582                  |       | 21.6                       |       | 2.3                        |       | 2.2 |   |
| Total operating expenses                 |       | 34,372                 |       | 10.9                       |       | 91.8                       |       | 93.9 |   |
| Operating income                         |       | 11,009                 |       | 54.1                       |       | 8.2                        |       | 6.1 |   |
| Other expenses (income):                 |       |                   |       |                       |       |                       |       |   |   |
| Interest expense                         |       | (679                   | )          | (24.7                      | )          | 0.5                        |       | 0.8 |   |
| Interest income and other                |       | 24                     |       | 1.6                        |       | (0.4                       | )          | (0.5 | ) |
| Minority interest                        |       | 51                     |       | N/A                        |       | —                     |       | — |   |
| Income before income taxes               |       | 11,613                 |       | 60.8                       |       | 8.1                        |       | 5.7 |   |
| Provision for income taxes               |       | 5,919                  |       | 81.6                       |       | 3.5                        |       | 2.2 |   |
| Net income                               |       | $                      | 5,694      |                       | 48.1       | %                          | 4.6        | % | 3.5 | % |

 

Ouroperating revenue increased $45.4 million, or 13.6%, to $380.0 million in 2004from $334.7 million in 2003. Freight revenue increased $25.6 million, or 8.0%,to $346.2 million in 2004 from $320.6 million in 2003. We were able to increaseour freight revenue by increasing our freight rates, our detention charges andour business with existing and new customers. Freight revenue excludes $26.9million of fuel surcharge revenue in 2004 and $14.1 million in 2003, along with$7.0 million of MWL revenue in 2004. There was no MWL revenue recorded in 2003.Our average operating revenue per tractor per week increased 9.4% in 2004 from2003. Our average freight revenue per tractor per week increased 4.0% in 2004from 2003, due to a 7.3% increase in average freight revenue per total milepartially offset by a 3.1% decrease in average miles per tractor. Our weightedaverage number of tractors increased 3.8% in 2004 from 2003. However, anincrease in our number of unseated tractors caused our weighted average numberof seated tractors to increase by only 0.4% in 2004 from 2003.

 

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Theincrease in salaries, wages and benefits resulted primarily from an increase inthe size of our company-owned fleet, partially offset by a decrease in ouremployees’ health insurance expense due to favorable claims experience causinga decrease of $517,000 in the estimated costs of our self-insured medicalclaims in 2004.

 

Purchasedtransportation expense, excluding fuel surcharges passed through to independentcontractors and MWL carrier payments, decreased $648,000, or 1.0%, in 2004 from2003. This decrease was primarily due to a decrease in the number ofindependent contractor-owned tractors in our fleet, partially offset by a 1cent per mile increase in the amount paid to independent contractors effective April 1,2004. Payments to carriers for transportation services arranged by MWL were$4.1 million in 2004. No payments to carriers by MWL were recorded in 2003. Theamount of fuel surcharges passed through to independent contractors increased$3.2 million in 2004.

 

Fueland fuel taxes, which we refer to as fuel expense, net of fuel surchargerevenue of $26.9 million in 2004 and $14.1 million in 2003, increased $1.7million, or 4.1%, to $44.0 million in 2004 from $42.3 million in 2003. Our fuelprices, which remain high based on historical standards, significantly increasedto an average of $1.71 per gallon in 2004 from an average of $1.40 per gallonin 2003.

 

Theincrease in depreciation was due to an increase in revenue equipment and in therelative percentage of company-owned tractors to independent contractor-owned tractorsin 2004.

 

The increase ininsurance and claims in 2004 was comprised of a $2.7 million increase in thecost of self-insured accident claims and a $676,000 increase in insurancepremiums.

 

In 2004, increases inthe market value for used revenue equipment along with additional plannedrevenue equipment trades caused our gain on disposition of revenue equipment toincrease to $2.2 million from $640,000 in 2003.

 

Other expense includesprofessional fees, driver recruiting and retention costs, trailer and drop yardrental and other miscellaneous expenses. The increase in other expense wasimpacted by an increase of $759,000 in legal fees in 2004 and a reversal in2003 of a $370,000 accrual for a state sales tax claim which was dismissed in2003.

 

As a result of theforegoing factors, we improved our operating expenses as a percentage ofoperating revenue, or “operating ratio,” to 91.8% in 2004 from 93.9% in 2003. Ouroperating expenses as a percentage of operating revenue, with both amounts netof fuel surcharge revenue, improved to 91.1% in 2004 from 93.7% in 2003.

 

The decrease ininterest expense was primarily the result of lower average debt balancesoutstanding in 2004.

 

Our effective incometax rate was 42.9% in 2004 compared with 38.0% in 2003, because we increasedour federal and state deferred income tax liabilities by a total of $1.5million during the fourth quarter of 2004 as a result of an increase in ourstatutory federal and state income tax rates based upon projected future taxableincome.

 

As a result of thefactors described above, net income increased 48.1%, to $17.5 million in 2004from $11.8 million in 2003. Net earnings per share increased to $0.81 perdiluted share in 2004 from $0.68 per diluted share in 2003, despite a 25.0%increase in weighted average shares outstanding attributable primarily to ourpublic offering of common stock completed during the third quarter of 2003.

 

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**Liquidity andCapital Resources**

 

Our business requiressubstantial, ongoing capital investments, particularly for new tractors andtrailers. Our primary sources of liquidity are funds provided by operations,our unsecured senior notes and our revolving credit facility. A portion of ourtractor fleet is provided by independent contractors who own and operate theirown equipment. We have no capital expenditure requirements relating to thosedrivers who own their tractors or obtain financing through third parties.However, to the extent we purchase tractors and extend financing to theindependent contractors through our tractor purchase program, we have anassociated capital expenditure requirement.

 

Thetable below reflects our net cash flows provided by operating activities, netcash flows used for investing activities and total long-term debt, includingcurrent maturities, for the years indicated.

 
| **(In thousands)**                                            | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net cash flows provided by operating  activities                   |       | $          | 72,472     |       | $          | 50,890     |       | $ | 39,551 |   |
| Net cash flows used for investing activities                       |       | 88,557     |       | 58,829     |       | 57,313     |       |
| Long-term debt, including current maturities,  at December 31 |       | 48,300     |       | 30,257     |       | 27,857     |       |
|                                                                    |            |            |            |            |            |            |            |  |  |  |

 

In2005, we spent approximately $84.9 million, net of trade-ins, to purchase 932tractors and 831 trailers. We also recognized a gain of $3.9 million on thedisposition of used equipment in 2005. We estimate that capital expenditures,net of trade-ins, will be approximately $70 million for 2006, primarily for newrevenue equipment. This estimate may be impacted by the timing of tractorand trailer deliveries between 2006 and 2007. Based on our current operatingperformance, the market for used tractors, our liquidity and our expectationsconcerning tractors manufactured in 2007, we decided to accelerate our tractorfleet replacement during 2005 and 2006 to allow us greater flexibility in ourdecisions to purchase tractors in 2007, to add capacity to meet growing demand,and to add tractors to our company fleet as more of our drivers become companydrivers rather than independent contractors. This acceleration of our tractorfleet replacement has not impacted the useful lives of our tractors or causedimpairment to the carrying amount reflected in our consolidated balance sheet. Weexpect to fund these capital expenditures with cash flows from operations andborrowings under our revolving credit facility. We believe our sources ofliquidity are adequate to meet our current and anticipated needs for at leastthe next twelve months. Based upon anticipated cash flows, current borrowingavailability and sources of financing we expect to be available to us, we donot anticipate any significant liquidity constraints in the foreseeable future.

 

We have outstanding Series ASenior Unsecured Notes with an aggregate principal balance of $10.7 million at December 31,2005. These notes mature in October 2008, require annual principalpayments of $3.57 million and bear interest at a fixed rate of 6.78%. We alsohave outstanding Series B Senior Unsecured Notes with an aggregateprincipal balance of $7.1 million at December 31, 2005. These notes maturein April 2010, require annual principal payments of $1.43 million and bearinterest at a fixed rate of 8.57%.

 

Wemaintain an unsecured committed credit facility in the amount of $45.0 million,which matures in April 2008. We plan on entering into an amendment to thecredit facility which will increase the total facility from $45.0 million to$55.0 million through August 2006, at which time the amount of the creditfacility will return to $45.0 million. At December 31, 2005, the creditfacility had an outstanding principal balance of $30.4 million, outstandingstandby letters of credit of $3.6 million and remaining borrowing availabilityof $11.0 million. This facility bears interest at a variable rate based on theLondon Interbank Offered Rate or the bank’s Prime Rate, in each case plusapplicable margins. The weighted average interest rate for the credit facilitywas 6.17% at December 31, 2005.

 

Ourcredit facility prohibits us from paying, in any fiscal year, dividends inexcess of 25% of our net income from the prior fiscal year. The debt agreementsdiscussed above also contain restrictive covenants which, among other matters,require us to maintain certain financial ratios, including debt-to-equity, cashflow

 

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leverage, interest coverage andfixed charge coverage. We were in compliance with all of these covenants at December 31,2005.

 

We had$9.1 million in direct financing receivables from independent contractors underour tractor purchase program as of December 31, 2005, compared with $10.3million in receivables as of December 31, 2004. These receivables, whichare collateralized by the tractors financed, are used to attract and retainqualified independent contractors. We deduct payments from the independentcontractors’ settlements weekly and, as a result, have experienced minimalcollection issues for these receivables.

 

Thefollowing is a summary of our contractual obligations as of December 31,2005. We have entered into agreements to purchase $23.9 million of revenueequipment in 2006, which is included in the following summary. We also plan topurchase an additional $38.5 million of revenue equipment in 2006 for which wehave not entered into binding agreements.

 
| **** ****                                     | **** **** | ****Payments Due by Period**** | **** **** |
|----------------------------------------------------|----------------|-----------------------------------------------|----------------|
| **** ****                                     | **** **** | **** ****                                | **** **** | ****2007**** | **** **** | ****2009**** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **** ****                                     | **** **** | **** ****                                | **** **** | ****and**** | **** **** | ****and**** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ****(In thousands)****                             | **** **** | ****2006****                                  | **** **** | ****2008**** | **** **** | ****2010**** | **** **** | ****Thereafter**** | **** **** | ****Total**** | **** **** |
| ****Long-term debt obligations****                 | **** **** | ****$****                                     | ****5,000****  | **** **** | ****$**** | ****40,443**** | **** **** | ****$**** | ****2,857**** | **** **** | ****$**** | ****—**** | **** **** | ****$**** | 48,300 | **** **** |
| ****Purchase obligations for revenue equipment**** | **** **** | ****23,889****                                | **** **** | ****—**** | **** **** | ****—**** | **** **** | ****—**** | **** **** | ****23,889**** | **** **** |
| ****Operating lease obligations****                | **** **** | ****287****                                   | **** **** | ****384**** | **** **** | ****214**** | **** **** | ****70**** | **** **** | ****955**** | **** **** |
| ****Total****                                      | **** **** | ****$****                                     | ****29,176**** | **** **** | ****$**** | ****40,827**** | **** **** | ****$**** | ****3,071**** | **** **** | ****$**** | ****70**** | **** **** | ****$**** | 73,144 | **** **** |

 

**RelatedParties**

 

MWL,our 45% owned affiliate, is a third-party provider of logistics services to thetransportation industry. In 2005, 2004 and 2003, we received $21.1 million,$22.6 million and $13.8 million, respectively, of our revenue fromtransportation services arranged by MWL. We have applied the provisions of FASBInterpretation No. 46, “Consolidation of Variable Interest Entities,” asrevised, to our investment in MWL effective March 31, 2004. As a result,the accounts of MWL are included in our consolidated balance sheets as of December 31,2005 and December 31, 2004, and in our consolidated statements ofoperations beginning April 1, 2004. We accounted for our investment in MWL’soperating results using the equity method of accounting prior to April 1,2004.

 

Wepurchase fuel and obtain tires and related services from Bauer Built,Incorporated, or BBI. Jerry M. Bauer, one of our directors, is the presidentand a stockholder of BBI. We paid BBI $1.2 million in 2005, $924,000 in 2004and $805,000 in 2003 for fuel and tire services. In addition, we paid $2.0million in 2005, $1.4 million in 2004 and $2.3 million in 2003 to tiremanufacturers for tires that we purchased from the tire manufacturers but wereprovided by BBI. BBI received commissions from the tire manufacturers relatedto these purchases. Other than any benefit received from his ownership interest,Mr. Bauer receives no compensation or other benefits from our businesswith BBI.

 

During 2005 and 2004,we paid Durand Builders Service, Inc. $142,000 and $493,000, respectively,for various construction projects. Larry B. Hagness, one of our directors, isthe president and owner of Durand Builders Service, Inc. Other than anybenefit received from his ownership interest, Mr. Hagness receives nocompensation or other benefits from these transactions.

