Table ofContents

 

 

 

**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**ANNUALREPORT PURSUANT TO SECTION 13 0R 15(d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended December 31, 2008**

**Commission file number 0-15010**

 

**MARTENTRANSPORT, LTD.**

(Exact name of registrantas specified in its charter)

 

| **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 toSection 12(b) of the Act:**

 

| **Title of each class:**                   | ** ** | **Name of each exchange on which registered:** |
|--------------------------------------------|------------|------------------------------------------------|
| **COMMON STOCK, PAR VALUE $.01 PER SHARE** | ** ** | **THE NASDAQ STOCK MARKET LLC**                |
|                                       | ** ** | **(NASDAQ GLOBAL SELECT MARKET)**              |

 

Securities registeredpursuant to Section 12(g) of the Act: **NONE**

 

Indicate by check mark ifthe Registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.  YES o  NO x

 

Indicate by check mark ifthe Registrant is not required to file reports pursuant to Section 13 or15(d) of the Exchange Act.  YES o  NO x

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  YES x  NO o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act.  Large acceleratedfiler o  Accelerated filer xNon-accelerated filer (do not check if a smaller reporting company) o Smallerreporting company o

 

Indicate by check markwhether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2).  YES o NO  x

 

As of June 30, 2008(the last business day of the Registrant’s most recently completed secondfiscal quarter), the aggregate market value of the Common Stock of theRegistrant (based upon the closing price of the Common Stock at that date asreported by the NASDAQ Global Select Market), excluding outstanding sharesbeneficially owned by directors and executive officers, was $265,403,000.

 

As of February 27,2009, 21,836,571 shares of Common Stock of the Registrant were outstanding.

 

Part III of this AnnualReport on Form 10-K incorporates by reference information (to the extent specificsections are referred to in this Report) from the Registrant’s Proxy Statementfor the annual meeting to be held May 5, 2009, or 2009 Proxy Statement.

 

 

 

----

Table of Contents

 

**TABLEOF CONTENTS**

 
| ** **        | ** ** | ** **                                                                                                            | ** ** | **Page**   |
|-------------------|------------|-----------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **        | ** ** | ** **                                                                                                            | ** ** | ** ** |
| **PART I**   |       |                                                                                                                  |
|              |       | ** **                                                                                                            |       |       |
| ITEM 1.           | * *   | *BUSINESS*                                                                                                            | * *   | 1          |
| ITEM 1A.          | * *   | *RISK FACTORS*                                                                                                        | * *   | 6          |
| ITEM 1B.          | * *   | *UNRESOLVED STAFF  COMMENTS*                                                                                          | * *   | 11         |
| ITEM 2.           | * *   | *PROPERTIES*                                                                                                          | * *   | 11         |
| ITEM 3.           | * *   | *LEGAL PROCEEDINGS*                                                                                                   | * *   | 11         |
| ITEM 4.           | * *   | *SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS*                                                                | * *   | 11         |
| ITEM 4A.          | * *   | *EXECUTIVE  OFFICERS OF THE REGISTRANT*                                                                               | * *   | 11         |
|              | * *   | * *                                                                                                              | * *   |       |
| **PART II**  | * *   |                                                                                                                  |
|              | * *   | * *                                                                                                              | * *   |       |
| ITEM 5.           | * *   | *MARKET FOR  REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES  OF EQUITY SECURITIES* | * *   | 13         |
| ITEM 6.           | * *   | *SELECTED FINANCIAL DATA*                                                                                             | * *   | 15         |
| ITEM 7.           | * *   | *MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS*                         | * *   | 16         |
| ITEM 7A.          | * *   | *QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK*                                                         | * *   | 31         |
| ITEM 8.           | * *   | *FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA*                                                                        | * *   | 32         |
| ITEM 9.           | * *   | *CHANGES IN  AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE*                               | * *   | 54         |
| ITEM 9A.          | * *   | *CONTROLS AND PROCEDURES*                                                                                             | * *   | 54         |
| ITEM 9B.          | * *   | *OTHER INFORMATION*                                                                                                   | * *   | 54         |
|              | * *   | * *                                                                                                              | * *   |       |
| **PART III** | * *   |                                                                                                                  |
|              | * *   | * *                                                                                                              | * *   |       |
| ITEM 10.          | * *   | *DIRECTORS,  EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE*                                                             | * *   | 55         |
| ITEM 11.          | * *   | *EXECUTIVE COMPENSATION*                                                                                              | * *   | 56         |
| ITEM 12.          | * *   | *SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS*                    | * *   | 56         |
| ITEM 13.          | * *   | *CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE*                                          | * *   | 56         |
| ITEM 14.          | * *   | *PRINCIPAL  ACCOUNTANT FEES AND SERVICES*                                                                             | * *   | 56         |
|              | * *   | * *                                                                                                              | * *   |       |
| **PART IV**  | * *   |                                                                                                                  |
|              | * *   | * *                                                                                                              | * *   |       |
| ITEM 15.          | * *   | *EXHIBITS AND  FINANCIAL STATEMENT SCHEDULES*                                                                         | * *   | 57         |
|              | * *   | * *                                                                                                              | * *   |       |
| **OTHER**         |       |                                                                                                                  |
|              |       | Signature  Page                                                                                                       |       | 59         |
|              |       |                                                                                                                  |       |       |
|              |       | Exhibit Index                                                                                                    |       | 61         |

 

i

----

Table of Contents

 

**FORWARD-LOOKING INFORMATION**

** **

*This Annual Report on Form 10-K contains certainforward-looking statements.  Suchstatements are made pursuant to the safe harbor provisions of the PrivateSecurities Litigation Reform Act of 1995. Any statements not of historical fact may be considered forward-lookingstatements.  Written words such as “may,”“expect,” “believe,” “anticipate,” “plan,” “goal,” or “estimate,” or othervariations of these or similar words, identify such statements.  These statements by their nature involvesubstantial risks and uncertainties, and actual results may differ materiallyfrom those expressed in such forward-looking statements.  Important factors known to us that couldcause such material differences are identified in this Annual Report on Form 10-Kunder the heading “Risk Factors” beginning on page 6.  We undertake no obligation to correct orupdate 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.*

 

*References in this Annual Report to “we,” “us,” “our,”or the “Company” or similar terms refer to Marten Transport, Ltd. and itsconsolidated subsidiaries unless the context otherwise requires.*

 

**PART I**

** **

**ITEM1.**                                  *BUSINESS*

** **

**Overview**

** **

We are one of the leading temperature-sensitivetruckload carriers in the United States. We specialize in transporting anddistributing food and other consumer packaged goods that require atemperature-controlled or insulated environment.  In 2008, we generated $607.1 million inoperating revenue, which consists of revenue from both truckload and logisticsoperations. Approximately 85% of our truckload revenue resulted from haulingtemperature-sensitive products and 15% from hauling dry freight.  We operate throughout the United States andin parts of Canada and Mexico, with substantially all of our revenue generatedfrom within the United States. Our primary long-haul traffic lanes are betweenthe Midwest and the West Coast, Southwest, Southeast, and the East Coast, aswell as from California to the Pacific Northwest.  We provide regional truckload carrierservices in the Southeast, West Coast, Midwest and South Central regions.  In 2008, our average length of haul was 853miles.

 

Our growth strategy is to expand our businessinternally by offering shippers a high level of service and significant freightcapacity.  We market primarily to largeshippers that offer consistent volumes of freight in the lanes we prefer andare willing to compensate us for a high level of service.  With our fleet of 2,376 company andindependent contractor tractors, we are able to offer service levels thatinclude up to 99% on-time performance and delivery within the narrow timewindows often required when shipping perishable commodities.

 

We have two reportable segments — Truckload andLogistics.  Financial informationregarding these segments can be found in the Notes to Consolidated FinancialStatements under Item 8 of this Form 10-K. The primary source of our operating revenue is truckload revenue, whichwe generate by transporting long-haul and regional freight for our customersand report within our Truckload segment. Generally, we are paid by the mile for our services.  We also derive truckload revenue from fuelsurcharges, loading and unloading activities, equipment detention and otherancillary services.  Our operatingrevenue also includes revenue reported within our Logistics segment, whichconsists of revenue from our internal brokerage and intermodal operations, bothlaunched in 2005, and through our 45% interest in MW Logistics, LLC, or MWL, athird-party provider of logistics services to the transportation industry.  Brokerage services involve arranging for anothercompany to transport freight for our customers while we retain the billing,collection and customer management responsibilities.  Intermodal services involve the transport ofour trailers on railroad flatcars for a portion of a trip, with the balance ofthe trip using our tractors or, to a lesser extent, contracted carriers.

 

1

----

Table of Contents

 

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

 

We maintain a website at *www.marten.com*.  We are not including the informationcontained 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 onour website to Forms 3, 4 and 5 that our officers, directors and 10%stockholders file with the Securities and Exchange Commission pursuant to Section 16(a) ofthe Securities Exchange Act of 1934.

 

**Marketing and Operations**

** **

We approach our business as an integrated effort ofmarketing and operations. Our emphasis in marketing is directed to thetemperature-sensitive truckload market, which is generally service-sensitive,as opposed to being solely price competitive. We target large food and consumerpackaged goods companies whose products require temperature-sensitive servicesand who ship multiple truckloads per week. By emphasizing high-quality service,we seek to become a core carrier for our customers. In 2008, our two largestcustomers were General Mills and Kraft.

 

Our marketing efforts are conducted by a staff ofapproximately 125 sales, customer service and support personnel under thesupervision of our senior management team. Marketing personnel travel withintheir regions to solicit new truckload and logistics customers and maintaincontact with existing customers. Customer service managers regularly contactcustomers to solicit additional business on a load-by-load basis.

 

Our operations and sales personnel strive to improveour asset productivity by seeking freight that allows for rapid turnaroundtimes, minimizes non-revenue miles between loads, and carries a favorable ratestructure. Once we have established a customer relationship, customer servicemanagers work closely with our fleet managers to match customer needs with ourcapacity and the location of revenue equipment. Fleet managers use ouroptimization system to assign loads to satisfy customer and operationalrequirements, as well as to meet the routing needs of our drivers. We attemptto route most of our trucks over selected operating lanes, which we believeassists us in meeting customer requirements, balancing traffic, reducingnon-revenue miles, and improving the reliability of delivery schedules.

 

We employ technology in our operations when we believethat it will allow us to operate more efficiently and the investment iscost-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 totake advantage of volume discounts available in our fuel network.

 

2

----

Table of Contents

 

·                  Auxiliary power units installed on approximately 96% of ourcompany-owned tractors as of December 31, 2008 that allow us to decreasefuel costs associated with idling our tractors.

 

We believe this integrated approach to our marketingand operations, coupled with our use of technology, has allowed us to provideour customers with a high level of service and support our revenue growth in anefficient manner. For example, we had a non-revenue mile percentage of 8.1%during 2008, and a tractor to non-driver employee ratio of 4.5-to-1 as of December 31,2008.  Both of these statistics point tothe efficiency of our operations and we believe compare favorably to othertemperature-sensitive and dry van trucking companies.

 

**Major Customers**

** **

An important part of our growth strategy is toincrease our business with large customers. Accordingly, a significant amountof our business is concentrated with a relatively small number of customers. In2008, our top 30 customers accounted for approximately 77% of our revenue, andour top ten customers accounted for 55% of our revenue.  Nine of our top ten customers have been significantcustomers of ours for over ten years. We believe we are the largest or secondlargest temperature-sensitive carrier for eight of our top ten customers.  General Mills accounted for 19% and Kraftaccounted for 10% of our revenue in 2008. We believe our relationships with these key customers are sound, but weare dependent upon them and the loss of some or all of their business couldhave a materially adverse effect on our results.

 

**Drivers and Other Personnel**

** **

We believe that maintaining a safe and productiveprofessional driver group is essential to providing excellent customer serviceand achieving profitability. Approximately 256 of our drivers as of December 31,2008 have driven more than one million miles for us without a preventableaccident, while approximately 90 of our drivers have driven more than twomillion miles and three have driven more than three million miles for uswithout a preventable accident.

 

We select drivers, including independent contractors,using our specific guidelines for safety records, driving experience, andpersonal evaluations. We maintain stringent screening, training, and testingprocedures for our drivers to reduce the potential for accidents and thecorresponding costs of insurance and claims. We train new drivers at ourWisconsin, California, Georgia, Oregon, Indiana and Texas terminals in allphases of 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 a fixed rateper mile. The rate increases based on length of service. Drivers also areeligible for bonuses based upon safe, efficient driving. We pay independentcontractors on a fixed rate per mile. Independent contractors pay for their ownfuel, insurance, maintenance, and repairs.

 

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

 

As of December 31, 2008, we had approximately2,775 employees. This total consists of approximately 2,248 drivers, 171mechanics and maintenance personnel, and 356 support personnel, which includesmanagement and administration. As of that date, we also contracted with 188independent contractors. None of our employees are represented by a collectivebargaining unit. We consider relations with our employees to be good.

 

3

----

Table of Contents

 

**Revenue Equipment**

** **

Our revenue equipment programs are an important partof our overall goal of profitable growth. We evaluate our equipment decisionsbased on factors such as initial cost, useful life, warranty terms, expectedmaintenance costs, fuel economy, driver comfort, customer needs, manufacturersupport, and resale value. We generally operate newer, well-maintainedequipment with uniform specifications to minimize our spare parts inventory,streamline our maintenance program, and simplify driver training.

 

As of December 31, 2008, we operated a fleet of2,376 tractors, including 2,188 company-owned tractors and 188 tractorssupplied by independent contractors.  Theaverage age of our company-owned tractor fleet at December 31, 2008 wasapproximately 2.2 years.  In 2008, wereplaced most of our company-owned tractors within approximately 3.5 yearsafter purchase.

 

Freightliner and Peterbilt manufacture most of ourcompany-owned tractors. Maintaining a relatively new and standardized fleetallows 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 most routineservicing and repairs at our terminal facilities to reduce costly on-roadrepairs and out-of-route trips. We do not have any agreements with tractormanufacturers pursuant to which they agree to repurchase the tractors orguarantee a residual value, and we therefore could incur losses upondisposition if resale values of used tractors decline.

 

We historically have contracted with independent contractorsto provide and operate a portion of our tractor fleet. Independent contractorsown their own tractors and are responsible for all associated expenses,including financing costs, fuel, maintenance, insurance, and taxes. We believethat a combined fleet complements our recruiting efforts.  The percentage of our fleet provided byindependent contractors was 8% as of December 31, 2008.

 

As of December 31, 2008, we operated a fleet of4,218 trailers. Most of our trailers are equipped with Thermo-King refrigerationunits, air ride suspensions, and anti-lock brakes. Most of our single vantrailers are refrigerated, 53 feet long, and 102 inches wide. The average ageof our trailer fleet at December 31, 2008 was approximately 3.1 years. In2008, we replaced most of our company-owned trailers within approximately 5.5years after purchase.

 

**Insurance and Claims**

** **

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 areresponsible for our proportionate share of the legal expenses relating to suchclaims as well. We reserve currently for anticipated losses and expenses. Weperiodically evaluate and adjust our insurance and claims reserves to reflectour experience.  We are responsible forthe first $1.0 million on each auto liability claim and also responsible for upto $1.0 million in the aggregate for 33% of all auto liability claim amounts inexcess of $1.0 million.  We are alsoresponsible for the first $750,000 on each workers’ compensation claim.  We have $6.8 million in standby letters ofcredit to guarantee settlement of claims under agreements with our insurancecarriers and regulatory authorities.  Wemaintain insurance coverage for per-incident and total losses in excess of theamounts for which we self-insure up to specified policy limits with licensedinsurance 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.

 

4

----

Table of Contents

 

**Fuel**

** **

Our operations are heavily dependent upon the use ofdiesel fuel. The price and availability of diesel fuel can vary and are subjectto political, economic, and market factors that are beyond our control.  Fuel prices fluctuated dramatically andquickly at various times during the last three years and they remain high basedon historical standards.  We activelymanage our 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.  During2008, over 99% of our fuel purchases were made at these designatedlocations.  To help further reduce fuelconsumption, we began installing auxiliary power units in our tractors during2007.  These units reduce fuelconsumption by providing quiet climate control and electrical power for ourdrivers without idling the tractor engine. These units were installed in approximately 96% of our company-ownedfleet as of December 31, 2008.

 

We further manage our exposure to changes in fuelprices through fuel surcharge programs with our customers and other measuresthat we have implemented.  We havehistorically been able to pass through most long-term increases in fuel pricesand related taxes to customers in the form of fuel surcharges.  These fuel surcharges, which adjust with thecost of fuel, enable us to recover a substantial portion of the higher cost offuel as prices increase, except for non-revenue miles, out-of-route miles orfuel used while the tractor is idling. As of December 31, 2008, we had noderivative financial instruments to reduce our exposure to fuel pricefluctuations.

 

**Competition**

** **

We operate primarily in the temperature-sensitivesegment of the truckload market.  Thismarket is highly competitive and fragmented. We compete with many othertruckload carriers that provide temperature-sensitive service of varying sizesand, to a lesser extent, with less-than-truckload carriers, railroads, andother transportation companies, many of which have more equipment, a widerrange of services, and greater capital resources than we do or have othercompetitive advantages. In particular, several of the largest truckloadcarriers that offer primarily dry-van service also offer temperature-sensitiveservice, and these carriers could attempt to increase their business in thetemperature-sensitive market.  We alsocompete with other motor carriers for the services of drivers, independentcontractors, and management employees. We believe that the principal competitive factors in our business areservice, freight rates, capacity, and financial stability.  As one of the largest and best-capitalizedcarriers focused on the temperature-sensitive segment, we believe we are wellpositioned to compete in that segment.

 

**Regulation**

** **

The United States Department of Transportation, orDOT, and various state and local agencies exercise broad powers over ourbusiness, generally governing such activities as authorization to engage inmotor carrier operations, safety and insurance requirements.  Our company drivers and independentcontractors also must comply with the safety and fitness regulationspromulgated by the DOT, including those relating to drug and alcohol testing andhours-of-service.  Revised rules thatlimit driver hours-of-service were adopted effective January 4, 2004, andthen modified effective October 1, 2005. On July 24, 2007, a federal appeals court vacated portions of the October 2005Rules; however, interim rules issued in December 2007 retained thevacated portions in effect.  On November 19,2008, final rules effective January 19, 2009 were issued which leftthe interim rules unchanged.

 

We believe that we are well equipped to minimize theeconomic impact of the current hours-of-service rules on ourbusiness.  We have negotiated delay timecharges with the majority of our customers. Prior to the effectiveness of the current rules, we also initiateddiscussions with many of our customers regarding steps that they can take toassist us in managing our drivers’ non-driving activities, such as loading,unloading, or waiting, and we plan to continue to actively communicate with ourcustomers regarding these matters in the future.  In situations where shippers are unable or unwillingto take these steps, we assess detention and other 

 

5

----

Table of Contents

 

charges to offset losses in productivity resultingfrom the current hours-of-service regulations. The regulations did not have a significant impact on our operations orfinancial results in 2006 through 2008.