 

****Off-Balance Sheet Arrangements****

 

****Other than standby letters of creditmaintained in connection with our self-insurance programs in the amount of $3.6million and operating leases summarized above in our summary of contractualobligations, we did not have any other material off-balance sheet arrangementsat December 31, 2005.****

 

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****Inflation and Fuel Costs****

 

Most ofour operating expenses are inflation-sensitive, with inflation generallyproducing increased costs of operations. During the past three years, the mostsignificant effects of inflation have been on revenue equipment prices,accident claims, health insurance and employee compensation. We attempt tolimit the effects of inflation through increases in freight rates and costcontrol efforts.

 

In addition to inflation,fluctuations in fuel prices can affect our profitability. We requiresubstantial amounts of fuel to operate our tractors and power thetemperature-control units on our trailers. Substantially all of our contractswith customers contain fuel surcharge provisions. Although we historically havebeen able to pass through most long-term increases in fuel prices and relatedtaxes to customers in the form of surcharges and higher rates, increasesusually are not fully recovered. Fuel prices were high throughout 2003 and 2004and significantly increased further in 2005, which has increased our cost ofoperating. The elevated level of fuel prices is expected to continue in 2006.

 

****Seasonality****

 

Ourtractor productivity generally decreases during the winter season becauseinclement weather impedes operations and some shippers reduce their shipments.At the same time, operating expenses generally increase, with fuel efficiencydeclining because of engine idling and harsh weather creating higher accidentfrequency, increased claims and more equipment repairs.

 

**CriticalAccounting Policies**

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions about future events, and apply judgments that affect thereported amounts of assets, liabilities, revenue and expenses in ourconsolidated financial statements and related notes. We base our estimates,assumptions and judgments on historical experience, current trends and otherfactors believed to be relevant at the time our consolidated financialstatements are prepared. However, because future events and their effectscannot be determined with certainty, actual results could differ from ourestimates and assumptions, and such differences could be material. We believethat the following critical accounting policies affect our more significantestimates, assumptions and judgments used in the preparation of ourconsolidated financial statements.

 

*Revenue Recognition.*We recognizerevenue, including fuel surcharges, at the time shipment of freight is completed.

 

*Accounts Receivable.*We aredependent on a limited number of customers, and as a result, our trade accountsreceivable are highly concentrated. Trade accounts receivable are recorded at the invoiced amounts, net ofan allowance for doubtful accounts. A considerable amount of judgment isrequired in assessing the realization of these receivables including thecurrent creditworthiness of each customer and related aging of the past-duebalances, including any billing disputes. In order to assess the collectibilityof these receivables, we perform ongoing credit evaluations of ourcustomers’ financial condition. Through these evaluations, we may becomeaware of a situation where a customer may not be able to meet itsfinancial obligations due to deterioration of its financial viability, creditratings or bankruptcy. The allowance for doubtful accounts is based on the bestinformation available to us and is reevaluated and adjusted as additionalinformation is received. We evaluate the allowance based on historicalwrite-off experience, the size of the individual customer balances, past-dueamounts and the overall national economy. We review the adequacy of ourallowance for doubtful accounts quarterly.

 

*Property and Equipment.* The transportation industry requires significant capital investments.Our net property and equipment was $269.9 million as of December 31, 2005and $215.7 million as of December 31, 2004. Our depreciation expense was$38.2 million for 2005, $32.8 million for 2004 and $30.0 million for 2003. Wecompute depreciation of our property and equipment for financial reportingpurposes based on the cost of each asset, reduced by its estimated salvagevalue, using the straight-line method over its estimated useful life. Wedetermine and periodically evaluate our estimate of the projected salvagevalues and useful

 

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lives primarily by consideringthe market for used equipment, prior useful lives and changes in technology. Wehave not changed our policy regarding salvage values as a percentage of initialcost or useful lives of tractors and trailers within the last ten years. Webelieve that our policies and past estimates have been reasonable. Actualresults could differ from these estimates. A 5% decrease in estimated salvagevalues would have decreased our net property and equipment as of December 31,2005 by approximately $5.1 million, or 1.9%.

 

In2005, we replaced most of our company-owned tractors within 3.5 years and ourtrailers within 7 years after purchase. Our useful lives for depreciatingtractors is 5 years and trailers is 7 years, with a 25% salvage value fortractors and a 35% salvage value for trailers. These salvage values are basedupon the expected market values of the equipment after 5 years for tractors and7 years for trailers. Depreciation expense calculated in this mannerapproximates the continuing declining value of the revenue equipment, and, fortractors, continues at a consistent straight-line rate for units held beyondthe normal replacement cycle. Calculating tractor depreciation expense with a5-year useful life and a 25% salvage value results in the same depreciation rateof 15% of cost per year and the same net book value of 47.5% of cost at the3.5-year replacement date as using a 3.5-year useful life and 47.5% salvagevalue. As a result, there is no difference in recorded depreciation expense ona quarterly or annual basis with our 5-year useful life and 25% salvage valuecompared with a 3.5-year useful life and 47.5% salvage value.

 

*Impairment of Assets.* Long-lived assets are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to future net undiscounted cashflows expected to be generated by the asset. If such assets are considered tobe impaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the assets exceeds the fair value of the assets. Assetsto be disposed of are reported at the lower of the carrying amount or fairvalue less the costs to sell.

 

*Insurance and Claims.* We self-insure, in part, for losses relating to workers’ compensation,auto liability, general liability, cargo and property damage claims, along withemployees’ health insurance with varying risk retention levels. We maintaininsurance coverage for per-incident and total losses in excess of these riskretention levels in amounts we consider adequate based upon historicalexperience and our ongoing review. However, we could suffer a series oflosses within our self-insured retention limits or losses over our policylimits, which could negatively affect our financial condition and operatingresults. We are responsible for the first $1.0 million on each auto liabilityclaim and as of June 1, 2005, we also are responsible for up to $1.0million in the aggregate for all auto liability claims between $1.0 million and$2.0 million. We are also responsible for the first $750,000 on each workers’compensation claim. We have $3.6 million in standby letters of credit toguarantee settlement of claims under agreements with our insurance carriers andregulatory authorities. The insurance and claims accruals in our consolidatedbalance sheets were $13.1 million as of December 31, 2005, and $13.7million as of December 31, 2004. We reserve currently for the estimatedcost of the uninsured portion of pending claims. We periodically evaluate andadjust these reserves based on our evaluation of the nature and severity ofoutstanding individual claims and our estimate of future claims developmentbased on historical claims development factors. We believe that our claimsdevelopment factors have historically been reasonable, as indicated by theadequacy of our insurance and claims accruals compared to settled claims.Actual results could differ from these current estimates. In addition, to theextent that claims are litigated and not settled, jury awards are difficult topredict. If our claims settlement experience worsened causing our historicalclaims development factors to increase by 5%, our estimated outstanding lossreserves as of December 31, 2005 would have needed to increase byapproximately $2.0 million.

 

*Income Taxes*. We accountfor income taxes in accordance with Statement of Financial Accounting StandardsNo. 109, “Accounting for Income Taxes.” As part of the process of preparing our consolidated financialstatements, we are required to estimate our income taxes in each of thejurisdictions in which we operate. This process involves estimating our currenttax exposure together with assessing temporary differences resulting fromdiffering treatment of items for tax and financial reporting purposes. Thesetemporary differences result in deferred tax assets and liabilities, which areincluded in our  accompanyingconsolidated balance sheets. Deferred tax assets and liabilities are measuredusing enacted tax rates expected to apply to taxable income in the years inwhich the temporary differences are expected to be recovered or settled. To theextent it is determined that it is not likely that our deferred tax assets willbe recovered from

 

23

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future taxable income, a valuation allowancemust be established for the amount of the deferred tax assets determined not tobe realizable. A valuation allowance for deferred tax assets has not beendeemed necessary due to our profitable operations. However, if the facts or ourfinancial results were to change, thereby impacting the likelihood of realizingthe deferred tax assets, judgment would have to be applied to determine theamount of any valuation allowance required in any given period.

 

**RecentAccounting Pronouncement**

 

In December 2004,the Financial Accounting Standards Board, or FASB, issued Statement ofFinancial Accounting Standards, or SFAS, No. 123 (revised 2004), “Share-BasedPayment.”  SFAS No. 123, as revised,requires entities to recognize the grant-date fair value of stock options andother equity-based compensation issued to employees in the income statement. Thestatement eliminates entities’ ability to account for share-based compensationtransactions using the intrinsic value method of accounting in AccountingPrinciples Board, or APB, Opinion No. 25, “Accounting for Stock Issued toEmployees,” which was permitted under SFAS No. 123, as originally issued. InApril 2005, the Securities and Exchange Commission deferred the effectivedate of SFAS No. 123, as revised, to the beginning of the first annualreporting period beginning after June 15, 2005. Accordingly, we willrecognize the grant-date fair value of stock options in our consolidatedstatements of operations beginning in our first quarter of 2006.

 

We plan to adopt the provisions of SFAS No. 123, as revised,effective January 1, 2006, as required, using the modified prospectivetransition method for our existing stock-based compensation plans. Under themodified prospective transition method, the fair value based accounting methodwill be used for all employee awards granted, modified, or settled after theadoption date. Compensation expense related to the non-vested portion of awardsoutstanding as of that date will be based on the grant date fair value of thoseawards as calculated under the original provisions of SFAS No. 123. Weestimate that the adoption of SFAS No. 123, as revised, will result inapproximately $300,000 to $400,000 of stock-based compensation expense, net ofrelated income tax benefit, in 2006 related to non-vested employee optionsissued prior to the adoption date and options with service-based vesting issuedor expected to be issued in 2006. Additionally, options which vest uponachievement of certain performance criteria from 2006 through 2010 have beenand are expected to be issued in 2006. We estimate that these performance-basedoptions will result in approximately $500,000 to $600,000 in total stock-basedcompensation expense, net of related income tax benefit, which will be recordedin the period(s), if any, in which the performance criteria are achieved.

 

24

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**ITEM 7A.****              *****QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK***

 

We are exposed to avariety of market risks, most importantly the effects of the price andavailability of diesel fuel and changes in interest rates.

 

**Commodity Price Risk**

 

Our operations areheavily dependent upon the use of diesel fuel. The price and availability ofdiesel fuel can vary and are subject to political, economic and market factorsthat are beyond our control. Significant increases in diesel fuel costs couldmaterially and adversely affect our results of operations and financialcondition. Historically, we have been able to recover a portion of diesel fuelprice increases from customers in the form of fuel surcharges.

 

We presently use fuelsurcharges to address the risk of high fuel prices. Fuel surcharge programs arewidely accepted among our customers, though they can vary somewhat fromcustomer-to-customer. We believe fuel surcharges are effective at mitigatingthe risk of high fuel prices, although we do not recover the full amount offuel price increases.

 

**Interest RateRisk**

 

Ourmarket risk is also affected by changes in interest rates. We have historicallymaintained a combination of fixed rate and variable rate obligations to manageour interest rate exposure. Fixed rate obligations expose us to the risk thatinterest rates might fall. Variable rate obligations expose us to the risk thatinterest rates might rise. We did not have any interest rate swaps at December 31,2005, although we may enter into such swaps in the future if we deemappropriate.

 

Ourfixed rate obligations consist of amounts outstanding under our unsecuredsenior notes. The $10.7 million outstanding at December 31, 2005, underour Series A Senior Notes, bears interest at a fixed annual rate of 6.78%.The $7.1 million outstanding at December 31, 2005, under our Series BSenior Notes, bears interest at a fixed annual rate of 8.57%. Based on suchoutstanding amounts, a one percentage point decline in market interest rateswould have the effect of increasing the premium we pay over market interestrates by approximately $179,000 annually.

 

Ourvariable rate obligations consist of borrowings under our revolving creditfacility. Our revolving credit facility carries a variable interest rate basedon the London Interbank Offered Rate or the bank’s Prime Rate, in each caseplus applicable margins. The weighted average interest rate for the facilitywas 6.17% at December 31, 2005. As of December 31, 2005, we hadborrowed $30.4 million under the credit facility. Based on such outstandingamount, a one percentage point increase in market interest rates would cost us$304,000 in additional gross interest cost on an annual basis.

 

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# ***ITEM 8.***          FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA

# *** ***

**Management’sAnnual Report on Internal Control Over Financial Reporting**

 

The management of Marten Transport, Ltd. (the “Company”) is responsiblefor establishing and maintaining adequate internal control over financialreporting. The Company’s internal control system was designed to providereasonable assurance to the Company’s management and board of directorsregarding the preparation and fair presentation of published financialstatements.

 

All internal control systems, no matter how well designed, haveinherent limitations. Therefore, even those systems determined to be effectivecan provide only reasonable assurance with respect to financial statementpreparation and presentation.