 

We are also subject to various environmental laws andregulations dealing with the handling of hazardous materials, fuel storagetanks, air emissions from our vehicles and facilities, engine idling, anddischarge and retention of storm water. These regulations did not have a significant impact on our operations orfinancial results in 2006 through 2008.

 

**ITEM 1A.**                         *RISK FACTORS*

** **

The following factors are important and should beconsidered carefully in connection with any evaluation of our business,financial condition, results of operations, prospects, or an investment in ourcommon stock.  The risks anduncertainties described below are those that we currently believe maymaterially affect our company or our financial results.  Additional risks and uncertainties notpresently known to us or that we currently deem immaterial may also impair ourbusiness operations or affect our financial results.

 

*Our business is subject to general economic andbusiness factors that are largely out of our control, any of which could have amaterially adverse effect on our operating results*. Our business is dependent on a number of general economic and businessfactors that may have a materially adverse effect on our results of operations,many of which are beyond our control. These factors include excess capacity in the trucking industry, strikesor other work stoppages, and significant increases or fluctuations in interestrates, fuel taxes, and license and registration fees.  We are affected by recessionary economiccycles and downturns in customers’ business cycles, particularly in marketsegments and industries where we have a significant concentration of customers.Economic conditions may adversely affect our customers and their ability to payfor our services.

 

It is not possible to predict the effects of actual orthreatened armed conflicts or terrorist attacks, efforts to combat terrorism,military action against any foreign state, heightened security requirements, orother related events and the subsequent effects on the economy or on consumerconfidence in the United States, or the impact, if any, on our future resultsof operations.

 

*The recent instability of the credit markets andthe resulting effects on the economy could have a material adverse effect onour operating results. *Recently, there has been widespreadconcern over the instability of the credit markets and the current creditmarket effects on the economy. If the economy and credit markets continue toweaken, our business, financial results, and results of operations could bematerially and adversely affected, especially if consumer confidence declinesand domestic spending decreases. Although we think it is unlikely given our current cash position, we mayneed to incur indebtedness, which may include drawing on our Credit Facility,or issue debt securities in the future to fund working capital requirements,make investments, or for general corporate purposes.  Additionally, the stresses in the creditmarket have caused uncertainty in the equity markets, which may result involatility of the market price for our securities.

 

*We operate in a highly competitive and fragmented industry,and numerous competitive factors could impair our ability to maintain ourcurrent profitability*.  We compete with many othertruckload carriers that provide temperature-sensitive service of varying sizesand, to a lesser extent, with less-than-truckload carriers, railroads and othertransportation companies, many of which have more equipment, a wider range ofservices and greater capital resources than we do or have other competitiveadvantages. In particular, several of the largest truckload carriers that offerprimarily dry-van service also offer temperature-sensitive service, and thesecarriers could attempt to increase their business in the temperature-sensitivemarket. 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 

 

6

----

Table of Contents

 

carriers” as approved service providers, or conductbids from multiple carriers for their shipping needs, and in some instances wemay not be selected as a core carrier or to provide service under such bids.

 

In addition, the trend toward consolidation in thetrucking industry may create other large carriers with greater financialresources and other competitive advantages relating to their size.  Competition from freight logistics andbrokerage companies may negatively impact our customer relationships andfreight rates.  Furthermore, economies ofscale that may be passed on to smaller carriers by procurement aggregationproviders may improve such carriers’ ability to compete with us.

 

*We derive a significant portion of our revenue fromour major customers, the loss of one or more of which could have a materiallyadverse effect on our business*.  A significantportion of our revenue is generated from our major customers.  For 2008, our top 30 customers, based onrevenue, accounted for approximately 77% of our revenue; our top ten customersaccounted for approximately 55% of our revenue; our top five customersaccounted for approximately 41% of our revenue; and our top two customersaccounted for approximately 30% of our revenue. Generally, we enter into one-year contracts with our major customers,the majority of which do not contain any firm obligations 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 customers periodically solicitbids from multiple carriers for their shipping needs, and this process maydepress freight rates or result in loss of business to our competitors.  Some of our customers also operate their ownprivate trucking fleets, and they may decide to transport more of their ownfreight.  A reduction in or terminationof our services by one or more of our major customers could have a materiallyadverse effect on our business and operating results.

 

*Increased prices, reduced productivity, andrestricted availability of new revenue equipment could cause our financialcondition, results of operations and cash flows 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 pay increased prices for revenue equipment andincur additional expenses and related financing costs for the foreseeablefuture.  Our business could be harmed ifwe are unable to continue to obtain an adequate supply of new tractors andtrailers or if we have to pay increased prices for new revenue equipment.

 

The EPA adopted revised emissions control regulations,which require progressive reductions in exhaust emissions from diesel enginesthrough 2010, for engines manufactured in October 2002, and thereafter.The revised regulations decrease the amount of emissions that can be releasedby tractor engines and affect tractors produced after the effective date of theregulations. Compliance with these regulations has increased the cost of ournew tractors, lowered fuel mileage and increased our operating expenses. Somemanufacturers have significantly increased new equipment prices, in part tomeet new engine design requirements imposed by the EPA. These adverse effectscombined with the uncertainty as to the reliability of the vehicles equippedwith the newly designed diesel engines and the residual values that will be realizedfrom the disposition of these vehicles could increase our costs or otherwiseadversely affect our business or operations.

 

*We have significant ongoing capital requirementsthat could harm our financial condition, results of operations and cash flows ifwe are unable to generate sufficient 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 future periods,our capital needs would increase. We expect to pay for projected capitalexpenditures with cash flows from operations and borrowings under our revolvingcredit facility. If we are unable to generate sufficient cash from operationsand obtain financing on favorable terms in the future, we may have to limit ourgrowth, enter into less favorable financing arrangements, or operate ourrevenue equipment for longer periods, any of which could have a materiallyadverse effect on our profitability.

 

7

----

Table of Contents

 

*Ongoing insurance and claims expenses couldsignificantly affect our earnings*.  Our futureinsurance and claims expense might exceed historical levels, which could reduceour earnings. We self-insure for a portion of our claims exposure resultingfrom workers’ compensation, auto liability, general liability, cargo andproperty 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 our reservedamounts.

 

We maintain insurance above the amounts for which weself-insure with licensed insurance carriers. Although we believe the aggregateinsurance limits should be sufficient to cover reasonably expected claims, itis possible that one or more claims could exceed our aggregate coverage limits.Insurance carriers have raised premiums for many businesses, including truckingcompanies. As a result, our insurance and claims expense could increase, or wecould raise our self-insured retention when our policies are renewed. If theseexpenses increase, or if we experience a claim in excess of our coveragelimits, or we experience a claim for which coverage is not provided, results ofour operations and financial condition could be materially and adverselyaffected.

 

*Increases in compensation or difficulty inattracting drivers could affect our profitability and ability to grow*. In recent years the transportation industry has experienced substantialdifficulty in attracting and retaining qualified drivers, including independentcontractors.  With increased competitionfor drivers, we could experience greater difficulty in attracting sufficientnumbers of qualified drivers.  Inaddition, due in part to current economic conditions, including the cost offuel and insurance, the available pool of independent contractor drivers issmaller than it has been historically. Accordingly, we may face difficulty inattracting and retaining drivers for all of our current tractors and for thosewe may add.  Additionally, we may facedifficulty in increasing the number of our independent contractor drivers. Inaddition, our industry suffers from high turnover rates of drivers. Ourturnover rate requires us to recruit a substantial number of drivers. Moreover,our turnover rate could increase. If we are unable to continue to attractdrivers and contract with independent contractors, we could be required tocontinue adjusting our driver compensation package beyond the norm or lettrucks sit idle.  An increase in ourexpenses or in the number of tractors without drivers could materially andadversely affect our growth and profitability.

 

*Fluctuations in the price or availability of fuelmay increase our cost of operation, which could materially and adversely affectour profitability*.  We require large amounts of diesel fuel tooperate our tractors and to power the temperature-control units on ourtrailers. Fuel is one of our largest operating expenses. Fuel prices tend tofluctuate, and prices and availability of all petroleum products are subject topolitical, economic and market factors that are beyond our control. We dependprimarily on fuel surcharges, auxiliary power units for our tractors, volumepurchasing arrangements with truck stop chains and bulk purchases of fuel atour terminals to control and recover our fuel expenses. There can be noassurance that we will be able to collect fuel surcharges, enter into volumepurchase agreements, or execute successful hedges in the future. Additionally,we may encounter decreases in productivity that may offset or eliminate savingsfrom auxiliary power units, or may incur unexpected maintenance or other costsassociated with such units. The absence of meaningful fuel price protectionthrough these measures, fluctuations in fuel prices, or a shortage of dieselfuel, could materially and adversely affect our results of operations.

 

*Seasonality and the impact of weather can affectour profitability*.  Our tractor productivity generally decreasesduring the winter season because inclement weather impedes operations and someshippers reduce their shipments. At the same time, operating expenses generallyincrease, with harsh weather creating higher accident frequency, increasedclaims and more equipment repairs. We can also suffer short-term impacts fromweather-related events such as hurricanes, blizzards, ice-storms, and floodsthat could harm our results or make our results more volatile.

 

8

----

Table of Contents

 

*We operate in a highly regulated industry andincreased costs of compliance with, or liability for violation of, existing orfuture regulations could have a materially adverse effect on our business*. The DOT and various state and local agencies exercise broad powers overour business, generally governing such activities as authorization to engage inmotor carrier operations, safety and insurance requirements. Our companydrivers and independent contractors also must comply with the safety andfitness regulations promulgated by the DOT, including those relating to drugand alcohol testing and hours-of-service. We also may become subject to new or more restrictive regulationsrelating to fuel emissions, drivers’ hours-of-service, ergonomics, or othermatters affecting safety or operating methods. Other agencies, such as the EPAand the Department of Homeland Security, or DHS, also regulate our equipment,operations, and drivers.  Future laws andregulations may be more stringent and require changes in our operatingpractices, influence the demand for transportation services, or require us toincur significant additional costs. Higher costs incurred by us or by oursuppliers who pass the costs onto us through higher prices could adverselyaffect our results of operations.

 

The DOT, through the Federal Motor Carrier SafetyAdministration, or FMCSA, imposes safety and fitness regulations on us and ourdrivers.  Revised rules that limitdriver hours-of-service were adopted effective January 4, 2004, and thenmodified effective October 1, 2005. On July 24, 2007, a federal appeals court vacated portions of theserules.  Two of the key portions that werevacated include the expansion of the driving day from 10 hours to 11 hours, andthe “34-hour restart,” which allows drivers to reset their maximum allowablehours in a week.  The court indicatedthat, in addition to other reasons, it vacated these two portions of the rules becauseFMCSA failed to provide adequate data supporting its decision to increase thedriving day and provide for the 34-hour restart.  Following a request by FMCSA for a 12-monthextension of the vacated rules, the court, in an order filed on September 28,2007, granted a 90-day stay of the mandate and directed that issuance of itsruling be withheld until December 27, 2007, to allow FMCSA time to prepareits response.  On December 17, 2007,FMCSA submitted interim final rules, which became effective December 27,2007.  The interim rules retainedthe 11 hour driving day and the 34-hour restart, but provided greaterstatistical support and analysis regarding the increased driving time and the34-hour restart.  The FMCSA publishedfinal rules effective January 19, 2009 on November 19, 2008which left the interim rules unchanged. As advocacy groups may continue to challenge the final rules, a court’sdecision to strike down the final rules could have varying effects, asreducing driving time to 10 hours daily may reduce productivity in somelanes.  A court’s decision to strike downthe final rules could decrease productivity and cause some loss ofefficiency, as drivers and shippers may need to be retrained, computerprogramming may require modifications, additional drivers may need to beemployed or engaged, additional equipment may need to be acquired, and someshipping lanes may need to be reconfigured. We are also unable to predict the effect of any new rules thatmight be proposed, but any such proposed rules could increase costs in ourindustry or decrease productivity.

 

In the aftermath of the September 11, 2001terrorist attacks, federal, state, and municipal authorities have implementedand continue to implement various security measures, including checkpoints andtravel restrictions on large trucks. As a result, it is possible we may fail tomeet the needs of our customers or may incur increased expenses to do so. Thesesecurity measures could negatively impact our operating results.

 

Some states and municipalities have begun to restrictthe locations and amount of time where diesel-powered tractors, such as ours,may idle, in order to reduce exhaust emissions. The State of California has recently enacted legislation which requirestractors weighing more than 10,000 pounds to use alternative sources, such asauxiliary power units, when powering their cabs at idle for more than fiveminutes.  The State of California hasalso enacted legislation requiring compliance with exhaust emissions standardsfor refrigeration units on trailers. Compliance is being phased in by the state, beginning with 2001 andearlier models.  Given our investment inauxiliary power units for our tractors and the average age of our trailerfleet, we do not expect these regulations will have a significant impact on ouroperations or financial results.

 

From time to time, various federal, state, or localtaxes are increased, including taxes on fuels. We cannot predict whether, or in what form, any such increase applicableto us will be enacted, but such an increase could aversely affect ourprofitability.

 

9

----

Table of Contents

 

*Service instability in the railroad industry couldincrease 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 dependenceon railroads will increase if we continue to expand our intermodal services. Inmost markets, rail service is limited to a few railroads or even a singlerailroad. Any reduction in service by the railroads with which we have, or inthe future may have, relationships is likely to increase the cost of therail-based services we provide and reduce the reliability, timeliness, andoverall attractiveness of our rail-based services. Furthermore, railroads arerelatively free to adjust shipping rates up or down as market conditionspermit. Price increases could result in higher costs to our customers andreduce or eliminate our ability to offer intermodal services. In addition, wecannot assure you that we will be able to negotiate additional contracts withrailroads to expand our capacity, add additional routes, or obtain multipleproviders, which could limit our ability to provide this service.

 

*Our operations are subject to various environmentallaws and regulations, the violation of which could result in substantial finesor penalties*.  We are subject to various environmental lawsand regulations dealing with the handling of hazardous materials, fuel storagetanks, air emissions from our vehicles and facilities, engine idling, anddischarge and retention of storm water. We operate in industrial areas, wheretruck 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 and criminalliability, any of which could have a materially adverse effect on our businessand operating results.

 

*Our management information systems may proveinadequate*.  We depend upon our management informationsystems for many aspects of our business. Some of our key software has been developed internally by ourprogrammers or by adapting purchased software to our needs and this softwaremay not be easily modified or integrated with other software and systems.  Our business will be materially and adverselyaffected if our management information systems are disrupted or if we areunable to improve, upgrade, integrate or expand our systems as we continue toexecute our growth strategy, including our logistics services.

 

10

----

Table of Contents

 

**ITEM 1B.**                         *UNRESOLVED STAFF COMMENTS*

** **

None.

 

**ITEM 2.**                                  *PROPERTIES*

** **

Our executive offices and principal terminal arelocated 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. We added an additional facility in 2007 in Mondovi, Wisconsin whichconsists of 15,000 square feet of equipment repair and maintenance spacelocated on approximately 11 acres.  Weoperate facilities in or near the following cities at which we perform thefollowing designated operating activities:

 
| **Company Locations** | ** ** | **Owned or  Leased** | ** ** | **Fueling and  Maintenance** | ** ** | **Driver  Recruitment** | ** ** | **Driver  Training** | ** ** | **Dispatch** | ** ** | **Sales** | ** ** |
|----------------------------|------------|---------------------------|------------|-----------------------------------|------------|-------------------------|------------|----------------------|------------|--------------|------------|-----------|------------|
| Mondovi, Wisconsin         |       | Owned                     |       | X                                 |       | X                       |       | X                    |       | X            |       | X         |       |
| Ontario, California        |       | Owned                     |       | X                                 |       |                    |       | X                    |       |         |       |      |       |
| Atlanta, Georgia           |       | Owned                     |       | X                                 |       |                    |       | X                    |       | X            |       |      |       |
| Portland, Oregon           |       | Owned                     |       | X                                 |       |                    |       | X                    |       | X            |       |      |       |
| Indianapolis, Indiana      |       | Owned                     |       | X                                 |       | X                       |       | X                    |       | X            |       |      |       |
| Irving, Texas              |       | Leased                    |       | X                                 |       |                    |       | X                    |       | X            |       |      |       |
| Richmond, Virginia         |       | Leased                    |       |                              |       |                    |       |                 |       | X            |       |      |       |
| Laredo, Texas              |       | Leased                    |       |                              |       |                    |       |                 |       | X            |       |      |       |

 

**ITEM 3.**                                  *LEGAL PROCEEDINGS*

** **

We are involved in litigation incidental to ouroperations. These lawsuits primarily involve claims for workers’ compensation,personal injury, or property damage incurred in the transportation of freight.

 

**ITEM 4.**                                  *SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS*

** **

No matters were submitted to a vote of securityholders during the fourth quarter of the year ended December 31, 2008.

 

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

** **

Our executive officers, with their ages and theoffices held as of February 27, 2009, are as follows:

 
| **Name**            | ** ** | **Age** | ** ** | **Position**                                                 | ** ** |
|---------------------|------------|---------|------------|--------------------------------------------------------------|------------|
| Randolph L. Marten  |       | 56      |       | Chairman of the Board,  Chief Executive Officer and Director |       |
|                |       |    |       |                                                         |       |
| Timothy M. Kohl     |       | 61      |       | President                                                    |       |
|                |       |    |       |                                                         |       |
| Robert G. Smith     |       | 65      |       | Chief Operating Officer                                      |       |
|                |       |    |       |                                                         |       |
| Timothy P. Nash     |       | 57      |       | Executive Vice  President of Sales and Marketing             |       |
|                |       |    |       |                                                         |       |
| James J. Hinnendael |       | 45      |       | Chief Financial Officer                                      |       |
|                |       |    |       |                                                         |       |
| John H. Turner      |       | 47      |       | Vice President of Sales                                      |       |

 

11

----

Table of Contents

 

**Randolph L. Marten** has been a full-time employee of ourssince 1974.  Mr. Marten has been aDirector since October 1980, our Chairman of the Board since August 1993and our Chief Executive Officer since January 2005.  Mr. Marten also served as our Presidentfrom June 1986 until June 2008, our Chief Operating Officer from June 1986until August 1998 and as a Vice President from October 1980 to June 1986.

 

**Timothy M. Kohl** has been our President since June 2008.  Mr. Kohl joined the company in November 2007,and has over 20 years’ experience in the transportation services industry.  Mr. Kohl served as Knight TransportationInc.’s President from 2004 to 2007 and as its Secretary from 2000 to 2007.  Mr. Kohl served as a director on Knight’sBoard of Directors from 2001 to 2006, and he served as its Chief FinancialOfficer from 2000 to 2004.  Mr. Kohlalso served as Knight’s Vice President of Human Resources from 1996 through1999.  From 1999 through 2000, Mr. Kohlserved as Vice President of Knight’s southeast region.  Prior to his employment with Knight, Mr. Kohlwas employed by Burlington Motor Carriers as Vice President of HumanResources.  Prior to his employment withBurlington Motor Carriers, Mr. Kohl served as Vice President of HumanResources for J.B. Hunt.

 

**Robert G. Smith** has been our Chief Operating Officersince August 1998.  Mr. Smithalso served as our Vice President of Operations from June 1993 until May 1999and as our Director of Operations from September 1989 to June 1993.  Mr. Smith served as director ofoperations for Transport Corporation of America, an irregular-route truckloadcarrier, from 1985 to 1989.

 

**Timothy P. Nash** has been our Executive Vice President ofSales and Marketing since November 2000. Mr. Nash also served as our Vice President of Sales from November 1990to November 2000 and as a Regional Sales Manager from July 1987 to November 1990.  Mr. Nash served as a regional salesmanager for Overland Express, Inc., a long-haul  truckload carrier, from1986 to 1987.

 

**James J. Hinnendael** has been our Chief Financial Officersince January 2006 and served as our Controller from January 1992 to December 2005.  Mr. Hinnendael served in variousprofessional capacities with Ernst & Young LLP, a public accountingfirm, from 1987 to 1991.  Mr. Hinnendaelis a certified public accountant.

 

**John H. Turner** has been our Vice President of Salessince January 2007 and an executive officer since August 2007.  He also served as our Vice President of Salesfrom October 2000 to February 2005, and as an executive officer from January 2002to February 2005.  Mr. Turneralso served as our Director of Sales from July 1999 to October 2000and in various professional capacities in our sales and marketing area from August 1991to July 1999 and as our Operations Manager-West from October 1990 to August 1991.  Previously, Mr. Turner served as a vicepresident for Naterra Land, Inc., a recreational land developer, from 2005to 2006 and as the western fleet general manager and area sales manager forMunson Transportation, Inc., a long-haul truckload carrier, from 1986 to1990.

 

12

----

Table of Contents

 

**PART II**

** **

**ITEM5.**           *MARKET FOR REGISTRANT’S COMMON EQUITY, RELATEDSTOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES*

** **

Our common stock is listed on the NASDAQ Global SelectMarket under the symbol “MRTN.”  Thetable below shows the range of high and low bid prices for the quartersindicated on the NASDAQ Global Select Market. Such quotations reflect inter-dealer prices, without retail markups,markdowns or commissions and, therefore, may not necessarily represent actualtransactions.

 
| ** **                            | ** ** | **Common Stock Price** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|
| ** **                            | ** ** | **High**                         | ** ** | **Low** | ** ** |
| **Year ended December 31, 2008** | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Fourth Quarter                        | ** ** | **$**                            | **20.61**  | ** ** | **$** | **14.98** | ** ** |
| Third Quarter                         | ** ** | **22.59**                        | ** ** | **15.00** | ** ** |
| Second Quarter                        | ** ** | **18.32**                        | ** ** | **15.00** | ** ** |
| First Quarter                         | ** ** | **17.85**                        | ** ** | **11.50** | ** ** |
| ** **                            | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Year ended December 31, 2007** | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Fourth Quarter                        |       | $                                | 16.60      |   | $ | 10.60 |   |
| Third Quarter                         |       | 18.46                            |       | 13.54 |   |
| Second Quarter                        |       | 19.80                            |       | 15.70 |   |
| First Quarter                         |       | 19.28                            |       | 14.30 |   |

 

The prices do not include adjustments for retailmark-ups, mark-downs or commissions.  On February 27,2009, we had 233 record stockholders, and approximately 1,528 beneficialstockholders of our common stock.

 

We have not paid a cash dividend on our common stocksince we became publicly traded in September 1986.  Our ability to pay cash dividends iscurrently limited by restrictions contained in our revolving creditfacility.  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 will depend on our financialcondition, results of operations, capital commitments, restrictions underthen-existing agreements, and other factors our Board of Directors deemsrelevant.

 

On December 4, 2007, our Board of Directorsapproved and we announced a share repurchase program to repurchase up to onemillion shares of our common stock either through purchases on the open marketor through private transactions and in accordance with Rule 10b-18 of theExchange Act.  The timing and extent towhich we will repurchase shares depends on market conditions and othercorporate considerations.  The repurchaseprogram does not have an expiration date.

 

In the first quarter of 2008 we repurchased andretired 67,500 shares of our common stock for $810,000.  We made no purchases in 2007 or in theremainder of 2008.

 

13

----

Table of Contents

 

**Comparative Stock Performance**

** **

The graph below compares the cumulative totalstockholder return on our common stock with the NASDAQ Market index and the SICcode 4213 (trucking, except local) line-of-business index for the last fiveyears.  Morningstar, Inc. preparedthe line-of-business index.  The graphassumes $100 is invested in our common stock, the NASDAQ Stock Market index andthe line-of-business index on January 1, 2004, with reinvestment ofdividends.  The comparisons in the graphbelow are based on historical data and are not intended to forecast thepossible future performance of our common stock.  The information in the graph below shall bedeemed “furnished” and not “filed” for purposes of Section 18 of theExchange Act or otherwise subject to the liabilities of that section.

 

COMPARISON OF 5-YEARCUMULATIVE TOTAL RETURN

AMONG MARTEN TRANSPORT,LTD.,

NASDAQ MARKET INDEX ANDSIC CODE INDEX

 

 

ASSUMES $100 INVESTED ONJAN. 1, 2004

ASSUMES DIVIDENDREINVESTED

FISCAL YEAR ENDINGDEC. 31, 2008

 

14

----

Table of Contents

 

**ITEM6.**                                  *SELECTED FINANCIAL DATA*

** **

The following selected financial data should be readin conjunction with the consolidated financial statements and notes under Item8 of this Form 10-K.

 
| **(Dollars in thousands, except per share amounts)** | ** ** | **2008**    | ** **  | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------|-------------|----------|------------|----------|------------|----------|------------|----------|------------|
| **FOR THE YEAR**                                                                   |       |        |        |     |       |     |       |     |       |     |       |
| Operating revenue                                                                  | ** ** | **$**       | **607,099** |     | $          | 560,017  |       | $        | 518,890    |     | $          | 460,202 |   | $ | 380,048 |   |
| Operating income                                                                   | ** ** | **32,705**  |        | 27,801   |       | 41,169   |       | 42,867   |       | 31,345   |       |
| Net income                                                                         | ** ** | **18,071**  |        | 14,968   |       | 24,518   |       | 25,061   |       | 17,536   |       |
| Operating ratio                                                                    | ** ** | **94.6**    | **%**       | 95.0     | %          | 92.1     | %          | 90.7     | %          | 91.8     | %          |
|                                                                               |       |        |        |     |       |     |       |     |       |     |       |
| **PER-SHARE DATA**                                                                 |       |        |        |     |       |     |       |     |       |     |       |
| Basic earnings per common share                                                    | ** ** | **$**       | **0.83**    |     | $          | 0.69     |       | $        | 1.13       |     | $          | 1.16 |   | $ | 0.83 |   |
| Diluted earnings per common share                                                  | ** ** | **0.82**    |        | 0.68     |       | 1.12     |       | 1.14     |       | 0.81     |       |
| Book value                                                                         | ** ** | **11.71**   |        | 10.86    |       | 10.15    |       | 8.99     |       | 7.82     |       |
|                                                                               |       |        |        |     |       |     |       |     |       |     |       |
| **AT YEAR END**                                                                    |       |        |        |     |       |     |       |     |       |     |       |
| Total assets                                                                       | ** ** | **$**       | **397,443** |     | $          | 407,390  |       | $        | 410,822    |     | $          | 349,733 |   | $ | 288,929 |   |
| Long-term debt                                                                     | ** ** | **2,857**   |        | 44,643   |       | 58,659   |       | 48,300   |       | 30,257   |       |
| Stockholders’ equity                                                          | ** ** | **255,736** |        | 236,930  |       | 220,993  |       | 193,917  |       | 167,921  |       |

 

15

----

Table of Contents

 

**ITEM7.**           *MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS*

** **

*Thefollowing discussion and analysis of our financial condition and results ofoperations should be read together with the selected consolidated financialdata and our consolidated financial statements and the related notes appearingelsewhere in this report. This discussion and analysis contains forward-lookingstatements that involve risks, uncertainties and assumptions. Our actualresults may differ materially from those anticipated in these forward-lookingstatements as a result of many factors, including but not limited to thoseunder the heading “Risk Factors” beginning on page 6.  We do not assume, and specifically disclaim,any obligation to update any forward-looking statement contained in thisreport.*

 

**Overview**

** **

The primary source of our operating revenue istruckload revenue, which we generate by transporting long-haul and regionalfreight for our customers and report within our Truckload segment.  Generally, we are paid by the mile for ourservices.  We also derive truckloadrevenue from fuel surcharges, loading and unloading activities, equipmentdetention and other ancillary services. The main factors that affect our truckload revenue are the rate per milewe receive from our customers, the percentage of miles for which we arecompensated and the number of miles we generate with our equipment.  We monitor our revenue production primarilythrough average truckload revenue, net of fuel surcharges, per tractor perweek.  We also analyze our averagetruckload revenue, net of fuel surcharges, per total mile, non-revenue miles percentage,the miles per tractor we generate, our accessorial revenue and our othersources of operating revenue.

 

Our operating revenue also includes revenue reportedwithin our Logistics segment, which consists of revenue from our internalbrokerage and intermodal operations, both launched in 2005, and through our 45%interest in MWL, a third-party provider of logistics services to thetransportation industry.  Brokerageservices involve arranging for another company to transport freight for ourcustomers while we retain the billing, collection and customer managementresponsibilities.  Intermodal servicesinvolve the transport of our trailers on railroad flatcars for a portion of atrip, with the balance of the trip using our tractors or, to a lesser extent,contracted carriers.  The main factorsthat affect our logistics revenue are the rate per mile and other charges wereceive from our customers and the rates charged by third-party providers.

 

In addition to the factors discussed above, ouroperating revenue is also affected by, among other things, the United Stateseconomy, inventory levels, the level of truck and rail capacity in thetransportation market and specific customer demand.

 

In 2008, we increased our operating revenue by $47.1million, or 8.4%.  Our operating revenue,net of fuel surcharges, increased $1.5 million, or 0.3%, compared with2007.  Fuel surcharges increased $45.5million, or 52.3%, in 2008 due to the significant increase in the average costof fuel from 2007.  Truckload segmentrevenue, net of fuel surcharges, decreased 5.5% due to a 6.5% decrease in ourweighted average number of tractors, partially offset by a 2.2% increase inaverage truckload revenue, net of fuel surcharges, per total mile.  The increase in average truckload revenue,net of fuel surcharges, per total mile was the result of an improved freightmix and a reduced average length of haul. Our average truckload revenue, net of fuel surcharges, per tractor perweek increased 0.7% in 2008 primarily due to the increase in revenue per totalmile, partially offset by a 1.1% decrease in average miles per tractor.  The changes in our operating statistics areconsistent with the growth of our regional temperature-controlled operations in2008.  By focusing on shorter lengths ofhaul in certain defined areas, we are addressing customer trends towardregional distribution to lower their transportation expense, furthering our ownobjectives of reducing fuel consumption per load, and matching some of ourdrivers’ desires to stay closer to home. The concentration of a portion of our fleet in these markets is evidentin a 6.4% reduction from 2007 in average length of haul to 853 miles.  In response to a challenging freightenvironment with industry-wide capacity exceeding freight demand, we decreasedour fleet throughout 2007.  As a result,our average fleet size was 164 tractors less in 2008 than in 2007.  The 0.3% increase in our operating revenue,net of fuel surcharges, was driven by continued volume growth in each of 

 

16

----

Table of Contents

 

our internal brokerageand intermodal services and in the logistics services provided by MWL,partially offset by the decrease in truckload revenue, net of fuelsurcharges.  Logistics revenue, whichrepresented 16.3% of our operating revenue in 2008, increased $29.4 million, or42.4%, compared with 2007.

 

Our profitability on the expense side is impacted byvariable costs of transporting freight for our customers, fixed costs andexpenses containing both fixed and variable components.  The variable costs include fuel expense,driver-related expenses, such as wages, benefits, training, and recruitment,and independent contractor costs, which are recorded under purchasedtransportation.  Expenses that have bothfixed and variable components include maintenance and tire expense and ourtotal cost of insurance and claims. These expenses generally vary with the miles we travel, but also have acontrollable component based on safety, fleet age, efficiency and otherfactors.  Our main fixed costs relate tothe acquisition and financing of long-term assets, such as revenue equipmentand operating terminals.  We expect ourannual cost of tractor and trailer ownership will increase in future periods asa result of higher prices of new equipment. Although certain factors affecting our expenses are beyond our control,we monitor them closely and attempt to anticipate changes in these factors inmanaging our business.  For example, fuelprices fluctuated dramatically at various times during the last several years,with the D.O.E. national average cost of fuel increasing to $3.80 per gallon in2008 from $2.89 per gallon in 2007.  We manageour exposure to changes in fuel prices primarily through fuel surchargeprograms with our customers, as well as through volume fuel purchasingarrangements with national fuel centers and bulk purchases of fuel at ourterminals.  To help further reduce fuelexpense, we began installing auxiliary power units in our tractors in 2007 toprovide climate control and electrical power for our drivers without idling thetractor engine.  For our Logisticssegment, our profitability on the expense side is impacted by the percentage oflogistics revenue we pay to providers for the transportation services wearrange.

 

Our operating expenses as a percentage of operatingrevenue, or “operating ratio,” was 94.6% in 2008 compared with 95.0% in2007.  Our earnings per diluted shareincreased to $0.82 in 2008 from $0.68 in 2007.

 

Our business requires substantial, ongoing capitalinvestments, particularly for new tractors and trailers. At December 31,2008, we had approximately $2.9 million of long-term debt, including currentmaturities, and $255.7 million in stockholders’ equity.  In 2008, we spent $32.6 million to purchasenew revenue equipment, net of proceeds from dispositions.  These expenditures were funded with cashflows from operations.  We estimate thatcapital expenditures, net of proceeds from dispositions, will be approximately$40 million to $60 million in 2009, which we will adjust throughout the year aswe size our fleet to existing customer demand. We believe our sources of liquidity are adequate to meet our current andanticipated needs for at least the next twelve months.  Based upon anticipated cash flows, currentborrowing availability and sources of financing we expect to be available tous, we do not anticipate any significant liquidity constraints in theforeseeable future.

 

This Management’s Discussion and Analysis of FinancialCondition and Results of Operations includes discussions of truckload andlogistics revenue, net of fuel surcharges, and net fuel expense (fuel and fueltaxes net of fuel surcharge revenue and surcharges passed through toindependent contractors, outside drayage carriers and railroads).  We provide these additional disclosuresbecause management believes these measures provide a more consistent basis forcomparing results of operations from period to period.  These financial measures in this report havenot been determined in accordance with U.S. generally accepted accountingprinciples (GAAP).  Pursuant to Item 10(e) ofRegulation S-K, we have included the amounts necessary to reconcile thesenon-GAAP financial measures to the most directly comparable GAAP financialmeasures, operating revenue and fuel and fuel taxes.

 

17

----

Table of Contents

 

**Share-based Payment Arrangement Compensation**

** **

Effective January 1, 2006, we adopted the fairvalue recognition provisions of Statement of Financial Accounting Standards No. 123R,“Share-Based Payment” (“SFAS 123R”) using the modified prospective transitionmethod, and therefore have not restated prior periods’ results.  All share-based compensation expense isrecorded in salaries, wages and benefits expense.  Total share-based compensation expenserecorded in 2008 was $666,000 ($432,000 net of income tax benefit), in 2007 was$460,000 ($321,000 net of income tax benefit) and in 2006 was $447,000($318,000 net of income tax benefit), which entirely represents additionalshare-based compensation expense recorded as a result of adopting SFAS 123R.  Unrecognized compensation expense fromunvested service-based stock option awards was $1.5 million as of December 31,2008 and is expected to be recorded over a weighted-average period of 3.6years.  Unrecognized compensation expensefrom unvested performance-based stock option awards was $911,000 as of December 31,2008 and will be recorded in the periods in which the performance condition isprobable of achievement through 2010.

 

**Results of Operations**

** **

The following table sets forth for the years indicatedcertain operating statistics regarding our revenue and operations:

 
| ** **                                                                    | ** ** | **2008**    | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------|------------|----------|------------|----------|------------|
| Truckload Segment:                                                            |       |        |       |     |       |     |       |
| Average truckload revenue, net of fuel surcharges,  per total mile            | ** ** | **$**       | **1.512**  |     | $          | 1.480    |       | $ | 1.477 |   |
| Average miles per tractor(1)                                                  | ** ** | **108,026** |       | 109,269  |       | 108,781  |       |
| Average truckload revenue, net of fuel surcharges,  per tractor   per week(1) | ** ** | **$**       | **3,124**  |     | $          | 3,101    |       | $ | 3,081 |   |
| Average tractors(1)                                                           | ** ** | **2,352**   |       | 2,516    |       | 2,504    |       |
| Average miles per trip                                                        | ** ** | **853**     |       | 911      |       | 937      |       |
| Total miles — company-employed drivers (in thousands)                    | ** ** | **222,043** |       | 228,776  |       | 222,579  |       |
| Total miles — independent contractors (in thousands)                     | ** ** | **32,081**  |       | 46,096   |       | 49,810   |       |
|                                                                          |       |        |       |     |       |     |       |
| Logistics Segment:                                                            |       |        |       |     |       |     |       |
| Brokerage:                                                                    |       |        |       |     |       |     |       |
| Revenue (in thousands)                                                        | ** ** | **$**       | **62,315** |     | $          | 48,640   |       | $ | 28,636 |   |
| Loads                                                                         | ** ** | **30,410**  |       | 25,246   |       | 16,083   |       |
| Intermodal:                                                                   |       |        |       |     |       |     |       |
| Revenue (in thousands)                                                        | ** ** | **$**       | **36,598** |     | $          | 20,837   |       | $ | 12,604 |   |
| Loads                                                                         | ** ** | **11,513**  |       | 6,793    |       | 4,073    |       |
| Average tractors                                                              | ** ** | **53**      |       | 31       |       | 19       |       |

 

----

(1)          Includestractors driven by both company-employed drivers and independent contractors.  Independent contractors provided 188, 339 and365 tractors as of December 31, 2008, 2007 and 2006, respectively.