 

The Company’s management assessed the effectiveness of the Company’sinternal control over financial reporting as of December 31, 2005. Inmaking this assessment, management used the criteria set forth by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO) in *Internal Control—Integrated Framework*. Basedon our assessment the Company believes that, as of December 31, 2005, theCompany’s internal control over financial reporting is effective based on thosecriteria.

 

The Company’s independent registered public accounting firm has issuedan audit report on our assessment of the Company’s internal control overfinancial reporting. This report appears on page 27.

 

February 24, 2006

 

26

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**Report of****Independent Registered Public Accounting Firm**

 

*To the Board of Directors andStockholders of Marten Transport, Ltd.:*

* *

*We have audited management’sassessment, included in the accompanying Management’s Annual Report on InternalControl Over Financial Reporting, that Marten Transport, Ltd. and subsidiary(the “Company”) maintained effective internal control over financial reportingas of December 31, 2005, based on the criteria established in*Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO). The Company’s management is responsible for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting. Our responsibilityis to express an opinion on management’s assessment and an opinion on theeffectiveness of the Company’s internal control over financial reporting basedon our audit.

* *

*We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether effective internal controlover financial reporting was maintained in all material respects. Our auditincluded obtaining an understanding of internal control over financialreporting, evaluating management’s assessment, testing and evaluating thedesign and operating effectiveness of internal control, and performing suchother procedures as we considered necessary in the circumstances. We believethat our audit provides a reasonable basis for our opinion.*

* *

*A company’s internal control overfinancial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.*

* *

*Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.*

* *

*In our opinion, management’sassessment that the Company maintained effective internal control overfinancial reporting as of December 31, 2005, is fairly stated, in allmaterial respects, based on the criteria established in*Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO). Also, in our opinion, the Company maintained, in allmaterial respects, effective internal control over financial reporting as of December 31,2005, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO).

* *

*We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of Marten Transport, Ltd. andsubsidiary as of December 31, 2005 and 2004, and the related consolidatedstatements of operations, stockholders’ equity, and cash flows for each of theyears in the three-year period ended December 31, 2005, and our reportdated February 24, 2006 expressed an unqualified opinion on thoseconsolidated financial statements.*

* *

KPMG LLP

 

Minneapolis, Minnesota

February 24, 2006

 

27

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**Report of Independent Registered PublicAccounting Firm**

** **

To the Board of Directors and Stockholders of Marten Transport, Ltd.:

 

We have audited the accompanying consolidated balance sheets of MartenTransport, Ltd. and subsidiary (the “Company”) as of December 31, 2005 and2004, and the related consolidated statements of operations, stockholders’equity, and cash flows for each of the years in the three-year period ended December 31,2005. In connection with our audits of the consolidated financial statements,we have also audited the financial statement schedule for each of theyears in the three-year period ended December 31, 2005, listed in Item15(a)(2) of this Form 10-K. These consolidated financial statementsand financial statement schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements and financial statement schedule based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of MartenTransport, Ltd. and subsidiary as of December 31, 2005 and 2004, and theresults of their operations and their cash flows for each of the years in thethree-year period ended December 31, 2005, in conformity with U.S.generally accepted accounting principles. In addition, in our opinion, thefinancial statement schedule referred to above, when considered inrelation to the basic consolidated financial statements taken as a whole,presents fairly, in all material respects, the information set forth therein.

 

We also have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the effectiveness of MartenTransport Ltd.’s internal control over financial reporting as of December 31,2005, based on criteria established in *InternalControl*–*Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO), and our report dated February 24, 2006 expressed an unqualifiedopinion on management’s assessment of, and the effective operation of, internalcontrol over financial reporting.

 

KPMG LLP

 

Minneapolis, Minnesota

February 24, 2006

 

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**MARTENTRANSPORT, LTD.**

 

**Consolidated Balance Sheets**

 
| ** **                                                                                                                                                                                      | ** ** | **December 31,** | ** **  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|
| **(In thousands, except share information)**                                                                                                                                | ** ** | **2005**              | ** **  | **2004** | ** ** |
| **ASSETS**                                                                                                                                                                                      |       |                  | ** **  |   |   |
| **Current  assets:**                                                                                                                                                                            |       |                  | ** **  |   |   |
| Cash                                                                                                                                                                                            | ** ** | **$**                 | **1,080**   | ** ** | $ | 855 |   |
| Marketable  securities                                                                                                                                                                          | ** ** | **494**               | ** **  | 62 |   |
| Receivables:                                                                                                                                                                                    |       |                  | ** **  |   |   |
| Trade, less  allowances of $928 and $909, respectively                                                                                                                                          | ** ** | **47,383**            | ** **  | 39,090 |   |
| Other                                                                                                                                                                                           | ** ** | **6,975**             | ** **  | 8,372 |   |
| Prepaid  expenses and other                                                                                                                                                                     | ** ** | **13,264**            | ** **  | 11,869 |   |
| Deferred  income taxes                                                                                                                                                                          | ** ** | **3,873**             | ** **  | 5,856 |   |
| Total  current assets                                                                                                                                                                           | ** ** | **73,069**            | ** **  | 66,104 |   |
| **Property  and equipment:**                                                                                                                                                                    |       |                  | ** **  |   |   |
| Revenue  equipment                                                                                                                                                                              | ** ** | **339,606**           | ** **  | 283,245 |   |
| Buildings  and land                                                                                                                                                                             | ** ** | **10,877**            | ** **  | 10,467 |   |
| Office  equipment and other                                                                                                                                                                     | ** ** | **11,797**            | ** **  | 9,053 |   |
| Less  accumulated depreciation                                                                                                                                                                  | ** ** | **(92,342**           | **)**       | (87,067 | ) |
| Net property  and equipment                                                                                                                                                                     | ** ** | **269,938**           | ** **  | 215,698 |   |
| **Other  assets**                                                                                                                                                                               | ** ** | **6,726**             | ** **  | 7,127 |   |
| ** **                                                                                                                                                                                      |       | **$**                 | **349,733** | ** ** | $ | 288,929 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                  |       |                  | ** **  |   |   |
| **Current  liabilities:**                                                                                                                                                                       |       |                  | ** **  |   |   |
| Checks  issued in excess of cash balances                                                                                                                                                       | ** ** | **$**                 | **1,446**   | ** ** | $ | 3,704 |   |
| Accounts  payable                                                                                                                                                                               | ** ** | **7,646**             | ** **  | 4,579 |   |
| Insurance  and claims accruals                                                                                                                                                                  | ** ** | **13,126**            | ** **  | 13,654 |   |
| Accrued  liabilities                                                                                                                                                                            | ** ** | **18,557**            | ** **  | 12,292 |   |
| Current  maturities of long-term debt                                                                                                                                                           | ** ** | **5,000**             | ** **  | 5,000 |   |
| Total  current liabilities                                                                                                                                                                      | ** ** | **45,775**            | ** **  | 39,229 |   |
| **Long-term  debt,**less current maturities                                                                                                                                                     | ** ** | **43,300**            | ** **  | 25,257 |   |
| **Deferred  income taxes**                                                                                                                                                                      | ** ** | **66,310**            | ** **  | 56,522 |   |
| Total  liabilities                                                                                                                                                                              | ** ** | **155,385**           | ** **  | 121,008 |   |
| **Commitments  and contingencies** (Note 12)                                                                                                                                                    |       |                  | ** **  |   |   |
| **Minority  interest**                                                                                                                                                                          | ** ** | **431**               | ** **  | — |   |
| **Stockholders’  equity:**                                                                                                                                                                 |       |                  | ** **  |   |   |
| Preferred  stock, $.01 par value per share; 2,000,000 shares authorized; no shares  issued and outstanding                                                                                      | ** ** | **—**            | ** **  | **—** |   |
| Common  stock, $.01 par value per share; 48,000,000 shares authorized; 21,573,220  shares, at December 31, 2005, and 21,460,541 shares, at December 31,  2004, issued and outstanding | ** ** | **216**               | ** **  | 215 |   |
| Additional  paid-in capital                                                                                                                                                                     | ** ** | **71,045**            | ** **  | 70,111 |   |
| Retained  earnings                                                                                                                                                                              | ** ** | **122,656**           | ** **  | 97,595 |   |
| Total  stockholders’ equity                                                                                                                                                                | ** ** | **193,917**           | ** **  | 167,921 |   |
| ** **                                                                                                                                                                                      |       | **$**                 | **349,733** | ** ** | $ | 288,929 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**MARTENTRANSPORT, LTD.**

 

**Consolidated Statements of Operations**

 
| ** **                                       | ** ** | **For the years ended December 31,** | ** **  |
|--------------------------------------------------|------------|---------------------------------------------------------------|-------------|
| **(In thousands, except per share information)** | ** ** | **2005**                                                      | ** **  | **2004** | ** ** | **2003** | ** ** |
| **Operating  revenue**                           | ** ** | **$**                                                         | **460,202** | ** ** | $ | 380,048 |   | $ | 334,667 |   |
| **Operating  expenses (income):**                |       |                                                          | ** **  |   |   |   |   |
| Salaries,  wages and benefits                    | ** ** | **126,577**                                                   | ** **  | 107,307 |   | 101,023 |   |
| Purchased  transportation                        | ** ** | **81,897**                                                    | ** **  | 77,858 |   | 71,133 |   |
| Fuel and  fuel taxes                             | ** ** | **107,722**                                                   | ** **  | 70,912 |   | 56,371 |   |
| Supplies and  maintenance                        | ** ** | **28,192**                                                    | ** **  | 25,102 |   | 24,838 |   |
| Depreciation                                     | ** ** | **38,229**                                                    | ** **  | 32,757 |   | 30,046 |   |
| Operating  taxes and licenses                    | ** ** | **7,051**                                                     | ** **  | 6,303 |   | 5,697 |   |
| Insurance  and claims                            | ** ** | **18,914**                                                    | ** **  | 18,604 |   | 15,206 |   |
| Communications  and utilities                    | ** ** | **3,398**                                                     | ** **  | 3,168 |   | 3,326 |   |
| Gain on  disposition of revenue equipment        | ** ** | **(3,943**                                                    | **)**       | (2,221 | ) | (640 | ) |
| Other                                            | ** ** | **9,298**                                                     | ** **  | 8,913 |   | 7,331 |   |
| ** **                                       |       | **417,335**                                                   | ** **  | 348,703 |   | 314,331 |   |
| **Operating  income**                            | ** ** | **42,867**                                                    | ** **  | 31,345 |   | 20,336 |   |
| **Other  expenses (income):**                    |       |                                                          | ** **  |   |   |   |   |
| Interest  expense                                | ** ** | **2,361**                                                     | ** **  | 2,074 |   | 2,753 |   |
| Interest  income and other                       | ** ** | **(1,722**                                                    | **)**       | (1,493 | ) | (1,517 | ) |
| Minority  interest                               | ** ** | **741**                                                       | ** **  | 51 | ** ** | **—** | ** ** |
| ** **                                       |       | **1,380**                                                     | ** **  | 632 |   | 1,236 |   |
| **Income  before income taxes**                  | ** ** | **41,487**                                                    | ** **  | 30,713 |   | 19,100 |   |
| **Provision  for income taxes**                  | ** ** | **16,426**                                                    | ** **  | 13,177 |   | 7,258 |   |
| **Net income**                                   | ** ** | **$**                                                         | **25,061**  | ** ** | $ | 17,536 |   | $ | 11,842 |   |
| **Basic  earnings per common share**             | ** ** | **$**                                                         | **1.16**    | ** ** | $ | 0.83 |   | $ | 0.71 |   |
| **Diluted  earnings per common share**           | ** ** | **$**                                                         | **1.14**    | ** ** | $ | 0.81 |   | $ | 0.68 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**MARTENTRANSPORT, LTD.**

 