 

18

----

Table of Contents

 

*Comparison of Year Ended December 31,2008 to Year Ended December 31, 2007*

 

The followingtable sets forth for the years indicated our operating revenue, operatingincome and operating ratio by segment, along with the change for eachcomponent:

 
| ** **                                                      | ** ** | ** **  | ** **  | ** ** | ** ** | **Dollar**                  | ** ** | **Percentage**              | ** ** |
|-----------------------------------------------------------------|------------|-------------|-------------|------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                      | ** ** | ** **  | ** **  | ** ** | ** ** | **Change**                  | ** ** | **Change**                  | ** ** |
| **(Dollars in thousands)**                            | ** ** | **2008**    | ** **  | **2007**   | ** ** | **2008 vs. 2007** | ** ** | **2008 vs. 2007** | ** ** |
| Operating revenue:                                              |       |        |        |       |       |                        |       |                        |       |
| Truckload revenue, net of fuel surcharge revenue                |       | **$**       | **384,264** |       | $          | 406,754                     |       | $                           | (22,490    | ) | (5.5 | )% |
| Truckload fuel surcharge revenue                                | ** ** | **123,922** |        | 83,786     |       | 40,136                      |       | 47.9                        |       |
| Total Truckload revenue                                         | ** ** | **508,186** |        | 490,540    |       | 17,646                      |       | 3.6                         |       |
|                                                            |       |        |        |       |       |                        |       |                        |       |
| Logistics revenue, net of intermodal fuel surcharge  revenue(1) |       | **90,194**  |        | 66,163     |       | 24,031                      |       | 36.3                        |       |
| Intermodal fuel surcharge revenue                               | ** ** | **8,719**   |        | 3,314      |       | 5,405                       |       | 163.1                       |       |
| Total Logistics revenue                                         | ** ** | **98,913**  |        | 69,477     |       | 29,436                      |       | 42.4                        |       |
|                                                            |       |        |        |       |       |                        |       |                        |       |
| Total operating revenue                                         | ** ** | **$**       | **607,099** |       | $          | 560,017                     |       | $                           | 47,082     |   | 8.4 | % |
|                                                            |       |        |        |       |       |                        |       |                        |       |
| Operating income:                                               |       |        |        |       |       |                        |       |                        |       |
| Truckload                                                       | ** ** | **$**       | **26,055**  |       | $          | 22,689                      |       | $                           | 3,366      |   | 14.8 | % |
| Logistics                                                       | ** ** | **6,650**   |        | 5,112      |       | 1,538                       |       | 30.1                        |       |
| Total operating income                                          | ** ** | **$**       | **32,705**  |       | $          | 27,801                      |       | $                           | 4,904      |   | 17.6 | % |
|                                                            |       |        |        |       |       |                        |       |                        |       |
| Operating ratio(2):                                             |       |        |        |       |       |                        |       |                        |       |
| Truckload                                                       | ** ** | **94.9**    | **%**       | 95.4       | %          |                        |       | 0.5                         | %          |
| Logistics                                                       | ** ** | **93.3**    | ** **  | 92.6       |       |                        |       | (0.8                        | )          |
| Consolidated operating ratio                                    | ** ** | **94.6**    | **%**       | 95.0       | %          |                        |       | 0.4                         | %          |

 

----

(1)          Logisticsrevenue is net of $16.8 million and $17.1 million of inter-segment revenue in2008 and 2007, respectively, for loads transported by our tractors and arrangedby MWL that have been eliminated in consolidation.

 

(2)          Operatingexpenses as a percentage of operating revenue.

 

Our operating revenue increased $47.1 million, or8.4%, to $607.1 million in 2008 from $560.0 million in 2007.  Our operating revenue, net of fuelsurcharges, increased $1.5 million, or 0.3%, to $474.5 million in 2008 from$472.9 million in 2007.  The increase inoperating revenue, net of fuel surcharges, was driven by continued volumegrowth in each of our internal brokerage and intermodal services and in thelogistics services provided by MWL, partially offset by a decrease in truckloadrevenue, net of fuel surcharges.  Fuelsurcharges increased $45.5 million, or 52.3%, in 2008 due to the significantincrease in the average cost of fuel from 2007.

 

Truckload segment revenue increased $17.6 million, or3.6%, to $508.2 million in 2008 from $490.5 million in 2007.  Truckload segment revenue, net of fuelsurcharges, decreased 5.5% due to a 6.5% decrease in our weighted averagenumber of tractors, partially offset by a 2.2% increase in average truckloadrevenue, net of fuel surcharges, per total mile.  The increase in average truckload revenue,net of fuel surcharges, per total mile was the result of an improved freightmix and a reduced average length of haul. Our average truckload revenue, net of fuel surcharges, per tractor perweek increased 0.7% in 2008 from 2007 due to the increase in revenue per totalmile, partially offset by a 1.1% decrease in average miles per tractor.  The changes in our 

 

19

----

Table of Contents

 

operating statistics areconsistent with the growth of our regional temperature-controlled operations in2008.  By focusing on shorter lengths ofhaul in certain defined areas, we are addressing customer trends towardregional distribution to lower their transportation expense, furthering our ownobjectives of reducing fuel consumption per load, and matching some of ourdrivers’ desires to stay closer to home. The concentration of a portion of our fleet in these markets is evidentin a 6.4% reduction from 2007 in average length of haul to 853 miles.  In response to a challenging freightenvironment with industry-wide capacity exceeding freight demand, we decreasedour fleet throughout 2007.  As a result,our average fleet size was 164 tractors less in 2008 than in 2007.  The improvement in tractor productivity andin our overall cost structure resulted in increased profitability from 2007.

 

Logistics segment revenue increased $29.4 million, or42.4%, to $98.9 million in 2008 from $69.5 million in 2007.  Logistics segment revenue, net of intermodalfuel surcharges, increased 36.3%.  Theincrease in logistics revenue primarily resulted from continued volume growthin each of our internal brokerage and intermodal services and in the logisticsservices provided by MWL.  The increasein the operating ratio for our Logistics segment in 2008 was primarily due toan increase as a percentage of logistics revenue of the payments to carriersfor transportation services which we arranged.

 

The following table sets forth for the years indicatedthe dollar and percentage increase or decrease of the items in our consolidatedstatements of operations, and those items as a percentage of operating revenue:

 
| ** **                               | ** ** | **Dollar**                  | ** ** | **Percentage**              | ** ** | **Percentage of**     | ** ** |
|------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                               | ** ** | **Change**                  | ** ** | **Change**                  | ** ** | **Operating Revenue** | ** ** |
| **(Dollars in thousands)**     | ** ** | **2008 vs. 2007** | ** ** | **2008 vs. 2007** | ** ** | **2008**                   | ** ** | **2007** | ** ** |
|                                     |       |                        |       |                        |       |                       |       |   |   |
| Operating revenue:                       |       | $                           | 47,082     |                        | 8.4        | %                          | 100.0      | % | 100.0 | % |
| Operating expenses (income):             |       |                        |       |                        |       |                       |       |   |   |
| Salaries, wages and benefits             |       | (1,158                      | )          | (0.8                        | )          | 25.1                       |       | 27.5 |   |
| Purchased transportation                 |       | 9,399                       |       | 9.1                         |       | 18.6                       |       | 18.5 |   |
| Fuel and fuel taxes                      |       | 26,871                      |       | 18.0                        |       | 29.0                       |       | 26.6 |   |
| Supplies and maintenance                 |       | (243                        | )          | (0.6                        | )          | 6.3                        |       | 6.9 |   |
| Depreciation                             |       | 2,696                       |       | 5.7                         |       | 8.2                        |       | 8.4 |   |
| Operating taxes and licenses             |       | (94                         | )          | (1.4                        | )          | 1.1                        |       | 1.2 |   |
| Insurance and claims                     |       | 3,056                       |       | 13.7                        |       | 4.2                        |       | 4.0 |   |
| Communications and utilities             |       | (129                        | )          | (3.3                        | )          | 0.6                        |       | 0.7 |   |
| Gain on disposition of revenue equipment |       | 722                         |       | 21.3                        |       | (0.4                       | )          | (0.6 | ) |
| Other                                    |       | 1,058                       |       | 10.2                        |       | 1.9                        |       | 1.8 |   |
| Total operating expenses                 |       | 42,178                      |       | 7.9                         |       | 94.6                       |       | 95.0 |   |
|                                     |       |                        |       |                        |       |                       |       |   |   |
| Operating income                         |       | 4,904                       |       | 17.6                        |       | 5.4                        |       | 5.0 |   |
| Other expenses (income):                 |       |                        |       |                        |       |                       |       |   |   |
| Interest expense                         |       | (2,681                      | )          | (70.1                       | )          | 0.2                        |       | 0.7 |   |
| Interest income and other                |       | 509                         |       | 73.4                        |       | —                     |       | (0.1 | ) |
| Minority interest                        |       | 318                         |       | 39.7                        |       | 0.2                        |       | 0.1 |   |
|                                     |       | (1,854                      | )          | (47.2                       | )          | 0.3                        |       | 0.7 |   |
| Income before income taxes               |       | 6,758                       |       | 28.3                        |       | 5.0                        |       | 4.3 |   |
| Provision for income taxes               |       | 3,655                       |       | 41.1                        |       | 2.1                        |       | 1.6 |   |
| Net income                               |       | $                           | 3,103      |                        | 20.7       | %                          | 3.0        | % | 2.7 | % |

 

20

----

Table of Contents

 

Salaries, wages and benefits consist of compensationfor our employees, including both driver and non-driver employees, employees’health insurance, 401(k) plan contributions and other fringebenefits.  These expenses vary dependingupon the ratio of company drivers to independent contractors, our efficiency,our experience with employees’ health insurance claims, changes in health carepremiums and other factors. The decrease in salaries, wages and benefitsresulted primarily from a 2.9% decrease in the total miles driven by companydrivers and the adoption in the first quarter of 2008 of a per diem expensereimbursement program for our drivers, which was partially offset by a $2.3million increase in our self-insured medical claims, which increased ouremployees’ health insurance expense, and a $1.3 million increase in bonuscompensation expensed for our non-driver employees.

 

Purchased transportation consists of payments toindependent contractor providers of revenue equipment and to carriers fortransportation services we arrange in connection with brokerage and intermodalactivities.  This category will varydepending upon the ratio of company drivers versus independent contractors, theamount of fuel surcharges passed through to independent contractors and theamount and rates we pay to third-party railroad and motor carriers.  Purchased transportation expense increased$9.4 million in total, or 9.1%, in 2008 from 2007.  Payments to carriers for transportationservices we arranged in our brokerage and intermodal operations increased $21.3million to $73.8 million in 2008 from $52.5 million in 2007, as our Logisticsoperations significantly increased in size and scope.  The portion of purchased transportationexpense related to our independent contractors, including fuel surcharges,decreased $11.9 million in 2008, primarily due to a decrease in the number ofindependent contractor-owned tractors in our fleet.  We expect that purchased transportationexpense will continue to increase as we grow our Logistics segment, but thisincrease will be partially offset by an expected continuing decline in thenumber of independent contractor-owned tractors in our fleet due to difficultoperating conditions.

 

Net fuel expense (fuel and fuel taxes net of fuelsurcharge revenue and surcharges passed through to independent contractors,outside drayage carriers and railroads) decreased $14.6 million, or 19.2%, to$61.4 million in 2008 from $76.1 million in 2007.  Fuel surcharges passed through to independentcontractors, outside drayage carriers and railroads were $18.2 million in 2008and $14.2 million in 2007.  Over the pastyear, we have worked diligently to control fuel costs and usage by improvingour volume purchasing arrangements and optimizing our drivers’ fuel purchaseswith national fuel centers, focusing on shorter lengths of haul, installing andtightly managing the use of auxiliary power units in our tractors to minimize engineidling and improving fuel usage in our trailers’ refrigeration units.  The decrease in net fuel expense wasprimarily due to a 2.9% decrease in the total miles driven by our company-ownedfleet and to the cost control measures stated above, principally the use ofauxiliary power units.  Auxiliary powerunits, which were installed in 96% of our company-owned tractors as of December 31,2008, provide climate control and electrical power for our drivers withoutidling the tractor engine.   The impactof decreased miles and the cost control measures were partially offset by asignificant increase in the D.O.E. national average cost of fuel during 2008 to$3.80 per gallon from $2.89 per gallon in 2007. Net fuel expense represented 14.9% of truckload and intermodal revenue,net of fuel surcharges, in 2008, compared with 17.9% in 2007.

 

Depreciation relates to owned tractors, trailers,auxiliary power units, communications units, terminal facilities and otherassets.  The increase in depreciation wasdue to our investment in auxiliary power units since mid-2007 and to anincrease in the relative percentage of company-owned tractors to independentcontractor-owned tractors in 2008.  Weexpect our annual cost of tractor and trailer ownership will increase in futureperiods as a result of higher prices of new equipment, which is expected toresult in greater depreciation over the useful life.

 

Insurance and claims consist of the costs of insurancepremiums and the accruals we make for claims within our self-insured retentionamounts, primarily for personal injury, property damage, physical damage to ourequipment, cargo claims and workers’ compensation claims.  These expenses will vary primarily based uponthe frequency and severity of our accident experience, our self-insuredretention levels and the market for insurance. The increase in insurance and claims in 2008 was primarily the result ofan increase in the cost of self-insured auto liability and workers’compensation accident claims.  We areresponsible for the first $1.0 

 

21

----

Table of Contents

 

million on each autoliability claim and also responsible for up to $1.0 million in the aggregatefor 33% of all auto liability claim amounts in excess of $1.0 million.  We are responsible for the first $750,000 oneach workers’ compensation claim.  Oursignificant self-insured retention exposes us to the possibility of significantfluctuations in claims expense between periods depending on the frequency,severity and timing of claims and to adverse financial results if we incurlarge or numerous losses.  In the eventof an uninsured claim above our insurance coverage, or an increase in the frequencyor severity of claims within our self-insured retention, our financialcondition and results of operations could be materially and adversely affected.

 

A decrease in the market value for used revenueequipment, which we believe was driven by capacity reductions in the industry,caused our gain on disposition of revenue equipment to decrease to $2.7 millionin 2008 from $3.4 million in 2007, despite an increase in the number oftractors sold.  Future gains or losses ondisposition of revenue equipment will be impacted by the market for usedrevenue equipment, which is beyond our control. We do not expect our gain on disposition to improve in the near futureas we believe that there are few buyers with adequate financing in comparisonwith available inventory, and the expectation of additional trucking companyfailures is likely to keep used truck inventories high.

 

As a result of the foregoing factors, our operatingexpenses as a percentage of operating revenue, or “operating ratio,” was 94.6%in 2008 compared with 95.0% in 2007.

 

Interest expense primarily consists of interest on ourunsecured committed credit facility and senior unsecured notes.  The decrease in interest expense of $2.7million, or 70.1%, in 2008 from 2007 was primarily the result of lower averagedebt balances outstanding.

 

Our effective income tax rate increased to 41.0% in2008 from 37.3% in 2007, primarily because of the nondeductible effect of a perdiem pay structure for our drivers adopted in the first quarter of 2008.

 

As a result of the factors described above, net incomeincreased to $18.1 million in 2008 from $15.0 million in 2007. Net earningsincreased to $0.82 per diluted share in 2008 from $0.68 per diluted share in2007.

 

22

----

Table of Contents

 

*Comparisonof Year Ended December 31, 2007 to Year Ended December 31, 2006*

 

The followingtable sets forth for the years indicated our operating revenue, operatingincome and operating ratio by segment, along with the change for eachcomponent:

 
| ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Dollar**                  | ** ** | **Percentage**              | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Change**                  | ** ** | **Change**                  | ** ** |
| **(Dollars in thousands)**                            | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2007 vs. 2006** | ** ** | **2007 vs. 2006** | ** ** |
| Operating revenue:                                              |       |       |       |       |       |                        |       |                        |       |
| Truckload revenue, net of fuel surcharge revenue                |       | $          | 406,754    |       | $          | 402,327                     |       | $                           | 4,427      |   | 1.1 | % |
| Truckload fuel surcharge revenue                                |       | 83,786     |       | 75,323     |       | 8,463                       |       | 11.2                        |       |
| Total Truckload revenue                                         |       | 490,540    |       | 477,650    |       | 12,890                      |       | 2.7                         |       |
|                                                            |       |       |       |       |       |                        |       |                        |       |
| Logistics revenue, net of intermodal fuel surcharge  revenue(1) |       | 66,163     |       | 39,298     |       | 26,865                      |       | 68.4                        |       |
| Intermodal fuel surcharge revenue                               |       | 3,314      |       | 1,942      |       | 1,372                       |       | 70.6                        |       |
| Total Logistics revenue                                         |       | 69,477     |       | 41,240     |       | 28,237                      |       | 68.5                        |       |
|                                                            |       |       |       |       |       |                        |       |                        |       |
| Total operating revenue                                         |       | $          | 560,017    |       | $          | 518,890                     |       | $                           | 41,127     |   | 7.9 | % |
|                                                            |       |       |       |       |       |                        |       |                        |       |
| Operating income:                                               |       |       |       |       |       |                        |       |                        |       |
| Truckload                                                       |       | $          | 22,689     |       | $          | 37,500                      |       | $                           | (14,811    | ) | (39.5 | )% |
| Logistics                                                       |       | 5,112      |       | 3,669      |       | 1,443                       |       | 39.3                        |       |
| Total operating income                                          |       | $          | 27,801     |       | $          | 41,169                      |       | $                           | (13,368    | ) | (32.5 | )% |
|                                                            |       |       |       |       |       |                        |       |                        |       |
| Operating ratio(2):                                             |       |       |       |       |       |                        |       |                        |       |
| Truckload                                                       |       | 95.4       | %          | 92.1       | %          |                        |       | (3.6                        | )%         |
| Logistics                                                       |       | 92.6       |       | 91.1       |       |                        |       | (1.6                        | )          |
| Consolidated operating ratio                                    |       | 95.0       | %          | 92.1       | %          |                        |       | (3.1                        | )%         |

 

----

(1)   Logistics revenue is net of$17.1 million and $16.5 million of inter-segment revenue in 2007 and 2006, respectively,for loads transported by our tractors and arranged by MWL that have beeneliminated in consolidation.

 

(2)          Operating expenses as a percentage ofoperating revenue.

 

Our operating revenue increased $41.1 million, or7.9%, to $560.0 million in 2007 from $518.9 million in 2006. Our operatingrevenue, net of fuel surcharges, increased $31.3 million, or 7.1%, to $472.9million in 2007 from $441.6 million in 2006. The increase in operating revenue,net of fuel surcharges, was primarily due to continued volume growth in each ofour internal brokerage and intermodal services and in the logistics servicesprovided by MWL. Fuel surcharges increased $9.8 million, or 12.7%, in 2007 dueto an increase in the average cost of fuel from 2006.

 

Truckload segment revenue increased $12.9 million, or2.7%, to $490.5 million in 2007 from $477.7 million in 2006. Truckload segmentrevenue, net of fuel surcharges, increased 1.1%. We were able to increase ourtruckload revenue by increasing the size of our fleet and our business withexisting and new customers. Our average truckload revenue, net of fuelsurcharges, per tractor per week increased 0.6% in 2007 from 2006, due to a0.4% increase in average miles per tractor and a 0.2% increase in averagetruckload revenue, net of fuel surcharges, per total mile. Our weighted averagenumber of tractors increased 0.5% in 2007 from 2006. The slight improvement intractor productivity was more than offset by an increase in our overall cost 

 

23

----

Table of Contents

 

structure, which resultedin decreased profitability from 2006. Due to a challenging freight environment,we were not able to increase freight rates to cover higher costs.

 

Logistics segment revenue increased $28.2 million, or68.5%, to $69.5 million in 2007 from $41.2 million in 2006. Logistics segmentrevenue, net of intermodal fuel surcharges, increased 68.4%. The increase inlogistics revenue primarily resulted from continued volume growth in each ofour internal brokerage and intermodal services and in the logistics servicesprovided by MWL. The increase in the operating ratio for our Logistics segmentin 2007 was primarily due to an increase as a percentage of logistics revenueof the payments to carriers for transportation services which we arranged.

 

The following table sets forth for the years indicatedthe dollar and percentage increase or decrease of the items in our consolidatedstatements of operations, and those items as a percentage of operating revenue:

 
| ** **                               | ** ** | **Dollar**                  | ** ** | **Percentage**              | ** ** | **Percentage of**     | ** ** |
|------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                               | ** ** | **Change**                  | ** ** | **Change**                  | ** ** | **Operating Revenue** | ** ** |
| **(Dollars in thousands)**     | ** ** | **2007 vs. 2006** | ** ** | **2007 vs. 2006** | ** ** | **2007**                   | ** ** | **2006** | ** ** |
|                                     |       |                        |       |                        |       |                       |       |   |   |
| Operating revenue:                       |       | $                           | 41,127     |                        | 7.9        | %                          | 100.0      | % | 100.0 | % |
| Operating expenses (income):             |       |                        |       |                        |       |                       |       |   |   |
| Salaries, wages and benefits             |       | 9,401                       |       | 6.5                         |       | 27.5                       |       | 27.8 |   |
| Purchased transportation                 |       | 19,367                      |       | 22.9                        |       | 18.5                       |       | 16.3 |   |
| Fuel and fuel taxes                      |       | 13,942                      |       | 10.3                        |       | 26.6                       |       | 26.0 |   |
| Supplies and maintenance                 |       | 5,466                       |       | 16.5                        |       | 6.9                        |       | 6.4 |   |
| Depreciation                             |       | 2,649                       |       | 6.0                         |       | 8.4                        |       | 8.5 |   |
| Operating taxes and licenses             |       | (691                        | )          | (9.2                        | )          | 1.2                        |       | 1.4 |   |
| Insurance and claims                     |       | 1,170                       |       | 5.5                         |       | 4.0                        |       | 4.1 |   |
| Communications and utilities             |       | 234                         |       | 6.4                         |       | 0.7                        |       | 0.7 |   |
| Gain on disposition of revenue equipment |       | 3,604                       |       | 51.6                        |       | (0.6                       | )          | (1.3 | ) |
| Other                                    |       | (647                        | )          | (5.9                        | )          | 1.8                        |       | 2.1 |   |
| Total operating expenses                 |       | 54,495                      |       | 11.4                        |       | 95.0                       |       | 92.1 |   |
| Operating income                         |       | (13,368                     | )          | (32.5                       | )          | 5.0                        |       | 7.9 |   |
| Other expenses (income):                 |       |                        |       |                        |       |                       |       |   |   |
| Interest expense                         |       | 259                         |       | 7.3                         |       | 0.7                        |       | 0.7 |   |
| Interest income and other                |       | 413                         |       | 37.3                        |       | (0.1                       | )          | (0.2 | ) |
| Minority interest                        |       | 34                          |       | 4.4                         |       | 0.1                        |       | 0.1 |   |
|                                     |       | 706                         |       | 21.9                        |       | 0.7                        |       | 0.6 |   |
| Income before income taxes               |       | (14,074                     | )          | (37.1                       | )          | 4.3                        |       | 7.3 |   |
| Provision for income taxes               |       | (4,524                      | )          | (33.7                       | )          | 1.6                        |       | 2.6 |   |
| Net income                               |       | $                           | (9,550     | )                           | (39.0      | )%                         | 2.7        | % | 4.7 | % |

 

The increase in salaries, wages and benefits resultedprimarily from a 2.8% increase in the miles driven by company drivers. Additionally,higher self-insured medical claims increased our employees’ health insuranceexpense by $1.8 million in 2007.

 

Purchased transportation expense increased $19.4million in total, or 22.9%, in 2007 from 2006. Payments to carriers fortransportation services we arranged in our brokerage and intermodal operationsincreased $22.8 million to $52.5 million in 2007 from $29.7 million in 2006, asour Logistics operations significantly increased in size and scope comparedwith 2006. The portion of purchased transportation expense related to ourindependent contractors, including fuel surcharges, decreased $3.5 million in2007, primarily due to a decrease in the number of independent contractor-ownedtractors in our fleet.

 

24

----

Table of Contents

 

Net fuel expense (fuel and fuel taxes net of fuelsurcharge revenue and surcharges passed through to independent contractors,outside drayage carriers and railroads) increased $5.3 million, or 7.6%, to$76.1 million in 2007 from $70.7 million in 2006. Fuel surcharges passedthrough to independent contractors, outside drayage carriers and railroads were$14.2 million in 2007 and $12.9 million in 2006. The increase was primarily dueto a 2.8% increase in miles driven by our company-owned fleet and an increasein the D.O.E. national average cost of fuel during 2007 to $2.89 per gallonfrom $2.71 per gallon in 2006. These increases were partially offset by reducedidling fuel consumption resulting from the installation of auxiliary powerunits for our tractors that provide climate control and electrical power forour drivers without idling the tractor engine. Auxiliary power units wereinstalled in approximately 60% of our company-owned tractors as of December 31,2007. Net fuel expense represented 17.9% of truckload and intermodal revenue,net of fuel surcharges, in 2007, compared with 17.1% in 2006.

 

Supplies and maintenance consist of repairs,maintenance, tires, parts, oil and engine fluids, along with load-specificexpenses including loading/unloading, tolls, pallets and trailer hostling. Theincrease in supplies and maintenance in 2007 primarily resulted from the higherpercentage of company-owned tractors in our fleet, for which we bear allmaintenance expenses, an increase in the size of our trailer fleet associatedwith growth of our intermodal operations and an increase in the average age ofour tractor and trailer fleets. Our maintenance practices in 2007 wereconsistent with 2006.

 

The increase in depreciation was due to an increase inrevenue equipment and in the relative percentage of company-owned tractors toindependent contractor-owned tractors in 2007.

 

The increase in insurance and claims in 2007 wasprimarily the result of an increase in physical damage claims with respect toour tractors and trailers.

 

A decrease in the planned number of revenue equipmentdispositions and a decrease in the market value for used revenue equipmentcaused our gain on disposition of revenue equipment to decrease to $3.4 millionin 2007 from $7.0 million in 2006.

 

As a result of the foregoing factors, our operatingexpenses as a percentage of operating revenue, or “operating ratio,” was 95.0%in 2007 compared with 92.1% in 2006.

 

Our effective income tax rate increased to 37.3% in2007 from 35.4% in 2006, primarily because we decreased our deferred income taxliability in 2006 by 3.3% of income before income taxes. This decrease wasprimarily due to a change in income apportionment for several states, whichproduced a lower effective state income tax rate, net of federal impact.

 

As a result of the factors described above, net incomedecreased to $15.0 million in 2007 from $24.5 million in 2006. Net earnings pershare decreased to $0.68 per diluted share in 2007 from $1.12 per diluted sharein 2006.

 

25

----

Tableof Contents

** **

**Liquidity and Capital Resources**

** **

Our business requires substantial, ongoing capitalinvestments, particularly for new tractors and trailers. Our primary sources ofliquidity are funds provided by operations, our unsecured senior notes and ourrevolving credit facility. A portion of our tractor fleet is provided byindependent contractors who own and operate their own equipment. We have nocapital expenditure requirements relating to those drivers who own theirtractors or obtain financing through third parties. However, to the extent wepurchase tractors and extend financing to the independent contractors throughour tractor purchase program, we have an associated capital expenditurerequirement.

 

The table below reflects our net cash flows providedby operating activities, net cash flows used for investing activities, net cashflows (used for) provided by financing activities and total long-term debt,including current maturities, for the years indicated.

 
| **(In thousands)**                                            | ** ** | **2008**    | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------------------|------------|-------------|------------|----------|------------|----------|------------|
| Net cash flows provided by operating activities                    |       | **$**       | **76,356** |     | $          | 61,807   |       | $ | 77,070 |   |
| Net cash flows (used for) investing activities                     |       | **(37,602** | **)**      | (46,826  | )          | (86,848  | )          |
| Net cash flows (used for) provided by financing  activities        |       | **(39,977** | **)**      | (14,351  | )          | 11,686   |       |
| Long-term debt, including current maturities, at  December 31 |       | **2,857**   |       | 44,643   |       | 58,659   |       |
|                                                                    |            |             |            |          |            |          |            |  |  |  |

 

In December 2007, our Board of Directors approveda share repurchase program to repurchase up to one million shares of our commonstock either through purchases on the open market or through privatetransactions. The timing and extent to which we will repurchase shares dependson market conditions and other corporate considerations. In the first quarterof 2008 we repurchased and retired 67,500 shares of our common stock for$810,000. We made no purchases in 2007 or in the remainder of 2008. Therepurchase program does not have an expiration date.

 

In 2008, we spent $32.6 million to purchase newrevenue equipment, net of proceeds from dispositions. These expenditures werefunded with cash flows from operations. We estimate that capital expenditures,net of proceeds from dispositions, will be approximately $40 million to $60million in 2009, which we will adjust throughout the year as we size our fleetto existing customer demand. We believe our sources of liquidity are adequateto meet our current and anticipated needs for at least the next twelve months. Basedupon anticipated cash flows, current borrowing availability and sources offinancing we expect to be available to us, we do not anticipate any significantliquidity constraints in the foreseeable future.

 

We have outstanding senior unsecured notes with anaggregate principal balance of $2.9 million at December 31, 2008. Thesenotes mature in April 2010, require annual principal payments of $1.4million and bear interest at a fixed annual rate of 8.57%.

 

We maintain a credit agreement that provides for afive-year unsecured committed credit facility maturing in September 2011in an aggregate principal amount of up to $75 million. The aggregate principalamount of the credit facility may be increased at our option up to a maximumaggregate principal amount of $100 million. At December 31, 2008, therewas no outstanding principal balance on the credit facility. As of that date,we had outstanding standby letters of credit of $6.8 million and remainingborrowing availability of $68.2 million. This facility bears interest at avariable rate based on the London Interbank Offered Rate or the agent bank’sPrime Rate, in each case plus/minus applicable margins.

 

Our credit facility prohibits us from paying, in anyfiscal year, dividends in excess of 25% of our net income from the prior fiscalyear. The debt agreements discussed above also contain restrictive covenants 

 

26

----

Table of Contents

 

which, among othermatters, require us to maintain certain financial ratios, includingdebt-to-equity, cash flow leverage, interest coverage and fixed chargecoverage. We were in compliance with all of these covenants at December 31,2008.

 

We had $797,000 in direct financing receivables fromindependent contractors under our tractor purchase program as of December 31,2008, compared with $3.0 million in receivables as of December 31, 2007.These receivables, which are collateralized by the financed tractors, are usedto attract and retain qualified independent contractors. We deduct paymentsfrom the independent contractors’ settlements weekly and, as a result, haveexperienced minimal collection issues for these receivables. The decrease inthe receivables balance is related to an initiative to direct the leases to athird-party leasing vendor in 2007.

 

The following is asummary of our contractual obligations as of December 31, 2008.

 
| ** **                                 | ** ** | **Payments Due by Period** | ** ** |
|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                 | ** ** | ** **                                | ** ** | **2010** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | ** **                                | ** ** | **and** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(In thousands)**                    | ** ** | **2009**                                  | ** ** | **2011** | ** ** | **2012** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Purchase obligations for revenue equipment |       | $                                         | 3,451      |   | $ | — |   | $ | — |   | $ | — |   | $ | 3,451 |   |
| Long-term debt obligations                 |       | 1,428                                     |       | 1,429 |   | — |   | — |   | 2,857 |   |
| Building construction obligations          |       | 2,170                                     |       | — |   | — |   | — |   | 2,170 |   |
| Operating lease obligations                |       | 478                                       |       | 460 |   | 83 |   | 56 |   | 1,077 |   |
| Total                                      |       | $                                         | 7,527      |   | $ | 1,889 |   | $ | 83 |   | $ | 56 |   | $ | 9,555 |   |

 

**Related Parties**

** **

We purchase fuel and obtain tires and related servicesfrom Bauer Built, Inc., or BBI. Jerry M. Bauer, one of our directors, isthe president and a stockholder of BBI. We paid BBI $1.4 million in 2008, $1.1million in 2007 and $1.3 million in 2006 for fuel and tire services. Inaddition, we paid $2.3 million in 2008, $2.4 million in 2007 and $2.4 millionin 2006 to tire manufacturers for tires that we purchased from the tiremanufacturers but were provided by BBI. BBI received commissions from the tiremanufacturers related to these purchases. Other than any benefit received fromhis ownership interest, Mr. Bauer receives no compensation or otherbenefits from our business with BBI.

 

We paid Durand Builders Service, Inc. $564,000 in2008 and $547,000 in 2007 for various construction projects. Larry B. Hagness,one of our directors, is the president and owner of Durand Builders Service, Inc.Other than any benefit received from his ownership interest, Mr. Hagnessreceives no compensation or other benefits from these transactions.

 

In August 2008, we acquired a building adjacentto our headquarters which will be used for maintenance and storage fromRandolph L. Marten, our Chairman of the Board and Chief Executive Officer, in alike-kind exchange for a building of equal value owned by Marten Transport. Eachof the buildings were valued at $291,000 at the time of the exchange.

 

**Off-balance Sheet Arrangements**

** **

Other than standby letters of credit maintained inconnection with our self-insurance programs in the amount of $6.8 million andoperating leases summarized above in our summary of contractual obligations, wedid not have any other material off-balance sheet arrangements at December 31,2008.

 

27

----

Table of Contents

 

**Inflationand Fuel Costs**

** **

Mostof our 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.

 

Inaddition to inflation, fluctuations in fuel prices can affect ourprofitability. We require substantial amounts of fuel to operate our tractorsand power the temperature-control units on our trailers. Substantially all ofour contracts with customers contain fuel surcharge provisions. Although wehistorically have been able to pass through most long-term increases in fuelprices and related taxes to customers in the form of surcharges and higherrates, such increases usually are not fully recovered. Fuel prices were highthroughout the past three years, which has increased our cost of operating.

 

**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 harsh weathercreating higher accident frequency, increased claims and more equipmentrepairs.

 

**CriticalAccounting Policies**

** **

Thepreparation of financial statements in conformity with U.S. generally acceptedaccounting principles requires management to make estimates and assumptionsabout future events, and apply judgments that affect the reported amounts ofassets, liabilities, revenue and expenses in our consolidated financialstatements and related notes.  We baseour estimates, assumptions and judgments on historical experience, currenttrends and other factors believed to be relevant at the time our consolidatedfinancial statements are prepared. However, because future events and their effects cannot be determinedwith certainty, actual results could differ from our estimates and assumptions,and such differences could be material. We believe that the following critical accounting policies affect ourmore significant estimates, assumptions and judgments used in the preparationof our consolidated financial statements.

 

*RevenueRecognition*. We recognize revenue, including fuel surcharges,at the time shipment of freight is completed.

 

*AccountsReceivable*.  We aredependent upon a limited number of customers, and as a result, our tradeaccounts receivable are highly concentrated. Trade accounts receivable arerecorded at the invoiced amounts, net of an allowance for doubtfulaccounts.  A considerable amount ofjudgment is required in assessing the realization of these receivablesincluding the current creditworthiness of each customer and related aging ofthe past-due balances, including any billing disputes.  In order to assess the collectibility ofthese receivables, we perform ongoing credit evaluations of our customers’financial condition.  Through theseevaluations, we may become aware of a situation where a customer may not beable to meet its financial obligations due to deterioration of its financialviability, credit ratings or bankruptcy. The allowance for doubtful accounts is based on the best informationavailable to us and is reevaluated and adjusted as additional information isreceived.  We evaluate the allowancebased on historical write-off experience, the size of the individual customerbalances, past-due amounts and the overall national economy.  We review the adequacy of our allowance fordoubtful accounts monthly.

 

*Propertyand Equipment*. The transportation industry requiressignificant capital investments. Our net property and equipment was $314.3million as of December 31, 2008 and $325.2 million as of December 31,2007. Our depreciation expense was $49.7 million for 2008, $47.0 million for2007 and $44.4 million for 2006.  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 

 

28

----

Table of Contents

 

useful life. We determine and periodically evaluateour estimate of the projected salvage values and useful lives primarily byconsidering the market for used equipment, prior useful lives and changes intechnology. We have not changed our policy regarding salvage values as apercentage of initial cost or useful lives of tractors and trailers within thelast ten years. We believe that our policies and past estimates have beenreasonable. Actual results could differ from these estimates. A 5% decrease inestimated salvage values would have decreased our net property and equipment asof December 31, 2008 by approximately $8.3 million, or 2.6%.

 

In2008, we replaced most of our company-owned tractors within approximately 3.5years and our trailers within approximately 5.5 years after purchase.  Our useful lives for depreciating tractors isfive years and trailers is seven years, with a 25% salvage value for tractorsand a 35% salvage value for trailers. These salvage values are based upon the expected market values of theequipment after five years for tractors and seven years for trailers.  Depreciation expense calculated in thismanner approximates the continuing declining value of the revenue equipment,and continues at a consistent straight-line rate for units held beyond thenormal replacement cycle.  Calculatingtractor depreciation expense with a five-year useful life and a 25% salvagevalue results in the same depreciation rate of 15% of cost per year and thesame net book value of 47.5% of cost at the 3.5-year replacement date as usinga 3.5-year useful life and 47.5% salvage value. As a result, there is no difference in recorded depreciation expense ona quarterly or annual basis with our five-year useful life and 25% salvagevalue compared with a 3.5-year useful life and 47.5% salvage value.  Similarly, calculating trailer depreciationexpense with seven-year useful life and a 35% salvage value results in the samedepreciation rate of 9.3% of cost per year and the same net book value of 48.9%of cost at the 5.5-year replacement date as using a 5.5-year useful life and48.9% salvage value.  As a result, thereis no difference in recorded depreciation expense on a quarterly or annual basiswith our seven-year useful life and 35% salvage value compared with a 5.5-yearuseful life and 48.9% salvage value.