**ConsolidatedStatements of Stockholders’Equity**

 
| ** **                                            | ** ** | ** **       | ** ** | ** **  | ** ** | ** **     | ** ** | ** **        | ** ** | **Total**  | ** ** |
|-------------------------------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|-------------------|------------|------------|------------|
| ** **                                            | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **        | ** ** | **Stock-** | ** ** |
| ** **                                            | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Retained**   | ** ** | **holders’** | ** ** |
| **(In thousands)**                                    | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings**      | ** ** | **Equity** | ** ** |
| Balance at December 31,  2002                    |       | 14,316           |       | $           | 143        |           | $          | 10,822            |       | $          | 68,255     |   | $ | 79,220 |   |
| Net income                                            |       | —           |       | —      |       | —         |       | 11,842            |       | 11,842     |       |
| Issuance of  common stock from offering               |       | 6,075            |       | 61          |       | 52,062         |       | (34               | )          | 52,089     |       |
| Issuance of  common stock from stock option exercises |       | 249              |       | 2           |       | 1,024          |       | —            |       | 1,026      |       |
| Tax benefit  of stock option exercises                |       | —           |       | —      |       | 357            |       | —            |       | 357        |       |
| Balance at December 31,  2003                    |       | 20,640           |       | 206         |       | 64,265         |       | 80,063            |       | 144,534    |       |
| Net income                                            |       | —           |       | —      |       | —         |       | 17,536            |       | 17,536     |       |
| Issuance of  common stock from stock option exercises |       | 821              |       | 9           |       | 3,234          |       | (4                | )          | 3,239      |       |
| Tax benefit  of stock option exercises                |       | —           |       | —      |       | 2,612          |       | —            |       | 2,612      |       |
| Balance at December 31,  2004                    |       | 21,461           |       | 215         |       | 70,111         |       | 97,595            |       | 167,921    |       |
| Net income                                            |       | —           |       | —      |       | —         |       | 25,061            |       | 25,061     |       |
| Issuance of  common stock from stock option exercises |       | 112              |       | 1           |       | 524            |       | —            |       | 525        |       |
| Tax benefit  of stock option exercises                |       | —           |       | —      |       | 410            |       | —            |       | 410        |       |
| Balance at December 31,  2005                    |       | 21,573           |       | $           | 216        |           | $          | 71,045            |       | $          | 122,656    |   | $ | 193,917 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**MARTENTRANSPORT, LTD.**

 

**ConsolidatedStatements of Cash Flows**

 
| ** **                                                                        | ** ** | **For the years ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| **(In thousands)**                                                           | ** ** | **2005**                                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| **CASH  FLOWS PROVIDED BY OPERATING ACTIVITIES:**                                 |       |                                                          | ** ** |   |   |   |   |
| Operations:                                                                       |       |                                                          | ** ** |   |   |   |   |
| Net income                                                                        | ** ** | **$**                                                         | **25,061** | ** ** | $ | 17,536 |   | $ | 11,842 |   |
| Adjustments  to reconcile net income to net cash flows from operating activities: |       |                                                          | ** ** |   |   |   |   |
| Depreciation                                                                      | ** ** | **38,229**                                                    | ** ** | 32,757 |   | 30,046 |   |
| Gain on disposition  of revenue equipment                                         | ** ** | **(3,943**                                                    | **)**      | (2,221 | ) | (640 | ) |
| Deferred tax  provision                                                           | ** ** | **11,771**                                                    | ** ** | 6,173 |   | 4,224 |   |
| Tax benefit  of stock option exercises                                            | ** ** | **410**                                                       | ** ** | 2,612 |   | 357 |   |
| Minority  interest in undistributed earnings of affiliate                         | ** ** | **431**                                                       | ** ** | — |   | — |   |
| Changes in  other current operating items:                                        |       |                                                          | ** ** |   |   |   |   |
| Receivables                                                                       | ** ** | **(6,896**                                                    | **)**      | (5,543 | ) | (4,731 | ) |
| Prepaid  expenses and other                                                       | ** ** | **(1,395**                                                    | **)**      | (1,835 | ) | (2,202 | ) |
| Accounts  payable                                                                 | ** ** | **3,067**                                                     | ** ** | 896 |   | (1,236 | ) |
| Other  current liabilities                                                        | ** ** | **5,737**                                                     | ** ** | 515 |   | 1,891 |   |
| Net cash  provided by operating activities                                        | ** ** | **72,472**                                                    | ** ** | 50,890 |   | 39,551 |   |
| **CASH  FLOWS USED FOR INVESTING ACTIVITIES:**                                    |       |                                                          | ** ** |   |   |   |   |
| Purchases of  marketable securities                                               | ** ** | **(32,527**                                                   | **)**      | (70,153 | ) | (81,287 | ) |
| Sales of  marketable securities                                                   | ** ** | **32,095**                                                    | ** ** | 89,310 |   | 62,068 |   |
| Revenue  equipment additions                                                      | ** ** | **(117,722**                                                  | **)**      | (102,989 | ) | (55,196 | ) |
| Proceeds  from revenue equipment dispositions                                     | ** ** | **32,846**                                                    | ** ** | 30,686 |   | 16,194 |   |
| Buildings  and land, office equipment and other additions                         | ** ** | **(3,718**                                                    | **)**      | (4,188 | ) | (422 | ) |
| Proceeds  from buildings and land, office equipment and other dispositions        | ** ** | **68**                                                        | ** ** | 75 |   | 28 |   |
| Net change  in other assets                                                       | ** ** | **401**                                                       | ** ** | (1,570 | ) | 1,302 |   |
| Net cash  used for investing activities                                           | ** ** | **(88,557**                                                   | **)**      | (58,829 | ) | (57,313 | ) |
| **CASH  FLOWS PROVIDED BY FINANCING ACTIVITIES:**                                 |       |                                                          | ** ** |   |   |   |   |
| Borrowings  under credit facility and long-term debt                              | ** ** | **130,717**                                                   | ** ** | 58,400 |   | 35,200 |   |
| Repayment of  borrowings under credit facility and long-term debt                 | ** ** | **(112,674**                                                  | **)**      | (56,000 | ) | (70,972 | ) |
| Issuance of  common stock from offering                                           | ** ** | **—**                                                    | ** ** | — |   | 52,089 |   |
| Issuance of  common stock from stock option exercises                             | ** ** | **525**                                                       | ** ** | 3,239 |   | 1,026 |   |
| Change in  net checks issued in excess of cash balances                           | ** ** | **(2,258**                                                    | **)**      | 3,155 |   | 419 |   |
| Net cash  provided by financing activities                                        | ** ** | **16,310**                                                    | ** ** | 8,794 |   | 17,762 |   |
| **NET  CHANGE IN CASH**                                                           | ** ** | **225**                                                       | ** ** | 855 |   | — |   |
| **CASH:**                                                                         |       |                                                          | ** ** |   |   |   |   |
| Beginning of  year                                                                | ** ** | **855**                                                       | ** ** | — |   | — |   |
| End of year                                                                       | ** ** | **$**                                                         | **1,080**  | ** ** | $ | 855 |   | $ | — |   |
|                                                                              | ** ** | ** **                                                    | ** ** | ** ** |   |   |   |   |   |   |
| **SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:**                            |       |                                                          | ** ** |   |   |   |   |
| Cash paid  for:                                                                   |       |                                                          | ** ** |   |   |   |   |
| Interest                                                                          | ** ** | **$**                                                         | **2,347**  | ** ** | $ | 2,131 |   | $ | 2,937 |   |
| Income taxes                                                                      | ** ** | **$**                                                         | **2,966**  | ** ** | $ | 4,613 |   | $ | 538 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

32

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** **

**MARTEN TRANSPORT, LTD.**

** **

**Notes to Consolidated Financial Statements**

 

**1. Summary of Significant Accounting Policies**

 

**Nature of business:**Marten Transport, Ltd. is a long-haul truckload carrier providing protectiveservice transportation of time- and temperature-sensitive materials and generalcommodities to customers in the United States and Canada.

 

**Principles ofconsolidation: **Theaccompanying consolidated financial statements include the accounts of MartenTransport, Ltd. and its 45% owned affiliate, MW Logistics, LLC (“MWL”). MWL isa third-party provider of logistics services to the transportation industry. Wehave applied the provisions of FASB Interpretation No. 46, “Consolidationof Variable Interest Entities,” as revised, to our investment in MWL effective March 31,2004. As a result, the accounts of MWL are included in our consolidated balancesheets as of December 31, 2005 and December 31, 2004, and in our consolidatedstatements of operations beginning April 1, 2004. All materialintercompany accounts and transactions have been eliminated in consolidation. Priorto April 1, 2004, we accounted for our investment in MWL using the equitymethod of accounting. We recorded our share of the equity losses of MWL in theamount of $6,000 for the three months ended March 31, 2004 and $63,000 forthe year ended December 31, 2003.

 

**Marketablesecurities:**  Weinvest available funds in short-term marketable securities. This investment isin a mutual fund investing primarily in repurchase agreements and other U.S.government-backed securities having original maturities of three months orless, and is stated at market value, which approximates cost.

 

**Trade accounts receivable:**  Trade accounts receivable are recorded at theinvoiced amounts, net of an allowance for doubtful accounts. A considerableamount of judgment is required in assessing the realization of thesereceivables including the current creditworthiness of each customer and relatedaging of the past-due balances, including any billing disputes. In order toassess the collectibility of these receivables, we perform ongoing creditevaluations of our customers’ financial condition. Through these evaluations,we may become aware of a situation where a customer may not be ableto meet its financial obligations due to deterioration of its financialviability, credit ratings or bankruptcy. The allowance for doubtful accounts isbased on the best information available to us and is reevaluated and adjustedas additional information is received. We evaluate the allowance based onhistorical write-off experience, the size of the individual customer balances,past-due amounts and the overall national economy. We review the adequacy ofour allowance for doubtful accounts quarterly. Invoice balances over 30 daysafter the contractual due date are considered past due per our policy and arereviewed individually for collectibility. Initial payments by new customers aremonitored for compliance with contractual terms. Account balances are chargedoff against the allowance after all means of collection have been exhausted andthe potential recovery is considered remote.

 

**Property and equipment:**Additions and improvements to property and equipment are capitalized at cost. Maintenanceand repair expenditures are charged to operations. Gains and losses ondisposals of revenue equipment are included in operations as they are a normal,recurring component of our operations.

 

Depreciation is computed based on the cost ofthe asset, reduced by its estimated salvage value, using the straight-linemethod for financial reporting purposes. Accelerated methods are used forincome tax reporting purposes. Following is a summary of estimated useful livesfor financial reporting purposes:

 
|                       |   | **Years** | ** ** |
|----------------------------|--------|-----------|------------|
| Revenue equipment:         |   |      |       |
| Tractors                   |   | 5         |       |
| Trailers                   |   | 7         |       |
| Satellite  tracking        |   | 7         |       |
| Buildings                  |   | 20        |       |
| Office equipment and other |   | 3-15      |       |

 

33

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We typically replace most of ourcompany-owned tractors within approximately 3.5 years and our trailers withinapproximately 7 years after purchase. Our useful lives for depreciatingtractors is 5 years and for trailers is 7 years, with a 25% salvage value fortractors and a 35% salvage value for trailers. These salvage values are basedupon the expected market values of the equipment after 5 years for tractors and7 years for trailers. Depreciation expense calculated in this mannerapproximates the continuing declining value of the revenue equipment, and, fortractors, continues at a consistent straight-line rate for units held beyondthe normal replacement cycle.

 

Long-lived assets are reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amount ofan asset may not be recoverable. Recoverability of assets to be held andused is measured by a comparison of the carrying amount of an asset to futurenet undiscounted cash flows expected to be generated by the asset. If suchassets are considered to be impaired, the impairment to be recognized ismeasured by the amount by which the carrying amount of the assets exceed thefair value of the assets. Assets to be disposed of are reported at the lower ofthe carrying amount or fair value less the costs to sell.

 

**Net investment in direct financing leases:**Wehave direct financing tractor lease receivables from independent contractors,which expire over the next five years.

 

**Tires in service:**The cost of original equipment and replacement tires placed in service iscapitalized. Amortization is calculated based on cost, less estimated salvagevalue, using the straight-line method over 24 months. The current portion ofcapitalized tires in service is included in prepaid expenses and other in theaccompanying consolidated balance sheets. The long-term portion of capitalizedtires in service and the estimated salvage value are included in revenueequipment in the accompanying consolidated balance sheets. The cost ofrecapping tires is charged to operations.

 

**Income taxes: **Deferredtax assets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax basis. Deferred taxassets and liabilities are measured using enacted tax rates expected to applyto taxable income in the years in which those temporary differences areexpected to be recovered or settled. The effect on deferred tax assets andliabilities of a change in tax rates is recognized in income in the period thatincludes the enactment date. We have reflected the necessary deferred taxassets and liabilities in the accompanying consolidated balance sheets. Webelieve the future tax deductions will be realized principally through futurereversals of existing taxable temporary differences and future taxable income.

 

**Insurance and claims:**  We self-insure, in part, for losses relatingto workers’ compensation, auto liability, general liability, cargo and propertydamage claims, along with employees’ health insurance with varying riskretention levels. We maintain insurance coverage for per-incident and totallosses in excess of these risk retention levels in amounts we consider adequatebased upon historical experience and our ongoing review. We reserve currentlyfor the estimated cost of the uninsured portion of pending claims. Thesereserves are periodically evaluated and adjusted based on our evaluation of thenature and severity of outstanding individual claims and an estimate of futureclaims development based on historical claims development factors. Underagreements with our insurance carriers and regulatory authorities, we have $3.6million in standby letters of credit to guarantee settlement of claims.

 

**Revenue recognition: **We record revenueand related expenses on the date shipment of freight is completed. We earned15% of our revenue in 2005 from a single customer whose trade receivablesrepresented 9% of our trade receivables as of December 31, 2005. We earned11%, 11% and 10% of our revenue in 2004 from three single customers whose tradereceivables represented 8%, 7% and 10%, respectively, of our trade receivablesas of December 31, 2004. We earned 10% of our revenue in 2003 from asingle customer.

 

34

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**Earnings per common share:**  Basic earnings per common share is computedby dividing net income by the weighted average number of common sharesoutstanding during the year. Diluted earnings per common share is computed bydividing net income by the sum of the weighted average number of common sharesoutstanding plus all additional common shares that would have been outstandingif potentially dilutive common shares related to stock options and otherdilutive securities had been issued using the treasury stock method.

 

**Accounting for stock-based compensation: **We have adopted thedisclosure provisions of Statement of Financial Accounting Standards No. 148,“Accounting for Stock-Based Compensation – Transition and Disclosure.”  Statement No. 148 amends the disclosurerequirements of Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation.”  As of December 31,2005, we have two stock-based employee compensation plans, which are describedmore fully in Note 10. We account for these plans under the recognitionand measurement principles of Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related Interpretations. No stock-basedemployee compensation cost is reflected in net income, as all options grantedunder these plans had an exercise price equal to the market value of theunderlying common stock on the date of grant. The following table illustratesthe effect on net income and earnings per share if we had applied the fairvalue recognition provisions of Statement No. 123:

 
| **(In thousands, except per share amounts)**                                                                         | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| Net income,  as reported                                                                                                                      | ** ** | **$**      | **25,061** | ** ** | $          | 17,536   |       | $ | 11,842 |   |
| Deduct:  total stock-based employee compensation expense determined under fair value  based method for all awards, net of related tax effects | ** ** | **(108**   | **)**      | (157       | )          | (182     | )          |
| Pro forma  net income                                                                                                                         | ** ** | **$**      | **24,953** | ** ** | $          | 17,379   |       | $ | 11,660 |   |
|                                                                                                                                          | ** ** | ** ** | ** ** |       |       |     |       |
| Earnings per  common share:                                                                                                                   |       |       | ** ** |       |       |     |       |
| Basic-as  reported                                                                                                                            | ** ** | **$**      | **1.16**   | ** ** | $          | 0.83     |       | $ | 0.71 |   |
| Basic-pro  forma                                                                                                                              | ** ** | **$**      | **1.16**   | ** ** | $          | 0.82     |       | $ | 0.70 |   |
| Diluted-as  reported                                                                                                                          | ** ** | **$**      | **1.14**   | ** ** | $          | 0.81     |       | $ | 0.68 |   |
| Diluted-pro  forma                                                                                                                            | ** ** | **$**      | **1.14**   | ** ** | $          | 0.80     |       | $ | 0.67 |   |

 

The weighted-average fair value as of thedate of grant was $3.49 per share for options granted during 2003. No optionswere granted in 2005 or 2004. The fair value was estimated as of the date ofgrant using the Black-Scholes option pricing model with the followingweighted-average assumptions:

 
| ** **                                  | ** ** | **2005**   | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Expected  option life in years              | ** ** | **—** |       | —   |       | 6        |       |
| Risk-free  interest rate percentage         | ** ** | **—** |       | —   |       | 3.3      |       |
| Expected  stock price volatility percentage | ** ** | **—** |       | —   |       | 33       |       |
| Expected  dividend payments                 | ** ** | **—** |       | —   |       | —   |       |

 

**Segment reporting: **We have adopted theprovisions of Statement of Financial Accounting Standards No. 131, “Disclosuresabout Segments of an Enterprise and Related Information.”  Statement No. 131 establishes accountingstandards for segment reporting. We operate in a single segment—long-haultruckload carriage providing protective service transportation of time- andtemperature-sensitive materials and general commodities.

 

**Recent accounting pronouncement: **InDecember 2004, the Financial Accounting Standards Board, or FASB, issuedStatement of Financial Accounting Standards, or SFAS, No. 123 (revised2004), “Share-Based Payment.”  SFAS No. 123,as revised, requires entities to recognize the grant-date fair value of stockoptions and other equity-based compensation issued to employees in the incomestatement. The statement eliminates entities’ ability to account for share-basedcompensation transactions using the intrinsic value method of accounting inAccounting Principles Board, or APB, Opinion No. 25, “Accounting for StockIssued to

 

35

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Employees,” which was permittedunder SFAS No. 123, as originally issued. In April 2005, theSecurities and Exchange Commission deferred the effective date of SFAS No. 123,as revised, to the beginning of the first annual reporting period beginningafter June 15, 2005. Accordingly, we will recognize the grant-date fairvalue of stock options in our consolidated statements of operations beginningin our first quarter of 2006.

 

We plan to adopt the provisions of SFAS No. 123,as revised, effective January 1, 2006, as required, using the modified prospectivetransition method for our existing stock-based compensation plans. Under themodified prospective transition method, the fair value based accounting methodwill be used for all employee awards granted, modified, or settled after theadoption date. Compensation expense related to the non-vested portion of awardsoutstanding as of that date will be based on the grant date fair value of thoseawards as calculated under the original provisions of SFAS No. 123. Weestimate that the adoption of SFAS No. 123, as revised, will result inapproximately $300,000 to $400,000 of stock-based compensation expense, net ofrelated income tax benefit, in 2006 related to non-vested employee optionsissued prior to the adoption date and options with service-based vesting issuedor expected to be issued in 2006. Additionally, options which vest uponachievement of certain performance criteria from 2006 through 2010 have beenand are expected to be issued in 2006. We estimate that these performance-basedoptions will result in approximately $500,000 to $600,000 in total stock-basedcompensation expense, net of related income tax benefit, which will be recordedin the period(s), if any, in which the performance criteria are achieved.

 

**Use of estimates:**  We must make estimates and assumptions toprepare the consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America. These estimatesand assumptions affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities in the consolidated financialstatements. These estimates are primarily related to insurance and claimsaccruals and depreciation. Ultimate results could differ from these estimates.

 

**Reclassifications:**  The cash and checks issued in excess of cashbalances in our 2004 consolidated balance sheet and the changes in suchbalances in our 2004 consolidated statement of cash flows, the minorityinterest in the earnings of MWL in our 2004 consolidated statement of operationsand the purchases and sales of marketable securities, along with buildings andland, office equipment and other property and equipment additions and proceedsfrom dispositions, in our 2004 and 2003 consolidated statements of cash flowshave been reclassified to be consistent with the 2005 presentation. Thesereclassifications do not have a material effect on our consolidated financialstatements.

 

**2. Details of Consolidated Balance SheetAccounts**

 

**Prepaid expenses andother:**  As of December 31,prepaid expenses and other consisted of the following:

 
| **(In thousands)**    | ** ** | **2005**  | ** ** | **2004** | ** ** |
|----------------------------|------------|-----------|------------|----------|------------|
| License fees               | ** ** | **$**     | **4,447**  |     | $          | 4,249 |   |
| Tires in  service          | ** ** | **3,981** |       | 3,261    |       |
| Parts and  tires inventory | ** ** | **1,946** |       | 1,410    |       |
| Insurance  premiums        | ** ** | **1,003** |       | 1,010    |       |
| Other                      | ** ** | **1,887** |       | 1,939    |       |
| ** **                 |       | **$**     | **13,264** |     | $          | 11,869 |   |

 

36

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**Net investment indirect financing leases:**  As of December 31, the components of thenet investment in direct financing lease receivables from independentcontractors consisted of the following:

 
| **(In thousands)**                      | ** ** | **2005**   | ** ** | **2004** | ** ** |
|----------------------------------------------|------------|------------|------------|----------|------------|
| Total  minimum lease payments to be received | ** ** | **$**      | **11,633** |     | $          | 12,972 |   |
| Less:  unearned income                       | ** ** | **(2,508** | **)**      | (2,652   | )          |
| Net  investment in direct financing leases   | ** ** | **$**      | **9,125**  |     | $          | 10,320 |   |

 

The current portion of our net investment indirect financing leases is included in other receivables in the accompanyingconsolidated balance sheets. The long-term portion of our net investment indirect financing leases is included in other assets in the accompanyingconsolidated balance sheets. The interest method is used to amortize unearnedincome, which amortizes unearned income to income over the lease term so as toproduce a constant periodic rate of return on the net investment in each lease.The amortization of unearned income is included in interest income and other inthe accompanying consolidated statements of operations.

 

As of December 31, 2005, minimum leasepayments to be received for each of the five succeeding fiscal years are asfollows: $3,963,000 in 2006, $3,276,000 in 2007, $2,523,000 in 2008, $1,471,000in 2009 and $400,000 in 2010.

 

**Accrued liabilities:**  As of December 31, accrued liabilitiesconsisted of the following:

 
| **(In thousands)**  | ** ** | **2005**   | ** ** | **2004** | ** ** |
|--------------------------|------------|------------|------------|----------|------------|
| Accrued  payables        | ** ** | **$**      | **9,939**  |     | $          | 3,555 |   |
| Salaries and  wages      | ** ** | **3,392**  |       | 3,941    |       |
| Vacation                 | ** ** | **3,087**  |       | 2,727    |       |
| Current  income taxes    | ** ** | **921**    |       | 261      |       |
| Federal  highway use tax | ** ** | **—** |       | 570      |       |
| Other                    | ** ** | **1,218**  |       | 1,238    |       |
| ** **               |       | **$**      | **18,557** |     | $          | 12,292 |   |

 

37

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**3.****             Long-TermDebt**

 

As of December 31, long-term debtconsisted of the following:

 
| **(In thousands)**                                                                                                                                                                                                                                                                                                                               | ** ** | **2005**   | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| Unsecured  committed credit facility in the amount of $45 million with a bank maturing  in April 2008 and bearing variable interest based upon either the London  Interbank Offered Rate or the bank’s Prime Rate, in each case plus applicable  margins (6.17% weighted average interest rate for the facility at December 31,  2005) | ** ** | **$**      | **30,443** |     | $          | 7,400 |   |
| Series A  Senior Unsecured Notes maturing in October 2008 with annual principal  payments of $3.57 million which began in October 2002 and bearing fixed  interest at 6.78%                                                                                                                                                            | ** ** | **10,714** |       | 14,286   |       |
| Series B  Senior Unsecured Notes maturing in April 2010 with annual principal  payments of $1.43 million which began in April 2004 and bearing fixed  interest at 8.57%                                                                                                                                                                | ** ** | **7,143**  |       | 8,571    |       |
| Total  long-term debt                                                                                                                                                                                                                                                                                                                                 | ** ** | **48,300** |       | 30,257   |       |
| Less current  maturities of long-term debt                                                                                                                                                                                                                                                                                                            | ** ** | **5,000**  |       | 5,000    |       |
| Long-term  debt, less current maturities                                                                                                                                                                                                                                                                                                              | ** ** | **$**      | **43,300** |     | $          | 25,257 |   |

 

At December 31, 2005, our unsecuredcommitted credit facility (“credit facility”) had an outstanding principalbalance of $30.4 million, outstanding standby letters of credit of $3.6million, and remaining borrowing availability of $11.0 million.

 

Our credit facility prohibits us from paying,in any fiscal year, dividends in excess of 25% of our net income from the priorfiscal year. The debt agreements also contain restrictive covenants which,among other matters, require us to maintain certain financial ratios, includingdebt-to-equity, cash flow leverage, interest coverage and fixed charge coverage.We were in compliance with all of these covenants at December 31, 2005.

 

Maturities of long-term debt at December 31,2005, are as follows:

 
| **(In thousands)** | ** ** | **Amount** | ** ** |
|-------------------------|------------|------------|------------|
| 2006                    |       | $          | 5,000      |   |
| 2007                    |       | 5,000      |       |
| 2008                    |       | 35,443     |       |
| 2009                    |       | 1,429      |       |
| 2010                    |       | 1,428      |       |
|                    |       | $          | 48,300     |   |

 

38

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**4. Related Party Transactions**

 

The following related party transactionsoccurred during the three years ended December 31, 2005:

 

(a) We purchase fuel and obtain tiresand related services from a company in which one of our directors is thepresident and a principal stockholder. We paid that company $1.2 million in2005, $924,000 in 2004 and $805,000 in 2003 for fuel and tire services. Inaddition, we paid $2.0 million in 2005, $1.4 million in 2004 and $2.3 millionin 2003 to tire manufacturers for tires that we purchased from the tiremanufacturers but were provided by the same company. The same company receivedcommissions from the tire manufacturers related to these purchases. We also hadaccounts payable to the same company of $56,000 as of December 31, 2005and $57,000 as of December 31, 2004.