 

*Impairmentof Assets*. Long-lived assets are reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amountof an 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 exceeds 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.

 

*Insuranceand Claims*. We self-insure, in part, for losses relating toworkers’ 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. However, we couldsuffer a series of losses within our self-insured retention limits or lossesover our policy limits, which could negatively affect our financial conditionand operating results. We are responsible for the first $1.0 million on eachauto liability claim and also responsible for up to $1.0 million in theaggregate for 33% of all auto liability claim amounts in excess of $1.0million.  We are responsible for thefirst $750,000 on each workers’ compensation claim.  We have $6.8 million in standby letters ofcredit to guarantee settlement of claims under agreements with our insurancecarriers and regulatory authorities. The insurance and claims accruals in ourconsolidated balance sheets were $21.4 million as of December 31, 2008,and $17.4 million as of December 31, 2007. We reserve currently for theestimated cost of the uninsured portion of pending claims. We periodicallyevaluate and adjust these reserves based on our evaluation of the nature andseverity of outstanding individual claims and our estimate of future claimsdevelopment based on historical claims development factors. We believe that ourclaims development factors have historically been reasonable, as indicated bythe adequacy of our insurance and claims accruals compared to settled claims.Actual results could differ from these current estimates.  In addition, to the extent that claims arelitigated and not settled, jury awards are difficult to predict.  If our claims settlement experience worsenedcausing our historical claims development factors to increase by 5%, ourestimated outstanding loss reserves as of December 31, 2008 would haveneeded to increase by approximately $3.3 million.

 

29

----

Table of Contents

 

*Share-basedPayment Arrangement Compensation*.  We have granted stock options to certainemployees and non-employee directors.  Werecognize compensation expense for all share-based payment arrangements grantedafter December 31, 2005 and prior to but not yet vested as of December 31,2005, in accordance with Statement of Financial Accounting Standards No. 123R,“Share-Based Payment” (SFAS 123R).  Underthe fair value recognition provisions of SFAS 123R, we record share-basedcompensation expense net of an estimated forfeiture rate and only recordcompensation expense for those shares expected to vest on a straight-line basisover the requisite service period for service-based awards (normally thevesting period).  Compensation expensewill be recorded for performance-based awards in the periods in which theperformance condition is probable of achievement.  Determining the appropriate fair value modeland calculating the fair value of share-based payment arrangements require the inputof highly subjective assumptions, including the expected life of theshare-based payment arrangements and stock price volatility.  We use the Black-Scholes model to value ourstock option awards.  We believe thatfuture volatility will not materially differ from our historical volatility.  Thus, we use the historical volatility of ourcommon stock over the expected life of the award.  The assumptions used in calculating the fairvalue of share-based payment awards represent our best estimates, but theseestimates involve inherent uncertainties and the application of judgment.  As a result, if factors change and we usedifferent assumptions, share-based compensation expense could be materiallydifferent in the future.  In addition, weare required to estimate the expected forfeiture rate and only recognizeexpense for those shares expected to vest. If the actual forfeiture rate is materially different from the estimate,share-based compensation expense could be significantly different from what hasbeen recorded in the current period.

 

**RecentAccounting Pronouncements**

** **

In September 2006,the Financial Accounting Standards Board, or FASB, issued Statement ofFinancial Accounting Standards No. 157, “Fair Value Measurements,” (SFAS157).  SFAS 157 provides enhancedguidance for using fair value to measure assets and liabilities.  The statement provides a common definition offair value and establishes a framework to make the measurement of fair value ingenerally accepted accounting principles more consistent and comparable.  SFAS 157 also requires expanded disclosuresto provide information about the extent to which fair value is used to measureassets and liabilities, the methods and assumptions used to measure fair value,and the effect of fair value measures on earnings.  SFAS 157 is effective for 2008 financialstatements.  However, SFAS 157 as itrelates to fair value measurement requirements for non-financial assets andliabilities that are not remeasured at fair value on a recurring basis iseffective for 2009.  The adoption of SFAS157 did not and is not expected to have a significant impact on our financialcondition, results of operations or cash flows.

 

In December 2007,the FASB issued Statement of Financial Accounting Standards No. 160, “NoncontrollingInterests in Consolidated Financial Statements — an amendment of ARB No. 51”(SFAS 160).  SFAS 160 requires thataccounting and reporting for minority interests will be recharacterized asnoncontrolling interests and classified as a component of equity.  SFAS 160 also establishes reportingrequirements that provide sufficient disclosures that clearly identify anddistinguish between the interests of the parent and the interests of thenoncontrolling owners.  SFAS 160 appliesto all entities that prepare consolidated financial statements, exceptnot-for-profit organizations, but will affect only those entities that have anoutstanding noncontrolling interest in one or more subsidiaries or thatdeconsolidate a subsidiary.  Thisstatement is effective for the first quarter of 2009.  We continue to evaluate the impact of thisnew pronouncement, but currently believe the only impact of adopting SFAS 160would be to reclassify $1.7 million in minority interest to a separatecomponent of stockholders’ equity.

 

In December 2007,the FASB issued Statement of Financial Accounting Standards No. 141(revised 2007), “Business Combinations” (SFAS 141R), which replaces FASBStatement No. 141.  SFAS 141Restablishes principles and requirements for how an acquirer recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, any non-controlling interest in the acquiree and thegoodwill acquired.  The statement alsoestablishes disclosure requirements that will enable users to evaluate thenature and financial effects of the business combination.  SFAS 141R is effective for the first quarterof 

 

30

----

Table of Contents

 

2009.  Theadoption of SFAS 141R could have a significant impact on our financialcondition, results of operations and cash flows if we should enter into abusiness combination after that date.

 

**ITEM 7A.**                         *QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK*

** **

We areexposed to a variety of market risks, most importantly the effects of the priceand availability of diesel 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.Significant increases in diesel fuel costs could materially and adverselyaffect our results of operations and financial condition. Historically, we havebeen able to recover a portion of diesel fuel price increases from customers inthe form of fuel surcharges.

 

Wepresently use fuel surcharges to address the risk of high fuel prices. Fuelsurcharge programs are widely accepted among our customers, though they canvary somewhat from customer-to-customer. We believe fuel surcharges areeffective at mitigating the risk of high fuel prices, although we do notrecover the full amount of fuel price increases.

 

Whilewe do not currently have any outstanding hedging instruments to mitigate thismarket risk, we may enter into derivatives or other financial instruments tohedge a portion of our fuel costs in the future.

 

31

----

Tableof Contents

 

**ITEM 8.**                                  *FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA*

** **

**Management’s Annual Report on Internal Control OverFinancial Reporting**

** **

Management is responsible for establishing and maintaining an adequatesystem of internal control over financial reporting as defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934, as amended, forMarten Transport, Ltd. and subsidiaries (the “Company”).  This system is designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with U.S. generallyaccepted accounting principles.

 

The Company’s internal control over financial reporting includes thosepolicies and procedures that (i) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the Company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the Company are being madeonly in accordance with authorizations of management and directors of theCompany; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of theCompany’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements and even when determined tobe effective, can only provide reasonable assurance with respect to financialstatement preparation and presentation. Also, projection of any evaluation of the effectiveness of internal controlover financial reporting to future periods is subject to the risk that controlsmay become inadequate because of changes in conditions, or that the degree orcompliance with the policies or procedures may deteriorate.

 

Management, with the participation of the Company’s Chairman of theBoard and Chief Executive Officer and Chief Financial Officer, evaluated theeffectiveness of the Company’s internal control over financial reporting as of December 31,2008.  In making this evaluation,management used the criteria set forth by the Committee of SponsoringOrganizations of the Treadway Commission (COSO) in *InternalControl — Integrated Framework*. Based on this assessment, management concluded that the Company’sinternal control over financial reporting was effective as of December 31,2008.  Further, the Company’s independentregistered public accounting firm, KPMG LLP, has issued a report on the Company’sinternal controls over financial reporting on page 33 of this Report.

 

March 13,2009

 

32

----

Table of Contents

 

**Report of Independent RegisteredPublic Accounting Firm**

 

To the Board of Directorsand Stockholders of Marten Transport, Ltd.:

 

We have auditedthe accompanying consolidated balance sheets of Marten Transport, Ltd. andsubsidiaries (the Company) as of December 31, 2008 and 2007 and therelated consolidated statements of operations, stockholders’ equity, and cashflows for each of the years in the three-year period ended December 31,2008. In connection with our audits of the consolidated financial statements,we also have audited the financial statement schedule listed in Item15(a)(2).  We also have audited theCompany’s internal control over financial reporting as of December 31,2008 based on criteria established in *Internal Control -Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). The Company’s management isresponsible for these consolidated financial statements, for maintainingeffective internal control over financial reporting, and for its assessment ofthe effectiveness of internal control over financial reporting, included in theaccompanying Management’s Report on Internal Control Over FinancialReporting.  Our responsibility is toexpress an opinion on these consolidated financial statements and financialstatement schedule and an opinion on the Company’s internal control overfinancial reporting based on our audits.

 

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audits to obtain reasonable assurance about whether the financialstatements are free of material misstatement and whether effective internalcontrol over financial reporting was maintained in all material respects. Ouraudits of the consolidated financial statements included examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation. Our audit of internal control over financial reporting included obtainingan understanding of internal control over financial reporting, assessing therisk that a material weakness exists, and testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk. Our auditsalso included performing such other procedures as we considered necessary inthe circumstances. We believe that our audits provide a reasonable basis forour opinions.

 

A company’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertainto the maintenance 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 itsinherent limitations, internal control over financial reporting may not preventor detect misstatements. Also, projections of any evaluation of effectivenessto future 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,the consolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Marten Transport, Ltd. andsubsidiaries as of December 31, 2008 and 2007 and the results of theiroperations and their cash flows for each of the years in the three-year periodended December 31, 2008, in conformity with accounting principlesgenerally accepted in the United States of America.  Also, in our opinion, the accompanyingfinancial statement schedule, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly, in allmaterial respects, the information set forth therein. It is also in ouropinion, Marten Transport, Ltd. maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2008 based oncriteria established in *Internal Control -Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 
|                    | /s/ KPMG LLP |
|-------------------------|--------------|
|                    |         |
| Minneapolis,  Minnesota |         |
| March 13, 2009     |         |

 

33

----

Table of Contents

 

**MARTEN TRANSPORT, LTD.**

 

**Consolidated Balance Sheets**

 
| ** **                                                                                                                                                                                   | ** ** | **December 31,** | ** **  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|
| **(In thousands, except share information)**                                                                                                                             | ** ** | **2008**              | ** **  | **2007** | ** ** |
| **ASSETS**                                                                                                                                                                                   |       |                  |        |   |   |
| **Current assets:**                                                                                                                                                                          |       |                  |        |   |   |
| Cash                                                                                                                                                                                         | ** ** | **$**                 | **2,395**   |   | $ | 3,618 |   |
| Marketable securities                                                                                                                                                                        | ** ** | **2,604**             |        | 350 |   |
| Receivables:                                                                                                                                                                                 |       |                  |        |   |   |
| Trade, less allowances of $380 and $315,  respectively                                                                                                                                       | ** ** | **50,143**            |        | 51,539 |   |
| Other                                                                                                                                                                                        | ** ** | **7,385**             |        | 6,175 |   |
| Prepaid expenses and other                                                                                                                                                                   | ** ** | **13,705**            |        | 13,823 |   |
| Deferred income taxes                                                                                                                                                                        | ** ** | **6,140**             |        | 4,653 |   |
| Total current assets                                                                                                                                                                         | ** ** | **82,372**            |        | 80,158 |   |
| **Property and equipment:**                                                                                                                                                                  |       |                  |        |   |   |
| Revenue equipment                                                                                                                                                                            | ** ** | **423,188**           |        | 423,261 |   |
| Buildings and land                                                                                                                                                                           | ** ** | **14,067**            |        | 12,099 |   |
| Office equipment and other                                                                                                                                                                   | ** ** | **13,917**            |        | 12,070 |   |
| Less accumulated depreciation                                                                                                                                                                | ** ** | **(136,871**          | **)**       | (122,246 | ) |
| Net property and equipment                                                                                                                                                                   | ** ** | **314,301**           |        | 325,184 |   |
| **Other assets**                                                                                                                                                                             | ** ** | **770**               |        | 2,048 |   |
| ** **                                                                                                                                                                                   | ** ** | **$**                 | **397,443** |   | $ | 407,390 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                |       |                  |        |   |   |
| **Current liabilities:**                                                                                                                                                                     |       |                  |        |   |   |
| Checks issued in excess of cash balances                                                                                                                                                     | ** ** | **$**                 | **1,807**   |   | $ | — |   |
| Accounts payable                                                                                                                                                                             | ** ** | **15,785**            |        | 14,653 |   |
| Insurance and claims accruals                                                                                                                                                                | ** ** | **21,386**            |        | 17,431 |   |
| Accrued liabilities                                                                                                                                                                          | ** ** | **17,109**            |        | 17,731 |   |
| Current maturities of long-term debt                                                                                                                                                         | ** ** | **1,428**             |        | 5,000 |   |
| Total current liabilities                                                                                                                                                                    | ** ** | **57,515**            |        | 54,815 |   |
| **Long-term debt,** less current  maturities                                                                                                                                                 | ** ** | **1,429**             |        | 39,643 |   |
| **Deferred income taxes**                                                                                                                                                                    | ** ** | **81,048**            |        | 74,719 |   |
| Total liabilities                                                                                                                                                                            | ** ** | **139,992**           |        | 169,177 |   |
| **Commitments and contingencies**  (Note 10)                                                                                                                                                 |       |                  |        |   |   |
| **Minority interest**                                                                                                                                                                        | ** ** | **1,715**             |        | 1,283 |   |
| **Stockholders’ equity:**                                                                                                                                                               |       |                  |        |   |   |
| Preferred stock, $.01 par value per share; 2,000,000  shares authorized; no shares issued and outstanding                                                                                    |       | **—**            |        | — |   |
| Common stock, $.01 par value per share; 48,000,000  shares authorized; 21,830,071 shares at December 31, 2008, and  21,811,837 shares at December 31, 2007, issued and outstanding |       | **218**               |        | 218 |   |
| Additional paid-in capital                                                                                                                                                                   | ** ** | **75,305**            |        | 74,570 |   |
| Retained earnings                                                                                                                                                                            | ** ** | **180,213**           |        | 162,142 |   |
| Total stockholders’ equity                                                                                                                                                              | ** ** | **255,736**           |        | 236,930 |   |
|                                                                                                                                                                                         | ** ** | **$**                 | **397,443** |   | $ | 407,390 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

34

----

Table ofContents

 

**MARTEN TRANSPORT, LTD.**

 

**Consolidated Statementsof Operations**

 
| ** **                                                                | ** ** | **For the years ended December 31,** | ** **  |
|---------------------------------------------------------------------------|------------|---------------------------------------------------------------|-------------|
| **(In thousands, except per share information)** | ** ** | **2008**                                                      | ** **  | **2007** | ** ** | **2006** | ** ** |
| **Operating revenue**                                                     | ** ** | **$**                                                         | **607,099** | ** ** | $ | 560,017 |   | $ | 518,890 |   |
| **Operating expenses (income):**                                          |       |                                                          | ** **  |   |   |   |   |
| Salaries, wages and benefits                                              | ** ** | **152,616**                                                   | ** **  | 153,774 |   | 144,373 |   |
| Purchased transportation                                                  | ** ** | **113,175**                                                   | ** **  | 103,776 |   | 84,409 |   |
| Fuel and fuel taxes                                                       | ** ** | **175,892**                                                   | ** **  | 149,021 |   | 135,079 |   |
| Supplies and maintenance                                                  | ** ** | **38,378**                                                    | ** **  | 38,621 |   | 33,155 |   |
| Depreciation                                                              | ** ** | **49,705**                                                    | ** **  | 47,009 |   | 44,360 |   |
| Operating taxes and licenses                                              | ** ** | **6,729**                                                     | ** **  | 6,823 |   | 7,514 |   |
| Insurance and claims                                                      | ** ** | **25,409**                                                    | ** **  | 22,353 |   | 21,183 |   |
| Communications and utilities                                              | ** ** | **3,740**                                                     | ** **  | 3,869 |   | 3,635 |   |
| Gain on disposition of revenue equipment                                  | ** ** | **(2,664**                                                    | **)**       | (3,386 | ) | (6,990 | ) |
| Other                                                                     | ** ** | **11,414**                                                    | ** **  | 10,356 |   | 11,003 |   |
|                                                                      | ** ** | **574,394**                                                   | ** **  | 532,216 |   | 477,721 |   |
| **Operating income**                                                      | ** ** | **32,705**                                                    | ** **  | 27,801 |   | 41,169 |   |
| **Other expenses (income):**                                              |       |                                                          | ** **  |   |   |   |   |
| Interest expense                                                          | ** ** | **1,142**                                                     | ** **  | 3,823 |   | 3,564 |   |
| Interest income                                                           | ** ** | **(184**                                                      | **)**       | (693 | ) | (1,106 | ) |
| Minority interest                                                         | ** ** | **1,120**                                                     | ** **  | 802 |   | 768 |   |
|                                                                      | ** ** | **2,078**                                                     | ** **  | 3,932 |   | 3,226 |   |
| **Income before income taxes**                                            | ** ** | **30,627**                                                    | ** **  | 23,869 |   | 37,943 |   |
| **Provision for income taxes**                                            | ** ** | **12,556**                                                    | ** **  | 8,901 |   | 13,425 |   |
| **Net income**                                                            | ** ** | **$**                                                         | **18,071**  | ** ** | $ | 14,968 |   | $ | 24,518 |   |
| **Basic earnings per common share**                                       | ** ** | **$**                                                         | **0.83**    | ** ** | $ | 0.69 |   | $ | 1.13 |   |
| **Diluted earnings per common share**                                     | ** ** | **$**                                                         | **0.82**    | ** ** | $ | 0.68 |   | $ | 1.12 |   |

 

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

 

35

----

Table ofContents

 