 

(b) We paid $142,000 in 2005 and$493,000 in 2004 for various construction projects to a company in which one ofour directors is the president and owner. We also had accounts payable to thesame company of zero as of December 31, 2005 and $9,000 as of December 31,2004.

 

(c) We provide transportation servicesto MWL, a 45% owned affiliate. MWL is a third-party provider of logisticsservices to the transportation industry. In 2005, 2004 and 2003, we received$21.1 million, $22.6 million and $13.8 million, respectively, of our revenuefrom transportation services arranged by MWL.

 

39

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**5. Income Taxes**

 

The components of the provision for incometaxes consisted of the following:

 
| **(In thousands)** | ** ** | **2005**   | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------|------------|------------|------------|----------|------------|----------|------------|
| Current:                |       |       |       |     |       |     |       |
| Federal                 | ** ** | **$**      | **4,254**  |     | $          | 5,443    |       | $ | 2,520 |   |
| State                   | ** ** | **401**    |       | 1,561    |       | 514      |       |
| ** **              |       | **4,655**  |       | 7,004    |       | 3,034    |       |
| Deferred:               |       |       |       |     |       |     |       |
| Federal                 | ** ** | **9,413**  |       | 5,028    |       | 3,664    |       |
| State                   | ** ** | **2,358**  |       | 1,145    |       | 560      |       |
| ** **              |       | **11,771** |       | 6,173    |       | 4,224    |       |
| Total  provision        | ** ** | **$**      | **16,426** |     | $          | 13,177   |       | $ | 7,258 |   |

 

The statutory federal income tax rate isreconciled to the effective income tax rate as follows:

 
| ** **                                                                               | ** ** | **2005**   | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Statutory  federal income tax rate                                                       | ** ** | **35**     | **%**      | 35       | %          | 35       | %          |
| Increase in  taxes arising from:

State income  taxes, net of federal income tax benefit | ** ** | **4**      | ** ** | 6        |       | 4        |       |
| Federal  deferred income tax rate increase                                               | ** ** | **—** | ** ** | 4        |       | —   |       |
| Benefit of  lower tax bracket                                                            | ** ** | **—** | ** ** | (1       | )          | (1       | )          |
| Decrease in  accrual for tax contingencies                                               | ** ** | **—** | ** ** | (1       | )          | —   |       |
| Other, net                                                                               | ** ** | **1**      | ** ** | —   |       | —   |       |
| Effective  tax rate                                                                      | ** ** | **40**     | **%**      | 43       | %          | 38       | %          |

 

Our effective income tax rate increased to42.9% in 2004, because we increased our federal and state deferred income taxliabilities by a total of $1.5 million during the fourth quarter of 2004 as aresult of an increase in our statutory federal and state income tax rates based upon projected future taxableincome.

 

As of December 31, the net deferred taxliability consisted of the following:

 
| **(In thousands)**                                                                                 | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Deferred tax assets:                                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Reserves and  accrued liabilities for financial reporting in excess of tax                              | ** ** | **$**      | **6,150**  |       | $          | 6,173 |   |
| State income  tax deduction for financial reporting in excess of tax                                    | ** ** | **3,565**  |       | 2,739      |       |
| Other                                                                                                   | ** ** | **111**    |       | 50         |       |
| ** **                                                                                              |       | **9,826**  |       | 8,962      |       |
| Deferred tax  liabilities:                                                                              |       |       |       |       |       |
| Tax  depreciation in excess of depreciation for financial reporting                                     | ** ** | **70,113** |       | 59,361     |       |
| Prepaid  licenses and use tax expensed for income tax purposes and capitalized for  financial reporting | ** ** | **2,056**  |       | —     |       |
| Capital  lease receivables for financial reporting in excess of tax                                     | ** ** | **94**     |       | 267        |       |
| ** **                                                                                              |       | **72,263** |       | 59,628     |       |
| Net deferred  tax liability                                                                             | ** ** | **$**      | **62,437** |       | $          | 50,666 |   |

 

40

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We have not provided a valuation allowanceagainst deferred tax assets at December 31, 2005 or 2004. We believe thedeferred tax assets will be realized principally through future reversals ofexisting taxable temporary differences (deferred tax liabilities) and futuretaxable income.

 

**6. Earnings Per Common Share**

 

Basic and diluted earnings per common sharewere computed as follows:

 
| **(In thousands, except per share amounts)**                | ** ** | **2005**   | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Numerator:                                                                           |       |       |       |     |       |     |       |
| Net income                                                                           | ** ** | **$**      | **25,061** |     | $          | 17,536   |       | $ | 11,842 |   |
| Denominator:                                                                         |       |       |       |     |       |     |       |
| Basic  earnings per common share - weighted-average shares                           | ** ** | **21,518** |       | 21,088   |       | 16,641   |       |
| Effect of  dilutive stock options                                                    | ** ** | **444**    |       | 677      |       | 765      |       |
| Diluted  earnings per common share - weighted-average shares and assumed conversions | ** ** | **21,962** |       | 21,765   |       | 17,406   |       |
| Basic  earnings per common share                                                     | ** ** | **$**      | **1.16**   |     | $          | 0.83     |       | $ | 0.71 |   |
| Diluted  earnings per common share                                                   | ** ** | **$**      | **1.14**   |     | $          | 0.81     |       | $ | 0.68 |   |

 

All outstanding options were included in thecalculation of diluted earnings per share for all years presented.

 

**7. Stock Split**

 

On December 12, 2005, we effected athree-for-two stock split of our common stock, $.01 par value, in the form ofa 50% stock dividend. Our consolidated financial statements, related notes, andother financial data contained in this report have been adjusted to giveretroactive effect to the stock split for all periods presented.

 

**8. Amended andRestated Certificate of Incorporation**

 

In August 2003,our stockholders approved an Amended and Restated Certificate of Incorporationthat increased the number of authorized shares of capital stock from10 million shares consisting solely of common stock, $.01 par value, to25 million shares of capital stock consisting of 23 million shares ofcommon stock, $.01 par value, and 2 million shares of undesignatedpreferred stock, $.01 par value. In May 2005, our stockholders approved anamendment to our Amended and Restated Certificate of Incorporation increasingthe authorized number of shares of common stock, $.01 par value, from23 million shares to 48 million shares. The Board may fix therights, preferences, and privileges of the preferred stock, along with thevoting powers (full or limited or no voting powers), such preferences andrelative participating, optional, or other special rights, and suchqualifications, limitations, or restrictions, including dividend rights,conversion rights, redemption privileges, and preferences on liquidation ordissolution of each class or series of preferred stock. The preferredstock could have voting or conversion rights that could adversely affect thevoting power or other rights of holders of our common stock. The issuance ofpreferred stock also could have the effect, under certain circumstances, ofdelaying, deferring, or preventing a change of control of our company. At December 31,2005 there were no preferred shares outstanding.

 

**9. Stock Issuance**

 

We issued 6.075 million shares of ourcommon stock in a public offering completed during the third quarter of 2003.The stock issuance resulted in net proceeds to us of approximately$52.1 million, which were recorded as an increase to our stockholders’ equity.

 

41

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**10. Employee Benefits**

 

***Stock Incentive Plans****-*In May 2005, our stockholders approved our 2005Stock Incentive Plan (the “2005 Plan”). Our Board of Directors adopted the 2005Plan in March 2005 and approved amendments to the 2005 Plan in April 2005.Under the 2005 Plan, all of our employees and any subsidiary employees, as wellas all of our non-employee directors, consultants, advisors and independentcontractors, may be granted stock-based awards, including incentive andnon-statutory stock options and restricted stock awards, none of which havebeen awarded as of December 31, 2005. Stock options expire within 10 yearsafter the date of grant and the exercise price must be at least the fair marketvalue of our common stock on the date of grant. The maximum number of shares ofcommon stock that will be available for issuance under the 2005 Plan is 2.85million shares. The 2005 Plan replaces our 1995 Stock Incentive Plan (the “1995Plan”), which expired by its terms in March 2005.

 

Under the 1995 Plan, officers, directors andemployees were granted incentive and non-statutory stock options. Incentivestock option exercise prices were required to be at least the fair market valueof our common stock on the date of grant. Non-statutory stock option exerciseprices were required to be at least 85% of the fair market value of our commonstock on the date of grant. Stock options expire within 10 years after the dateof grant. As of December 31, 2005, there were 607,239 shares reserved forissuance under options outstanding under the 1995 Plan. No additional optionswill be granted under the 1995 Plan.

 

As of December 31, stock option activity underour plans was as follows:

 
| ** **                      | ** ** | **2005**     | ** ** | **2004**     | ** ** | **2003**   | ** ** |
|---------------------------------|------------|--------------|------------|--------------|------------|------------|------------|
| ** **                      | ** ** | ** **   | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                      | ** ** | ** **   | ** ** | **Average**  | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                      | ** ** | ** **   | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| ** **                      | ** ** | **Shares**   | ** ** | **Price**    | ** ** | **Shares** | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** |
| Outstanding,  beginning of year | ** ** | **750,468**  | ** ** | **$**        | **5.26**   |       | 1,573,032  |   | $ | 4.57 |   | 1,674,521 |   | $ | 4.10 |   |
| Granted                         | ** ** | **—**   | ** ** | **—**   | ** ** | **—** | ** ** | **—** |   | 151,878 |   | 9.11 |   |
| Exercised                       | ** ** | **(112,862** | **)**      | **4.68**     |       | (820,877   | )          | 3.95 |   | (248,304 | ) | 4.13 |   |
| Forfeited                       | ** ** | **(30,367**  | **)**      | **5.21**     |       | (1,687     | )          | 4.37 |   | (5,063 | ) | 4.37 |   |
| Outstanding,  end of year       | ** ** | **607,239**  | ** ** | **5.36**     |       | 750,468    |       | 5.26 |   | 1,573,032 |   | 4.57 |   |
| Exercisable,  end of year       | ** ** | **521,173**  | ** ** | **4.76**     |       | 526,031    |       | 4.59 |   | 1,237,220 |   | 4.09 |   |
|                                 |            |              |            |              |            |            |            |  |  |  |  |  |  |  |  |  |

 

The following table summarizes information regardingstock options outstanding and exercisable as of December 31, 2005:

 
| ** **                                   | ** ** | **Range of Exercise Price** | ** ** |
|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                   | ** ** | **$3.48 to**                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                   | ** ** | **$5.78**                                  | ** ** | **$10.76** | ** ** | **Total** | ** ** |
| Options  outstanding:                        |       |                                       |       |   |   |   |   |
| Number of  shares                            |       | 505,987                                    |       | 101,252 |   | 607,239 |   |
| Weighted-average  remaining contractual life |       | 4.7 years                                  |       | 7.8 years |   | 5.2 years |   |
| Weighted-average  exercise price             |       | $                                          | 4.28       |   | $ | 10.76 |   | $ | 5.36 |   |
| Options  exercisable:                        |       |                                       |       |   |   |   |   |
| Number of  shares                            |       | 480,673                                    |       | 40,500 |   | 521,173 |   |
| Weighted-average  exercise price             |       | $                                          | 4.26       |   | $ | 10.76 |   | $ | 4.76 |   |

 

***Retirement Savings Plan****-*We sponsor a defined contribution retirement savings planunder Section 401(k) of the Internal Revenue Code. Employees are eligiblefor the plan after one year of service. Participants are able to contribute upto the limit set by law, which in 2005 was $14,000 for participants less thanage 50 and $18,000 for participants age 50 and above. We contribute 25% of eachparticipant’s contribution, up to a total of 6% contributed. Our contributionvests at the rate of 20% per year for the second through sixth years of

 

42

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service. In addition, we may make elective contributions asdetermined by the board of directors. Elective contributions were not made in2005, 2004 or 2003. Total expense recorded for the plan was $702,000 in 2005,$404,000 in 2004 and $343,000 in 2003.

 

***Stock Purchase Plans****-*An Employee Stock Purchase Plan and an IndependentContractor Stock Purchase Plan are sponsored to encourage employee andindependent contractor ownership of our common stock. Eligible participantsspecify the amount of regular payroll or contract payment deductions andvoluntary cash contributions that are used to purchase shares of our commonstock. The purchases are made at the market price on the open market. We paythe broker’s commissions and administrative charges for purchases of common stockunder the plans.

 

**11. Fair Value of Financial Instruments**

 

The carrying amounts of marketablesecurities, accounts receivable, direct financing leases receivable andaccounts payable approximate fair value because of the short maturity of theseinstruments. The fair value of our total long-term debt is estimated to be$49.0 million at December 31, 2005, and $31.9 million at December 31,2004. The fair value was estimated using discounted cash flow analysis. Currentborrowing rates for similar long-term debt were used in this analysis.

 

**12. Commitments and Contingencies**

 

We are committed to: (a) purchase $23.9million of new revenue equipment in 2006; and (b) operating leaseobligations totaling $955,000 through 2011.

 

We are involved in legal actions that arisein the ordinary course of business. Although the outcomes of any such legalactions cannot be predicted, in the opinion of management, the resolution ofany currently pending or threatened actions will not have a material adverseeffect upon our financial position or results of operations.

 

**13. Quarterly Financial Data (Unaudited)**

 

The following is a summary of the quarterlyresults of operations for 2005 and 2004:

 
| **2005 Quarters (In thousands, except per share amounts)** | ** ** | **First** | ** **  | **Second** | ** ** | **Third**   | ** ** | **Fourth** | ** **  | **Total**  | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------|-------------|------------|------------|-------------|------------|------------|-------------|------------|------------|
| Operating  revenue                                                                            | ** ** | **$**     | **102,906** | ** ** | **$**      | **112,800** | ** ** | **$**      | **119,081** | ** ** | **$**      | **125,415** | ** ** | **$** | **460,202** | ** ** |
| Operating  income                                                                             | ** ** | **8,276** | ** **  | **11,556** | ** ** | **11,046**  | ** ** | **11,989** | ** **  | **42,867** | ** ** |
| Net income                                                                                    | ** ** | **4,815** | ** **  | **6,763**  | ** ** | **6,374**   | ** ** | **7,109**  | ** **  | **25,061** | ** ** |
| Basic  earnings per common share                                                              | ** ** | **0.22**  | ** **  | **0.31**   | ** ** | **0.30**    | ** ** | **0.33**   | ** **  | **1.16**   | ** ** |
| Diluted  earnings per common share                                                            | ** ** | **0.22**  | ** **  | **0.31**   | ** ** | **0.29**    | ** ** | **0.32**   | ** **  | **1.14**   | ** ** |
|                                                                                               |            |           |             |            |            |             |            |            |             |            |            |  |  |  |  |  |

 
| **2004 Quarters (In thousands, except per share  amounts)** | ** ** | **First** | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------|------------|-----------|------------|------------|------------|-----------|------------|------------|------------|-----------|------------|
| Operating  revenue                                          |       | $         | 84,530     |       | $          | 91,907    |       | $          | 97,892     |      | $          | 105,719 |   | $ | 380,048 |   |
| Operating  income                                           |       | 4,589     |       | 7,933      |       | 7,907     |       | 10,916     |       | 31,345    |       |
| Net income                                                  |       | 2,732     |       | 4,814      |       | 4,784     |       | 5,206      |       | 17,536    |       |
| Basic  earnings per common share                            |       | 0.13      |       | 0.23       |       | 0.23      |       | 0.24       |       | 0.83      |       |
| Diluted  earnings per common share                          |       | 0.13      |       | 0.22       |       | 0.22      |       | 0.24       |       | 0.81      |       |
|                                                             |            |           |            |            |            |           |            |            |            |           |            |  |  |  |  |  |

 

43

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| ***ITEM 9.*** | *** *** | ***CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE*** |
|---------------|--------------|---------------------------------------------------------------------------------------------|

# *** ***

No reports on Form 8-K have been required to befiled within the twenty-four months prior to December 31, 2005, involvinga change of accountants or disagreements on accounting and financialdisclosure.

 
| **ITEM 9A.** | *** *** | ***CONTROLS AND  PROCEDURES*** |
|--------------|--------------|--------------------------------|

 

 

As required by Rule 13a-15 under theSecurities Exchange Act of 1934 (“Exchange Act”), we have carried out an evaluationof the effectiveness of the design and operation of our disclosure controls andprocedures (as defined in Exchange Act Rule 13a-15(e)) as of the end ofthe period covered by this report. This evaluation was carried out under thesupervision and with the participation of our management, including ourPresident and Chief Executive Officer and our Chief Financial Officer. Basedupon that evaluation, our President and Chief Executive Officer and our ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective as of December 31, 2005. There were no changes in our internalcontrol over financial reporting that occurred during the period covered bythis report that have materially affected, or that are reasonably likely to materiallyaffect, our internal control over financial reporting. We intend toperiodically evaluate our disclosure controls and procedures as required by theExchange Act Rules.

 

We have included Management’s Annual Reporton Internal Control Over Financial Reporting in Item 8 above.

 

**ITEM9B.****       *OTHER INFORMATION***

 

None.

 

44

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**PART III**

 

# ***ITEM 10.***       DIRECTORS AND EXECUTIVE OFFICERSOF THE REGISTRANT

# *** ***

A.    Directorsof the Registrant.

 

The information inthe “Election of Directors—Information About Nominees” and “Election ofDirectors—Other Information About Nominees” sections of our 2006 ProxyStatement is incorporated in this Report by reference.

 

B.    ExecutiveOfficers of the Registrant.

 

Information aboutour executive officers is included in this Report under Item 4A, “ExecutiveOfficers of the Registrant.”

 

C.    Compliancewith Section 16(a) of the Exchange Act.

 

The information inthe “Section 16(a) Beneficial Ownership Reporting Compliance” section ofour 2006 Proxy Statement is incorporated in this Report by reference.

 

D.    AuditCommittee Financial Expert.

 

The information inthe “Election of Directors—Board and Board Committees” section of our 2006Proxy Statement is incorporated in this Report by reference.

 

E.     Identification of the Audit Committee.

 

The information inthe “Election of Directors—Board and Board Committees” section of our 2006Proxy Statement is incorporated in this Report by reference.

 

F.     Code of Ethics for Senior Financial Management.

 

Our Code of Ethics for Senior Financial Management applies to all of ourexecutive officers, including our principal executive officer, principalfinancial officer and controller, and meets the requirements of the Securitiesand Exchange Commission. We have posted our Code of Ethics for Senior Financial Management on our website at *www.marten.com*. We intend to disclose any amendmentsto and any waivers from a provision of our Code of Ethics for Senior FinancialManagement on our website within five business days following such amendment orwaiver.

 

45

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# ***ITEM 11.***       EXECUTIVE COMPENSATION

# *** ***

The information inthe “Election of Directors—Director Compensation” and “Compensation and OtherBenefits” sections of our 2006 Proxy Statement is incorporated in this Reportby reference.

 

# ***ITEM 12.***       SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

# *** ***

The information inthe “Security Ownership of Certain Beneficial Owners and Management” and “Compensationand Other Benefits — Equity Compensation Plan Information” sections of our 2006Proxy Statement is incorporated in this Report by reference.

 

# ***ITEM 13.***       CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS

# *** ***

The information inthe “Certain Transactions” section of our 2006 Proxy Statement isincorporated in this Report by reference.

 

# ***ITEM 14.***       PRINCIPAL ACCOUNTANT FEES ANDSERVICES

# *** ***

The information in the “Fees of Independent Auditors” section ofour 2006 Proxy Statement is incorporated in this Report by reference.

 

46

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**PART IV**

 

# ***ITEM 15.***       EXHIBITS AND FINANCIAL STATEMENTSCHEDULES

# *** ***

| **(a)**    | **1.**     |       | **Financial Statements  (See Part II, Item 8 of this Report):**                                                                                                                                                                                                                                                             | **Page**                                                                              |
|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------|
| ** ** | ** ** |       |                                                                                                                                                                                                                                                                                                                             |                                                                                  |
|       |       |       | Management’s Annual Report on Internal Control Over Financial  Reporting                                                                                                                                                                                                                                                    | 26                                                                                    |
|       |       |       |                                                                                                                                                                                                                                                                                                                             |                                                                                  |
|       |       |       | Report of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                          | 27                                                                                    |
|       |       |       |                                                                                                                                                                                                                                                                                                                             |                                                                                  |
|       |       |       | Report of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                          | 28                                                                                    |
|       |       |       |                                                                                                                                                                                                                                                                                                                             |                                                                                  |
|       |       |       | Consolidated Balance Sheets as of December 31, 2005 and 2004                                                                                                                                                                                                                                                                | 29                                                                                    |
|       |       |       |                                                                                                                                                                                                                                                                                                                             |                                                                                  |
|       |       |       | Consolidated Statements of Operations for  the years ended   December 31, 2005, 2004 and 2003                                                                                                                                                                                                                               | 30                                                                                    |
|       |       |       |                                                                                                                                                                                                                                                                                                                             |                                                                                  |
|       |       |       | Consolidated Statements of Stockholders’ Equity   for the years ended December 31, 2005, 2004 and 2003                                                                                                                                                                                                                 | 31                                                                                    |
|       |       |       |                                                                                                                                                                                                                                                                                                                             |                                                                                  |
|       |       |       | Consolidated Statements of Cash Flows for the years ended  December 31, 2005, 2004 and 2003                                                                                                                                                                                                                                 | 32                                                                                    |
|       |       |       |                                                                                                                                                                                                                                                                                                                             |                                                                                  |
|       |       |       | Notes to Consolidated Financial Statements                                                                                                                                                                                                                                                                                       | 33                                                                                    |
|       |       |       |                                                                                                                                                                                                                                                                                                                             |                                                                                  |
|       | **2.**     |       | **Financial Statement Schedules  (Consolidated Financial Statement Schedule Included in Part IV of  this Report):**                                                                                                                                                                                                    |                                                                                  |
|       |       |       |                                                                                                                                                                                                                                                                                                                             |                                                                                  |
|       |       |       | Schedule II – Valuation and Qualifying  Accounts and Reserves                                                                                                                                                                                                                                                          | 49                                                                                    |
|       |       |       |                                                                                                                                                                                                                                                                                                                             |                                                                                  |
|       |       |       | Schedules not  listed above have been omitted as the required information is inapplicable or  the information is presented in the consolidated financial statements or  related notes.                                                                                                                                           |                                                                                  |
|       |       |       |                                                                                                                                                                                                                                                                                                                             |                                                                                  |
|       | **3.**     | ** ** | **Exhibits:**                                                                                                                                                                                                                                                                                                                    |                                                                                  |
|       |       |       |                                                                                                                                                                                                                                                                                                                             |                                                                                  |
|       | * *   | * *   | *The exhibits to this Report are  listed in the Exhibit Index on pages 50 through 52. A copy of any  of the exhibits listed will be sent at a reasonable cost to any shareholder  as of March 13, 2006. Requests should be sent to James J. Hinnendael,  Chief Financial Officer, at our corporate headquarters.* | * *                                                                              |
|       | * *   | * *   | * *                                                                                                                                                                                                                                                                                                                         | * *                                                                              |
|       | * *   | * *   | *The following is a list of each  management contract or compensatory plan or arrangement required to be filed  as an exhibit to this Report under Item 14(c):*                                                                                                                                                             | * *                                                                              |
|       | * *   | * *   | * *                                                                                                                                                                                                                                                                                                                         | * *                                                                              |
|       |       |       | (1)                                                                                                                                                                                                                                                                                                                              | Marten Transport, Ltd. 1995 Stock Incentive  Plan.                                    |   |
|       |       |       |                                                                                                                                                                                                                                                                                                                             |                                                                                  |   |
|       |       |       | (2)                                                                                                                                                                                                                                                                                                                              | Marten Transport, Ltd.  2005 Stock Incentive Plan.                                    |   |
|       |       |       |                                                                                                                                                                                                                                                                                                                             |                                                                                  |   |
|       |       |       | (3)                                                                                                                                                                                                                                                                                                                              | Form of Non-Statutory Stock Option  Agreement for the 2005 Stock Incentive Plan. |   |
|       |       |       |                                                                                                                                                                                                                                                                                                                             |                                                                                  |   |
|       |       |       | (4)                                                                                                                                                                                                                                                                                                                              | Summary of Named Executive Officers’  Compensation.                              |   |
|       |       |       |                                                                                                                                                                                                                                                                                                                             |                                                                                  |   |
|       |       |       | (5)                                                                                                                                                                                                                                                                                                                              | 2006 Non-employee Director Compensation  Summary.                                     |   |

 

47

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** **

**SIGNATURES**

** **

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, Marten Transport, Ltd., the Registrant, has duly caused this Report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
| Dated:   March 10, 2006 | MARTEN TRANSPORT, LTD. |
|-----------------------------------|------------------------|
|                              |                   |
|                              |                   |
|                              | By                     | /s/ Randolph L. Marten |
|                              |                   | Randolph L. Marten |
|                              |                   | Chairman of the Board, President and Chief |
|                              |                   | Executive Officer |

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this Report has been signed below on March 10,2006, by the following persons on behalf of the Registrant and in thecapacities indicated.