**MARTEN TRANSPORT, LTD.**

** **

**Consolidated Statements of Stockholders’Equity**

 
| ** **                                                               | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | **Retained**             | ** ** | **Total  Stockholders’** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------|------------|----------------|------------|--------------------------|------------|-------------------------------|------------|
| **(In thousands)**                                                  | ** ** | **Shares**            | ** ** | **Amount**     | ** ** | **Paid-In Capital** | ** ** | **Earnings**                  | ** ** | **Equity** | ** ** |
| Balance at December 31, 2005                                        |       | 21,573                |       | $              | 216        |                     | $          | 71,045                        |       | $ | 122,656 |   | $ | 193,917 |   |
| Net income                                                               |       | —                |       | —         |       | —                   |       | 24,518                        |       | 24,518 |   |
| Issuance of common stock from share-based payment  arrangement exercises |       | 192                   |       | 2              |       | 811                      |       | —                        |       | 813 |   |
| Tax benefits from share-based payment arrangement  exercises             |       | —                |       | —         |       | 1,298                    |       | —                        |       | 1,298 |   |
| Share-based payment arrangement compensation expense                     |       | —                |       | —         |       | 447                      |       | —                        |       | 447 |   |
| Balance at December 31, 2006                                        |       | 21,765                |       | 218            |       | 73,601                   |       | 147,174                       |       | 220,993 |   |
| Net income                                                               |       | —                |       | —         |       | —                   |       | 14,968                        |       | 14,968 |   |
| Issuance of common stock from share-based payment  arrangement exercises |       | 47                    |       | —         |       | 303                      |       | —                        |       | 303 |   |
| Tax benefits from share-based payment arrangement  exercises             |       | —                |       | —         |       | 206                      |       | —                        |       | 206 |   |
| Share-based payment arrangement compensation expense                     |       | —                |       | —         |       | 460                      |       | —                        |       | 460 |   |
| Balance at December 31, 2007                                        |       | 21,812                |       | 218            |       | 74,570                   |       | 162,142                       |       | 236,930 |   |
| Net income                                                               |       | —                |       | —         |       | —                   |       | 18,071                        |       | 18,071 |   |
| Repurchase and retirement of common stock                                |       | (67                   | )          | —         |       | (810                     | )          | —                        |       | (810 | ) |
| Issuance of common stock from share-based payment  arrangement exercises |       | 85                    |       | —         |       | 356                      |       | —                        |       | 356 |   |
| Tax benefits from share-based payment arrangement  exercises             |       | —                |       | —         |       | 523                      |       | —                        |       | 523 |   |
| Share-based payment arrangement compensation expense                     |       | —                |       | —         |       | 666                      |       | —                        |       | 666 |   |
| Balance at December 31, 2008                                        |       | 21,830                |       | $              | 218        |                     | $          | 75,305                        |       | $ | 180,213 |   | $ | 255,736 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

36

----

Tableof Contents

 

**MARTEN TRANSPORT, LTD.**

** **

**Consolidated Statements of CashFlows**

 
| ** **                                                                        | ** ** | **For the years ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| **(In thousands)**                                                           | ** ** | **2008**                                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| **CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:**                                  |       |                                                          | ** ** |   |   |   |   |
| Operations:                                                                       |       |                                                          | ** ** |   |   |   |   |
| Net income                                                                        | ** ** | **$**                                                         | **18,071** | ** ** | $ | 14,968 |   | $ | 24,518 |   |
| Adjustments to reconcile net income to net cash  flows from operating activities: |       |                                                          | ** ** |   |   |   |   |
| Depreciation                                                                      | ** ** | **49,705**                                                    | ** ** | 47,009 |   | 44,360 |   |
| Gain on disposition of revenue equipment                                          | ** ** | **(2,664**                                                    | **)**      | (3,386 | ) | (6,990 | ) |
| Deferred income taxes                                                             | ** ** | **4,842**                                                     | ** ** | (1,237 | ) | 8,866 |   |
| Tax benefits from share-based payment arrangement  exercises                      | ** ** | **523**                                                       | ** ** | 206 |   | 1,298 |   |
| Excess tax benefits from share-based payment  arrangement exercises               |       | **(456**                                                      | **)**      | (166 | ) | (1,156 | ) |
| Share-based payment arrangement compensation expense                              |       | **666**                                                       | ** ** | 460 |   | 447 |   |
| Minority interest in earnings of affiliate, net of  distributions                 | ** ** | **432**                                                       | ** ** | 370 |   | 482 |   |
| Changes in other current operating items:                                         |       |                                                          | ** ** |   |   |   |   |
| Receivables                                                                       | ** ** | **186**                                                       | ** ** | (3,251 | ) | (105 | ) |
| Prepaid expenses and other                                                        | ** ** | **118**                                                       | ** ** | 404 |   | (963 | ) |
| Accounts payable                                                                  | ** ** | **(2,066**                                                    | **)**      | 1,999 |   | 5,008 |   |
| Other current liabilities                                                         | ** ** | **6,999**                                                     | ** ** | 4,431 |   | 1,305 |   |
| Net cash provided by operating activities                                         | ** ** | **76,356**                                                    | ** ** | 61,807 |   | 77,070 |   |
| **CASH FLOWS USED FOR INVESTING ACTIVITIES:**                                     |       |                                                          | ** ** |   |   |   |   |
| Revenue equipment additions                                                       | ** ** | **(64,509**                                                   | **)**      | (74,732 | ) | (125,388 | ) |
| Proceeds from revenue equipment dispositions                                      | ** ** | **31,938**                                                    | ** ** | 27,939 |   | 37,301 |   |
| Buildings and land, office equipment and other  additions                         | ** ** | **(4,055**                                                    | **)**      | (2,976 | ) | (1,257 | ) |
| Proceeds from buildings and land, office equipment and  other dispositions        |       | —                                                        | ** ** | 617 |   | — |   |
| Net change in other assets                                                        | ** ** | **1,278**                                                     | ** ** | 2,376 |   | 2,302 |   |
| Purchases of marketable securities                                                | ** ** | **(28,146**                                                   | **)**      | (50 | ) | (3,635 | ) |
| Sales of marketable securities                                                    | ** ** | **25,892**                                                    | ** ** | — |   | 3,829 |   |
| Net cash used for investing activities                                            | ** ** | **(37,602**                                                   | **)**      | (46,826 | ) | (86,848 | ) |
| **CASH FLOWS (USED FOR) PROVIDED BY FINANCING  ACTIVITIES:**                      |       |                                                          | ** ** |   |   |   |   |
| Borrowings under credit facility and long-term debt                               | ** ** | **154,267**                                                   | ** ** | 139,105 |   | 131,023 |   |
| Repayment of borrowings under credit facility and  long-term debt                 | ** ** | **(196,053**                                                  | **)**      | (153,121 | ) | (120,664 | ) |
| Repurchase and retirement of common stock                                         | ** ** | **(810**                                                      | **)**      | — |   | — |   |
| Issuance of common stock from share-based payment arrangement  exercises          |       | **356**                                                       | ** ** | 303 |   | 813 |   |
| Excess tax benefits from share-based payment  arrangement exercises               |       | **456**                                                       | ** ** | 166 |   | 1,156 |   |
| Change in net checks issued in excess of cash  balances                           | ** ** | **1,807**                                                     | ** ** | (804 | ) | (642 | ) |
| Net cash (used for) provided by financing activities                              | ** ** | **(39,977**                                                   | **)**      | (14,351 | ) | 11,686 |   |
| **NET CHANGE IN CASH**                                                            | ** ** | **(1,223**                                                    | **)**      | 630 |   | 1,908 |   |
| **CASH:**                                                                         |       |                                                          | ** ** |   |   |   |   |
| Beginning of year                                                                 | ** ** | **3,618**                                                     | ** ** | 2,988 |   | 1,080 |   |
| End of year                                                                       | ** ** | **$**                                                         | **2,395**  | ** ** | $ | 3,618 |   | $ | 2,988 |   |
| **SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION:**                            |       |                                                          | ** ** |   |   |   |   |
| Cash paid for:                                                                    |       |                                                          | ** ** |   |   |   |   |
| Interest                                                                          | ** ** | **$**                                                         | **1,240**  | ** ** | $ | 3,966 |   | $ | 3,620 |   |
| Income taxes                                                                      | ** ** | **$**                                                         | **6,368**  | ** ** | $ | 6,629 |   | $ | 2,336 |   |
| Non-cash investing activities:                                                    |       |                                                          | ** ** |   |   |   |   |
| Change in revenue equipment not yet paid for                                      | ** ** | **$**                                                         | **(468**   | **)** | $ | (10,233 | ) | $ | 7,976 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

37

----

Table of Contents

 

**MARTEN TRANSPORT, LTD.**

** **

**Notes to ConsolidatedFinancial Statements**

** **

**1.  Summaryof Significant Accounting Policies**

 

**Nature of business:** Marten Transport, Ltd. is a long-hauland regional truckload carrier providing protective service transportation anddistribution of time- and temperature-sensitive materials and generalcommodities to customers in the United States, Canada and Mexico.

 

**Principles of consolidation:** The accompanying consolidated financial statements include the accountsof Marten Transport, Ltd., its subsidiaries and its 45% owned affiliate, MWLogistics, LLC (“MWL”).  MWL is athird-party provider of logistics services to the transportation industry.  We have applied the provisions of FASBInterpretation No. 46, “Consolidation of Variable Interest Entities,” asrevised, to our investment in MWL.  Allmaterial intercompany accounts and transactions have been eliminated inconsolidation.

 

**Marketable securities:** We invest available funds in short-term marketable securities.  This investment is in a mutual fund investingprimarily in repurchase agreements and other U.S. government-backed securitieshaving original maturities of three months or less, and is stated at marketvalue, which approximates cost.  See note9 for additional discussion.

 

**Trade accounts receivable:** Trade accounts receivable are recorded at the invoiced amounts, net ofan allowance for doubtful accounts.  Aconsiderable amount of judgment is required in assessing the realization ofthese receivables including the current creditworthiness of each customer andrelated aging of the past-due balances, including any billing disputes.  In order to assess the collectibility ofthese receivables, we perform ongoing credit evaluations of our customers’financial condition.  Through theseevaluations, we may become aware of a situation where a customer may not beable to meet its financial obligations due to deterioration of its financialviability, credit ratings or bankruptcy. The allowance for doubtful accounts is based on the best informationavailable to us and is reevaluated and adjusted as additional information isreceived.  We evaluate the allowancebased on historical write-off experience, the size of the individual customerbalances, past-due amounts and the overall national economy.  We review the adequacy of our allowance fordoubtful accounts monthly.  Invoicebalances over 30 days after the contractual due date are considered past dueper our policy and are reviewed individually for collectibility.  Initial payments by new customers aremonitored for compliance with contractual terms.  Account balances are charged off against theallowance after all means of collection have been exhausted and the potentialrecovery is considered remote.

 

**Property and equipment:** Additions and improvements to propertyand equipment are capitalized at cost. Maintenance and repair expenditures are charged to operations.  Gains and losses on disposals of revenueequipment are included in operations as they are a normal, recurring componentof our operations.

 

38

----

Table of Contents

 

**MARTENTRANSPORT, LTD.**

 

**Notes toConsolidated Financial Statements (Continued)**

 

Depreciation is computed based on the cost of theasset, reduced by its estimated salvage value, using the straight-line methodfor financial reporting purposes.  Webegin depreciating assets in the month that each asset is placed in serviceand, therefore, is ready for its intended use. Accelerated methods are used for income tax reporting purposes.  Following is a summary of estimated usefullives for financial reporting purposes:

 
| ** **                 | ** ** | **Years** | ** ** |
|----------------------------|------------|-----------|------------|
| Revenue equipment:         |       |      |       |
| Tractors                   |       | 5         |       |
| Trailers                   |       | 7         |       |
| Satellite tracking         |       | 7         |       |
| Auxiliary power units      |       | 5         |       |
| Buildings                  |       | 20-40     |       |
| Office equipment and other |       | 3-15      |       |

 

In 2008, we replaced most of our company-ownedtractors within approximately 3.5 years and our trailers within approximately5.5 years after purchase.  Our usefullives for depreciating tractors is five years and for trailers is seven years,with a 25% salvage value for tractors and a 35% salvage value fortrailers.  These salvage values are basedupon the expected market values of the equipment after five years for tractorsand seven years for trailers. Depreciation expense calculated in this manner approximates thecontinuing declining value of the revenue equipment, and continues at aconsistent straight-line rate for units held beyond the normal replacementcycle.

 

Long-lived assets are reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable.  Recoverabilityof assets to be held and used is measured by a comparison of the carryingamount of an asset to future net undiscounted cash flows expected to begenerated by the asset.  If such assetsare considered to be impaired, the impairment to be recognized is measured bythe amount by which the carrying amount of the assets exceeds the fair value ofthe assets.  Assets to be disposed of arereported at the lower of the carrying amount or fair value less the costs tosell.

 

**Net investment in direct financingleases:** We havedirect financing tractor lease receivables from independent contractors, whichexpire over the next three years.

 

**Tires in service:** The cost of original equipment andreplacement tires placed in service is capitalized. Amortization is calculatedbased on cost, less estimated salvage value, using the straight-line methodover 24 months. The current portion of capitalized tires in service is includedin prepaid expenses and other in the accompanying consolidated balance sheets.The long-term portion of capitalized tires in service and the estimated salvagevalue are included in revenue equipment in the accompanying consolidatedbalance sheets. The cost of recapping tires is charged to operations.

 

**Income taxes:** Deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbasis.  Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled. The effect on deferred tax assets and liabilities of achange in tax rates is recognized in income in the period that includes theenactment date.  We have reflected thenecessary deferred tax assets and liabilities in the accompanying consolidatedbalance sheets.  We believe the futuretax deductions will be realized principally through future reversals of existingtaxable temporary differences and future taxable income.

 

39

----

Table of Contents

 

**MARTENTRANSPORT, LTD.**

 

**Notes toConsolidated Financial Statements (Continued)**

 

We adopted the provisions of Financial AccountingStandards Board, or FASB, Interpretation No. 48, “Accounting forUncertainty in Income Taxes — an Interpretation of FASB Statement No. 109”(FIN 48), on January 1, 2007.  The implementationof FIN 48 did not have a significant impact on our results of operations orfinancial position.  See Note 5 foradditional discussion.

 

In the ordinary course of business there is inherentuncertainty in quantifying our income tax positions.  We assess our income tax positions and recordtax benefits for all years subject to examination based upon management’sevaluation of the facts, circumstances, and information available at thereporting dates.  For those tax positionswhere it is more-likely-than-not that a tax benefit will be sustained, we haverecorded the largest amount of tax benefit with a greater than 50% likelihoodof being realized upon ultimate settlement with a taxing authority that hasfull knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not thata tax benefit will be sustained, no tax benefit has been recognized in thefinancial statements.  Potential accruedinterest and penalties related to unrecognized tax benefits are recognized as acomponent of income tax expense.

 

**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 maintain insurance coverage forper-incident and total losses in excess of these risk retention levels inamounts we consider adequate based upon historical experience and our ongoingreview.  We reserve currently for theestimated cost of the uninsured portion of pending claims. These reserves areperiodically evaluated and adjusted based on our evaluation of the nature andseverity of outstanding individual claims and an estimate of future claimsdevelopment based on historical claims development factors.  Under agreements with our insurance carriersand regulatory authorities, we have $6.8 million in standby letters of creditto guarantee settlement of claims.

 

**Revenue recognition:** We record revenue and related expenses on the date shipment of freightis completed.  We earned 19% and 10% ofour revenue in 2008 from two single customers whose trade receivablesrepresented 16% and 10%, respectively, of our trade receivables as of December 31,2008.  We earned 18% of our revenue in2007 from a single customer whose trade receivables represented 12% of ourtrade receivables as of December 31, 2007. We earned 17% of our revenue in 2006 from a single customer.

 

**Share-based payment arrangementcompensation:**  Under our stock incentive plans, all of ouremployees and any subsidiary employees, as well as all of our non-employeedirectors, consultants, advisors and independent contractors, may be grantedstock-based awards, including incentive and non-statutory stock options and restrictedstock awards.  Effective January 1,2006, we began recording compensation expense associated with share-basedpayment arrangements in accordance with Statement of Financial AccountingStandards No. 123R, “Share-Based Payment” (“SFAS 123R”) as interpreted bySEC Staff Accounting Bulletin No. 107. SFAS 123R requires all share-based payments to employees andnon-employee directors, including grants of employee stock options, to berecognized in the income statement based on their fair values at the date ofgrant.

 

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

 

40

----

Table of Contents

 

**MARTENTRANSPORT, LTD.**

 

**Notes toConsolidated Financial Statements (Continued)**

 

**Segment reporting:** We have adopted the provisions of Statement of Financial AccountingStandards No. 131, “Disclosures about Segments of an Enterprise andRelated Information.”  Statement No. 131establishes accounting standards for segment reporting.  Beginning with fiscal 2007, we have tworeportable segments — Truckload and Logistics. See Note 11 for more information.

 

**Use of estimates:** We must make estimates and assumptions to prepare the consolidatedfinancial statements in conformity with U.S. generally accepted accountingprinciples.  These estimates andassumptions affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities in the consolidated financialstatements.  These estimates areprimarily related to insurance and claims accruals and depreciation.  Ultimate results could differ from theseestimates.

 

**2.  Detailsof Consolidated Balance Sheet Accounts**

 

**Prepaid expenses and other:** As of December 31, prepaid expenses and other consisted of thefollowing:

 
| **(In thousands)**   | ** ** | **2008**  | ** ** | **2007** | ** ** |
|---------------------------|------------|-----------|------------|----------|------------|
| License fees              | ** ** | **$**     | **4,243**  |     | $          | 4,416 |   |
| Tires in service          | ** ** | **3,684** |       | 3,606    |       |
| Parts and tires inventory | ** ** | **2,235** |       | 2,189    |       |
| Insurance premiums        | ** ** | **1,531** |       | 1,349    |       |
| Other                     | ** ** | **2,012** |       | 2,263    |       |
|                      | ** ** | **$**     | **13,705** |     | $          | 13,823 |   |

 

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

 
| **(In thousands)**                     | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Total minimum lease payments to be received | ** ** | **$**    | **912**    |     | $          | 3,567 |   |
| Less: unearned income                       | ** ** | **(115** | **)**      | (562     | )          |
| Net investment in direct financing leases   | ** ** | **$**    | **797**    |     | $          | 3,005 |   |

 

The current portion of our net investment in directfinancing leases is included in other receivables in the accompanyingconsolidated balance sheets.  Thelong-term portion of our net investment in direct financing leases is includedin other assets in the accompanying consolidated balance sheets.  The interest method is used to amortizeunearned income, which amortizes unearned income to income over the lease termso as to produce a constant periodic rate of return on the net investment ineach lease.  The amortization of unearnedincome is included in interest income and other in the accompanying consolidatedstatements of operations.

 

As of December 31, 2008, minimum lease paymentsto be received for each of the three succeeding fiscal years are as follows:$591,000 in 2009, $272,000 in 2010 and $49,000 in 2011.