 
| **Signature**           | ** ** | **Title**                                     |
|-------------------------|------------|-----------------------------------------------|
|                    |       |                                          |
| /s/ Randolph L. Marten  |       | Chairman of the Board, President, Chief  |
| Randolph L. Marten      |       | Executive Officer and Director (Principal     |
|                    |       | Executive Officer)                            |
|                    |       |                                          |
| /s/ James J. Hinnendael |       | Chief Financial Officer                       |
| James J. Hinnendael     |       | (Principal Financial and Accounting           |
|                    |       | Officer)                                      |
|                    |       |                                          |
| /s/ Larry B. Hagness    |       | Director                                      |
| Larry B. Hagness        |       |                                          |
|                    |       |                                          |
|                    |       |                                          |
| /s/ Thomas J. Winkel    |       | Director                                      |
| Thomas J. Winkel        |       |                                          |
|                    |       |                                          |
|                    |       |                                          |
| /s/ Jerry M. Bauer      |       | Director                                      |
| Jerry M. Bauer          |       |                                          |
|                    |       |                                          |
|                    |       |                                          |
| /s/ Christine K. Marten |       | Director                                      |
| Christine K. Marten     |       |                                          |

 

48

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**SCHEDULE II**

 

**MARTENTRANSPORT, LTD.**

** **

**Valuationand Qualifying Accounts and Reserves**

**(Inthousands)**

 
| **Description**                    | ** ** | **Balance at  Beginning of  Year** | ** ** | **Charged to  Costs and  Expenses** | ** ** | **Deductions** | ** ** | **Balance at  End of Year** | ** ** |
|------------------------------------|------------|----------------------------------------------|------------|-----------------------------------------------|------------|----------------|------------|--------------------------------------------|------------|
| ** **                         | ** ** | ** **                                   | ** ** | ** **                                    | ** ** | ** **     | ** ** | ** **                                 | ** ** |
| Insurance  and claims accruals:    |       |                                         |       |                                          |       |           |       |                                       |       |
| Year ended December 31,  2005 |       | $                                            | 13,654     |                                          | $          | 23,221         |       | $                                          | (23,749    | )(1) | $ | 13,126 |   |
| Year ended December 31,  2004 |       | 12,052                                       |       | 22,884                                        |       | (21,282        | )(1)       | 13,654                                     |       |
| Year ended December 31,  2003 |       | 12,915                                       |       | 20,111                                        |       | (20,974        | )(1)       | 12,052                                     |       |
|                               |       |                                         |       |                                          |       |           |       |                                       |       |
| Allowance  for doubtful accounts:  |       |                                         |       |                                          |       |           |       |                                       |       |
| Year ended December 31,  2005 |       | 909                                          |       | 90                                            |       | (71            | )(2)       | 928                                        |       |
| Year ended December 31,  2004 |       | 793                                          |       | 120                                           |       | (4             | )(2)       | 909                                        |       |
| Year ended December 31,  2003 |       | 892                                          |       | 120                                           |       | (219           | )(2)       | 793                                        |       |
|                                    |            |                                              |            |                                               |            |                |            |                                            |            |  |  |  |  |

 

----

(1)   Claims payments

(2)   Write-offof bad debts, net of recoveries

 

See report of independent registered public accounting firm.

 

49

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** **

**MARTENTRANSPORT, LTD.**

**EXHIBIT INDEX TO ANNUAL REPORT**

**ON FORM 10-K**

**For theYear Ended December 31, 2005**

 
| **Item No.** |   | **Item**                                                                                                                                                      |   | **Filing Method**                                                                                                                                                                   |
|--------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **   |   | ** **                                                                                                                                                    |   | ** **                                                                                                                                                                          |
| 3.1          |   | Amended and Restated Certificate of  Incorporation effective August 11, 2003                                                                             |   | Incorporated by reference to Exhibit 4.1  of the Company’s Amendment No. 2 to Registration Statement on Form S-2  (File No. 33-107367).                    |
|         |   |                                                                                                                                                          |   |                                                                                                                                                                                |
| 3.2          |   | Amendment to Amended and Restated  Certificate of Incorporation effective May 25, 2005                                                                   |   | Incorporated by reference to Exhibit 3.3  of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,  2005 (File No. 0-15010).          |
|         |   |                                                                                                                                                          |   |                                                                                                                                                                                |
| 3.3          |   | Bylaws of the Company                                                                                                                                         |   | Incorporated by reference to Exhibit 3.2  of the Company’s Current Report on Form 8-K, filed on January 25,  2002 (File No. 0-15010).                      |
|         |   |                                                                                                                                                          |   |                                                                                                                                                                                |
| 4.1          |   | Specimen form of the Company’s  Common Stock Certificate                                                                                       |   | Incorporated by reference to Exhibit 4.1  of the Company’s Registration Statement on Form S-1 (File No. 33-8108).                                               |
|         |   |                                                                                                                                                          |   |                                                                                                                                                                                |
| 4.2          |   | Amended and Restated Certificate of  Incorporation effective August 11, 2003                                                                             |   | See Exhibit 3.1 above.                                                                                                                                                         |
|         |   |                                                                                                                                                          |   |                                                                                                                                                                                |
| 4.3          |   | Amendment to Amended and Restated  Certificate of Incorporation effective May 25, 2005                                                                   |   | See Exhibit 3.2 above.                                                                                                                                                         |
|         |   |                                                                                                                                                          |   |                                                                                                                                                                                |
| 4.4          |   | Bylaws of the Company                                                                                                                                         |   | See Exhibit 3.3 above.                                                                                                                                                         |
|         |   |                                                                                                                                                          |   |                                                                                                                                                                                |
| 10.1         |   | Marten Transport, Ltd. 1995 Stock Incentive  Plan                                                                                                             |   | Incorporated by reference to Exhibit 10.18  of the Company’s Annual Report on Form 10-K for the year ended December 31,  1994 (File No. 0-15010).          |
|         |   |                                                                                                                                                          |   |                                                                                                                                                                                |
| 10.2         |   | Note Purchase and Private Shelf Agreement  dated October 30, 1998, between the Company and The Prudential Insurance  Company of America                  |   | Incorporated by reference to Exhibit 10.12  of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30,  1998 (File No.   0-15010). |
|         |   |                                                                                                                                                          |   |                                                                                                                                                                                |
| 10.3         |   | Credit Agreement dated October 30,  1998, between the Company and U.S. Bank National Association                                                         |   | Incorporated by reference to Exhibit 10.13  of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30,  1998 (File No.   0-15010). |
|         |   |                                                                                                                                                          |   |                                                                                                                                                                                |
| 10.4         |   | Stock Redemption Agreement, dated June 30,  1999, between the Company and Darrell D. Rubel, as Personal Representative of  the Estate of Roger R. Marten |   | Incorporated by reference to Exhibit 10.15  of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,  1999 (File No. 0-15010).        |

 

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| **Item No.** |   | **Item**                                                                                                                                                |   | **Filing Method**                                                                                                                                                                  |
|--------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **   |   | ** **                                                                                                                                              |   | ** **                                                                                                                                                                         |
| 10.5         |   | First Amendment to Credit Agreement, dated January 3,  2000, between the Company, U.S. Bank National Association and The Northern  Trust Company   |   | Incorporated by reference to Exhibit 10.16  of the Company’s Annual Report on Form 10-K for the year ended December 31,  1999 (File No. 0-15010).         |
|         |   |                                                                                                                                                    |   |                                                                                                                                                                               |
| 10.6         |   | Second Amendment to Credit Agreement, dated  January 19, 2000, between the Company, U.S. Bank National Association  and The Northern Trust Company |   | Incorporated by reference to Exhibit 10.17  of the Company’s Annual Report on Form 10-K for the year ended December 31,  1999 (File No. 0-15010).         |
|         |   |                                                                                                                                                    |   |                                                                                                                                                                               |
| 10.7         |   | Third Amendment to Credit Agreement, dated April 5,  2000, between the Company, U.S. Bank National Association and The Northern  Trust Company     |   | Incorporated by reference to Exhibit 10.18  of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,  2000 (File No. 0-15010).      |
|         |   |                                                                                                                                                    |   |                                                                                                                                                                               |
| 10.8         |   | Note Purchase Agreement, dated April 6,  2000, between the Company and The Prudential Insurance Company of America                                 |   | Incorporated by reference to Exhibit 10.19  of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,  2000 (File No. 0-15010).      |
|         |   |                                                                                                                                                    |   |                                                                                                                                                                               |
| 10.9         |   | Fourth Amendment to Credit Agreement, dated  May 31, 2000, between the Company, U.S. Bank National Association and  The Northern Trust Company     |   | Incorporated by reference to Exhibit 10.20  of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,  2000 (File No. 0-15010).       |
|         |   |                                                                                                                                                    |   |                                                                                                                                                                               |
| 10.10        |   | Fifth Amendment to Credit Agreement, dated December 6,  2000, between the Company, U.S. Bank National Association and The Northern  Trust Company  |   | Incorporated by reference to Exhibit 10.20  of the Company’s Annual Report on Form 10-K for the year ended December 31,  2000 (File No. 0-15010).         |
|         |   |                                                                                                                                                    |   |                                                                                                                                                                               |
| 10.11        |   | Sixth Amendment to Credit Agreement, dated January 14,  2002, between the Company, U.S. Bank National Association and The Northern  Trust Company  |   | Incorporated by reference to Exhibit 10.16  of the Company’s Annual Report on Form 10-K for the year ended December 31,  2001 (File No. 0-15010).         |
|         |   |                                                                                                                                                    |   |                                                                                                                                                                               |
| 10.12        |   | Seventh Amendment to Credit Agreement,  dated March 29, 2003, between the Company, U.S. Bank National  Association and The Northern Trust Company  |   | Incorporated by reference to Exhibit 10.17  of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,  2003 (File No. 0-15010).      |
|         |   |                                                                                                                                                    |   |                                                                                                                                                                               |
| 10.13        |   | Eighth Amendment to Credit Agreement, dated  June 27, 2003, between the Company, U.S. Bank National Association and  The Northern Trust Company    |   | Incorporated by reference to Exhibit 10.1  of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30,  2003 (File No.   0-15010). |
|         |   |                                                                                                                                                    |   |                                                                                                                                                                               |
| 10.14        |   | Ninth Amendment to Credit Agreement, dated June 21,  2005, between the Company and U.S. Bank National Association                                  |   | Incorporated by reference to Exhibit 10.19  of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,  2005 (File No. 0-15010).       |

 

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| **Item No.** |   | **Item**                                                                                                                                                                                                                                                    |   | **Filing Method**                                                                                                                                                            |
|--------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **   |   | ** **                                                                                                                                                                                                                                                  |   | ** **                                                                                                                                                                   |
| 10.15        |   | Marten Transport, Ltd. 2005 Stock Incentive  Plan                                                                                                                                                                                                           |   | Incorporated by reference to Exhibit 10.18  of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,  2005 (File No. 0-15010). |
|         |   |                                                                                                                                                                                                                                                        |   |                                                                                                                                                                         |
| 10.16        |   | Form of Non-Statutory Stock Option  Agreement for the 2005 Stock Incentive Plan                                                                                                                                                                        |   | Incorporated by reference to Exhibit 10.1  of the Company’s Current Report on Form 8-K filed January 31, 2006.                                           |
|         |   |                                                                                                                                                                                                                                                        |   |                                                                                                                                                                         |
| 10.17        |   | Summary of Named Executive Officers’  Compensation                                                                                                                                                                                                     |   | Incorporated by reference to Exhibit 10.20  of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,  2005 (File No. 0-15010). |
|         |   |                                                                                                                                                                                                                                                        |   |                                                                                                                                                                         |
| 10.18        |   | 2005 Incentive Compensation Plan Summary                                                                                                                                                                                                                    |   | Incorporated by reference to Exhibit 99.1  of the Company’s Current Report on Form 8-K filed February 1, 2005.                                           |
|         |   |                                                                                                                                                                                                                                                        |   |                                                                                                                                                                         |
| 10.19        |   | 2006 Non-employee Director Compensation  Summary                                                                                                                                                                                                            |   | Filed with this Report.                                                                                                                                                      |
|         |   |                                                                                                                                                                                                                                                        |   |                                                                                                                                                                         |
| 23.1         |   | Consent of KPMG LLP                                                                                                                                                                                                                                         |   | Filed with this Report.                                                                                                                                                      |
|         |   |                                                                                                                                                                                                                                                        |   |                                                                                                                                                                         |
| 31.1         |   | Certification pursuant to  Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002, by Randolph L. Marten, the Registrant’s  President and Chief Executive Officer (Principal Executive Officer) |   | Filed with this Report.                                                                                                                                                      |
|         |   |                                                                                                                                                                                                                                                        |   |                                                                                                                                                                         |
| 31.2         |   | Certification pursuant to  Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002, by James J. Hinnendael, the Registrant’s  Chief Financial Officer (Principal Financial Officer)              |   | Filed with this Report.                                                                                                                                                      |
|         |   |                                                                                                                                                                                                                                                        |   |                                                                                                                                                                         |
| 32.1         |   | Certification pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                          |   | Filed with this Report.                                                                                                                                                      |

 

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