 

41

----

Table of Contents

 

**MARTENTRANSPORT, LTD.**

 

**Notes toConsolidated Financial Statements (Continued)**

 

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

 
| **(In thousands)** | ** ** | **2008**  | ** ** | **2007** | ** ** |
|-------------------------|------------|-----------|------------|----------|------------|
| Accrued payables        | ** ** | **$**     | **5,319**  |     | $          | 9,152 |   |
| Salaries and wages      | ** ** | **4,741** |       | 1,529    |       |
| Vacation                | ** ** | **3,416** |       | 3,456    |       |
| Current income taxes    | ** ** | **2,535** |       | 2,921    |       |
| Other                   | ** ** | **1,098** |       | 673      |       |
| ** **              |       | **$**     | **17,109** |     | $          | 17,731 |   |

 

**3. Long-Term Debt**

 

As of December 31, long-term debt consisted ofthe following:

 
| **(In thousands)**                                                                                                                                                                                                                                                                                                                                             | ** ** | **2008**   | ** ** | **2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| Series B Senior Unsecured Notes maturing in  April 2010 with annual principal payments of $1.43 million bearing  interest at 8.57%                                                                                                                                                                                                                        |       | **$**      | **2,857**  |     | $          | 4,286 |   |
| Series A Senior Unsecured Notes which matured  in October 2008 and which bore interest at 6.78%                                                                                                                                                                                                                                                           |       | **—** |       | 3,571    |       |
| Unsecured committed credit facility in the amount of  $75 million with banks maturing in September 2011 and bearing variable  interest based upon either the London Interbank Offered Rate or the agent bank’s  Prime Rate, in each case plus/minus applicable margins (5.82% weighted average  interest rate for the facility at December 31, 2007) |       | **—** |       | 36,786   |       |
| Total long-term debt                                                                                                                                                                                                                                                                                                                                                | ** ** | **2,857**  |       | 44,643   |       |
| Less current maturities of long-term debt                                                                                                                                                                                                                                                                                                                           | ** ** | **1,428**  |       | 5,000    |       |
| Long-term debt, less current maturities                                                                                                                                                                                                                                                                                                                             | ** ** | **$**      | **1,429**  |     | $          | 39,643 |   |

 

We maintain a credit agreement that provides for afive-year unsecured committed credit facility (“credit facility”) maturing in September 2011in an aggregate principal amount of up to $75 million. The aggregate principalamount of the credit facility may be increased at our option up to a maximumaggregate principal amount of $100 million. At December 31, 2008, therewas no outstanding principal balance on the credit facility. As of that date,we had outstanding standby letters of credit of $6.8 million and remainingborrowing availability of $68.2 million.

 

Our credit facility prohibits us from paying, in anyfiscal year, dividends in excess of 25% of our net income from the prior fiscalyear. The debt agreements also contain restrictive covenants which, among othermatters, require us to maintain certain financial ratios, includingdebt-to-equity, cash flow leverage, interest coverage and fixed chargecoverage. We were in compliance with all of these covenants at December 31,2008.

 

42

----

Table of Contents

 

**MARTENTRANSPORT, LTD.**

 

**Notes toConsolidated Financial Statements (Continued)**

 

Maturities of long-term debt at December 31,2008, are as follows:

 
| **(In thousands)** | ** ** | **Amount** | ** ** |
|-------------------------|------------|------------|------------|
| 2009                    |       | $          | 1,428      |   |
| 2010                    |       | 1,429      |       |
|                    |       | $          | 2,857      |   |

 

**4.  RelatedParty Transactions**

 

The following related party transactions occurredduring the three years ended December 31, 2008:

 

(a)           Wepurchase fuel and obtain tires and related services from a company in which oneof our directors is the president and a principal stockholder. We paid thatcompany $1.4 million in 2008, $1.1 million in 2007 and $1.3 million in 2006 forfuel and tire services. In addition, we paid $2.3 million in 2008, $2.4 millionin 2007 and $2.4 million in 2006 to tire manufacturers for tires that wepurchased from the tire manufacturers but were provided by the same company. Thesame company received commissions from the tire manufacturers related to thesepurchases. We had accounts payable to that company of $14,000 as of December 31,2008 and $25,000 as of December 31, 2007.

 

(b)           Wepaid $564,000 in 2008 and $547,000 in 2007 for various construction projects toa company in which one of our directors is the president and owner. We had noaccounts payable to that company as of December 31, 2008 and 2007.

 

(c)           In August 2008,we acquired a building adjacent to our headquarters which will be used formaintenance and storage from our Chairman of the Board and Chief ExecutiveOfficer in a like-kind exchange for a building of equal value owned by MartenTransport. Each of the buildings were valued at $291,000 at the time of theexchange.

 

**5.  Income Taxes**

 

The components of the provision for income taxesconsisted of the following:

 
| **(In thousands)** | ** ** | **2008**  | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------|------------|-----------|------------|----------|------------|----------|------------|
| Current:                |       |      |       |     |       |     |       |
| Federal                 | ** ** | **$**     | **6,497**  |     | $          | 8,922    |       | $ | 4,159 |   |
| State                   | ** ** | **1,217** |       | 1,216    |       | 400      |       |
|                    | ** ** | **7,714** |       | 10,138   |       | 4,559    |       |
|                    |       |      |       |     |       |     |       |
| Deferred:               |       |      |       |     |       |     |       |
| Federal                 | ** ** | **4,549** |       | (944     | )          | 9,088    |       |
| State                   | ** ** | **293**   |       | (293     | )          | (222     | )          |
|                    | ** ** | **4,842** |       | (1,237   | )          | 8,866    |       |
| Total provision         | ** ** | **$**     | **12,556** |     | $          | 8,901    |       | $ | 13,425 |   |

 

43

----

Table ofContents

 

**MARTENTRANSPORT, LTD.**

 

**Notes toConsolidated Financial Statements (Continued)**

 

The statutory federal income tax rate is reconciled tothe effective income tax rate as follows:

 
| ** **                                                                            | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Statutory federal income tax rate                                                     |       | **35**   | **%**      | 35       | %          | 35       | %          |
| Increase in taxes arising from state income taxes,  net of federal income tax benefit |       | **3**    | ** ** | 2        |       | —   |       |
| Non-deductible expenses                                                               | ** ** | **3**    | ** ** | —   |       | —   |       |
| Effective tax rate                                                                    | ** ** | **41**   | **%**      | 37       | %          | 35       | %          |

 

Our effective income tax rate increased to 41.0% in2008 from 37.3% in 2007, primarily because of the nondeductible effect of a perdiem pay structure for our drivers adopted in the first quarter of 2008. In2006, we decreased our deferred income tax liability by $1.3 million, or 3.3%of income before income taxes. Our effective income tax rate in 2006 included arevision to our previously recorded deferred income tax liability of 2.8% ofincome before income taxes, primarily due to a change in income apportionmentfor several states, which produced a lower effective state income tax rate, netof federal impact.

 

As of December 31, the net deferred tax liabilityconsisted of the following:

 
| **(In thousands)**          | ** ** | **2008**   | ** ** | **2007** | ** ** |
|----------------------------------|------------|------------|------------|----------|------------|
| Deferred tax assets:             |       |       |       |     |       |
| Reserves and accrued liabilities | ** ** | **$**      | **8,711**  |     | $          | 7,131 |   |
| Other                            | ** ** | **958**    |       | 679      |       |
| ** **                       |       | **9,669**  |       | 7,810    |       |
| Deferred tax liabilities:        |       |       |       |     |       |
| Depreciation                     | ** ** | **82,022** |       | 75,408   |       |
| Prepaid expenses                 | ** ** | **2,555**  |       | 2,468    |       |
| ** **                       |       | **84,577** |       | 77,876   |       |
| Net deferred tax liability       | ** ** | **$**      | **74,908** |     | $          | 70,066 |   |

 

We have not provided a valuation allowance againstdeferred tax assets at December 31, 2008 or 2007. We believe the deferredtax assets will be realized principally through future reversals of existingtaxable temporary differences (deferred tax liabilities) and future taxableincome.

 

As disclosed in Note 1, we adopted the provisions ofFIN 48 as of January 1, 2007. Our reserves for unrecognized tax benefitswere $131,000 as of December 31, 2008 and $69,000 as of December 31,2007. The $62,000 increase in the amount reserved in 2008 relates to currentperiod tax positions. The amount reserved as of December 31, 2007 wasadded in 2007 relating to current period tax positions. If recognized, $85,000of the unrecognized tax benefits as of December 31, 2008 would impact oureffective tax rate. No potential interest or penalties related to unrecognizedtax benefits were recognized in our financial statements as of December 31,2008. We do not expect the reserves for unrecognized tax benefits to changesignificantly within the next twelve months.

 

The federal statute of limitations remains open for2005 and forward. We file tax returns in numerous state jurisdictions withvarying statutes of limitations.

 

44

----

Table of Contents

 

**MARTENTRANSPORT, LTD.**

 

**Notes toConsolidated Financial Statements (Continued)**

 

**6.  EarningsPer Common Share**

 

Basic and diluted earnings per common share werecomputed as follows:

 
| **(In thousands, except per share amounts)**                | ** ** | **2008**   | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Numerator:                                                                           |       |       |       |     |       |     |       |
| Net income                                                                           | ** ** | **$**      | **18,071** |     | $          | 14,968   |       | $ | 24,518 |   |
| Denominator:                                                                         |       |       |       |     |       |     |       |
| Basic earnings per common share - weighted-average  shares                           |       | **21,787** |       | 21,795   |       | 21,735   |       |
| Effect of dilutive stock options                                                     | ** ** | **144**    |       | 166      |       | 220      |       |
| Diluted earnings per common share - weighted-average  shares and assumed conversions |       | **21,931** |       | 21,961   |       | 21,955   |       |
| Basic earnings per common share                                                      | ** ** | **$**      | **0.83**   |     | $          | 0.69     |       | $ | 1.13 |   |
| Diluted earnings per common share                                                    | ** ** | **$**      | **0.82**   |     | $          | 0.68     |       | $ | 1.12 |   |

 

Options totaling 410,100, 280,000 and 226,000 shareswere outstanding but were not included in the calculation of diluted earningsper share for 2008, 2007 and 2006, respectively, primarily because theirexercise prices were greater than the average market price of the common sharesand, therefore, including the options in the denominator would be antidilutive,or decrease the number of weighted-average shares. The shares above include99,500, 90,000 and 78,000 shares, respectively, of performance-based optionawards for which the performance condition was not considered probable ofachievement.

 

**7.  Share Repurchase Program**

 

In December 2007, our Board of Directors approveda share repurchase program to repurchase up to one million shares of our commonstock either through purchases on the open market or through privatetransactions. The timing and extent to which we will repurchase shares dependson market conditions and other corporate considerations. In the first quarterof 2008 we repurchased and retired 67,500 shares of our common stock for$810,000. We made no purchases in 2007 or in the remainder of 2008. Therepurchase program does not have an expiration date.

 

**8.  EmployeeBenefits**

 

***StockIncentive Plans***- Under our 2005 Stock Incentive Plan (the “2005 Plan”), all of our employeesand any subsidiary employees, as well as all of our non-employee directors,consultants, advisors and independent contractors, may be granted stock-basedawards, including incentive and non-statutory stock options and restrictedstock awards. Stock options expire within 7 or 10 years after the date of grantand the exercise price must be at least the fair market value of our commonstock on the date of grant. Stock options issued to non-employee directors upontheir annual re-election to our Board of Directors are generally exercisable atthe date of grant. Service-based options issued to employees are generallyexercisable beginning one year from the date of grant in cumulative amounts of20% per year. Performance-based options become exercisable upon achievement ofcertain performance criteria established by the Compensation Committee of ourBoard of Directors. Options exercised represent newly issued shares. Themaximum number of shares of common stock available for issuance under the 2005Plan is 2.85 million shares. As of December 31, 2008, there were 422,600shares reserved for issuance under options outstanding under the 2005 Plan. The2005 Plan replaces our 1995 Stock Incentive Plan (the “1995 Plan”), whichexpired by its terms in March 2005.

 

45

----

Table of Contents

 

**MARTENTRANSPORT, LTD.**

 

**Notes toConsolidated Financial Statements (Continued)**

 

Under our 1995 Plan, officers, directors and employeeswere granted incentive and non-statutory stock options. Incentive stock optionexercise prices were required to be at least the fair market value of ourcommon stock on the date of grant. Non-statutory stock option exercise priceswere required to be at least 85% of the fair market value of our common stockon the date of grant. Stock options expire within 10 years after the date ofgrant. Stock options issued to non-employee directors upon their annualre-election to our Board of Directors are generally exercisable at the date ofgrant. Service-based options issued to employees are generally exercisablebeginning one year from the date of grant in cumulative amounts of 20% peryear. Options exercised represent newly issued shares. As of December 31,2008, there were 272,763 shares reserved for issuance under options outstandingunder the 1995 Plan. No additional options will be granted under the 1995 Plan.

 

Effective January 1, 2006, we began recordingcompensation expense associated with share-based payment arrangements inaccordance with Statement of Financial Accounting Standards No. 123R, “Share-BasedPayment” (“SFAS 123R”) as interpreted by SEC Staff Accounting Bulletin No. 107.SFAS 123R supersedes Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (“APB 25”), and amends Statement of FinancialAccounting Standards No. 95, “Statement of Cash Flows.” Generally, theapproach in SFAS 123R is similar to the approach described in Statement ofFinancial Accounting Standards No. 123, “Accounting For Stock-BasedCompensation” (“SFAS 123”). However, SFAS 123R requires all share-basedpayments to employees and non-employee directors, including grants of employeestock options, to be recognized in the income statement based on their fairvalues at the date of grant.

 

We adopted the modified prospective transition methodprovided for under SFAS 123R, and consequently have not retroactively adjustedresults from prior periods. Under this transition method, compensation costassociated with share-based awards recognized in 2008, 2007 and 2006 includes: (a) compensationcost for all share-based payments granted prior to, but not yet vested as of December 31,2005, based on the grant-date fair value estimated in accordance with theprovisions of SFAS 123, and (b) compensation cost for all share-basedpayments granted subsequent to December 31, 2005, based on the grant-datefair value estimated in accordance with the provisions of SFAS 123R.

 

We use the Black-Scholes option pricing model tocalculate the grant-date fair value of option awards. The fair value of optionawards granted was estimated as of the date of grant using the followingweighted average assumptions:

 
| ** **                                    | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006** | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| Service-based options:                        |       |       | ** ** |       |       |     |       |
| Expected option life in years(1)              | ** ** | **6.2**    | ** ** | 7.0        |       | 7.0      |       |
| Expected stock price volatility percentage(2) | ** ** | **40**     | **%**      | 36         | %          | 29       | %          |
| Risk-free interest rate percentage(3)         | ** ** | **3.3**    | **%**      | 4.6        | %          | 4.6      | %          |
| Expected dividend yield(4)                    | ** ** | **—** | ** ** | —     |       | —   |       |
| Fair value as of the date of grant            | ** ** | **$**      | **7.76**   | ** ** | $          | 8.05     |       | $ | 9.55 |   |
|                                          |       |       | ** ** |       |       |     |       |
| Performance-based options:                    |       |       | ** ** |       |       |     |       |
| Expected option life in years(1)              | ** ** | **6.6**    | ** ** | 7.0        |       | 7.0      |       |
| Expected stock price volatility percentage(2) | ** ** | **39**     | **%**      | 36         | %          | 29       | %          |
| Risk-free interest rate percentage(3)         | ** ** | **3.3**    | **%**      | 4.6        | %          | 4.6      | %          |
| Expected dividend yield(4)                    | ** ** | **—** | ** ** | **—** |       | —   |       |
| Fair value as of the date of grant            | ** ** | **$**      | **7.90**   | ** ** | $          | 7.72     |       | $ | 9.83 |   |

 

46

----

Table of Contents

 

**MARTENTRANSPORT, LTD.**

 

**Notes toConsolidated Financial Statements (Continued)**

 
| (1)    |   | Expected option  life — We use historical employee exercise and option expiration data to  estimate the expected life assumption for the Black-Scholes grant-date  valuation. We believe that this historical data is currently the best  estimate of the expected term of a new option. We use a weighted-average  expected life for all awards. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| (2)    |   | Expected stock  price volatility — We use our stock’s historical volatility for the same  period of time as the expected life. We have no reason to believe that its  future volatility will differ from the past.                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| (3)    |   | Risk-free  interest rate — The rate is based on the U.S. Treasury yield curve in effect  at the time of the grant for the same period of time as the expected life.                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| (4)    |   | Expected  dividend yield — We have not historically paid cash dividends on our common  stock.                                                                                                                                                                                                                                                     |

 

We use the straight-line attribution method torecognize expense for all service-based option awards with graded vesting.  Compensation expense will be recorded forperformance-based option awards in the periods in which the performancecondition is probable of achievement.

 

Service-based option awards become immediatelyexercisable in full in the event of retirement, death or disability and upon achange in control with respect to all options that have been outstanding for atleast six months.  To be eligible forretirement, an employee must reach age 65. Performance-based option awards will remain exercisable to the extentpreviously exercisable for a period of one year after the employee’s employmentis terminated due to retirement, death or disability.  Performance-based option awards becomeimmediately exercisable in full in the event of a change in control withrespect to all options that have been outstanding for at least six months.

 

SFAS 123R requires compensation costs associated withservice-based option awards to be recognized over the requisite service period,which is the period between the grant date and the earlier of the award’sstated vesting term or the date the employee is eligible for retirement.  We immediately recognize the entire amount ofshare-based compensation cost for employees that are eligible for retirement atthe date of grant.  For awards granted toemployees approaching retirement eligibility, we recognize compensation cost ona straight-line basis over the period from the grant date through theretirement eligibility date.  Share-basedcompensation expense for employees who are not retirement eligible isrecognized on a straight-line basis over the stated vesting period of theaward.

 

The amount of share-based compensation recognizedduring a period is based on the value of the portion of the awards that areultimately expected to vest.  SFAS 123Rrequires forfeitures to be estimated at the time of grant and revised, ifnecessary, in subsequent periods if actual forfeitures differ from those estimates.  The term “forfeitures” is distinct from “cancellations”or “expirations” and represents only the unvested portion of the surrenderedaward.  We currently expect, based on ananalysis of our historical forfeitures and known forfeitures on existingawards, that approximately 1.25% of unvested outstanding options will beforfeited each year.  This analysis willbe re-evaluated quarterly and the forfeiture rate will be adjusted asnecessary.  Ultimately, the actualexpense recognized over the vesting period will only be for those shares thatvest.

 

Total share-based compensation expense recorded in2008 was $666,000 ($432,000 net of income tax benefit, $0.02 of earnings perbasic and diluted share), in 2007 was $460,000 ($321,000 net of income tax benefit,$0.015 of earnings per basic and diluted share) and in 2006 was $447,000($318,000 net of income tax

 

47

----

Table of Contents

 

**MARTENTRANSPORT, LTD.**

 

**Notes toConsolidated Financial Statements (Continued)**

 

benefit, $0.015 ofearnings per basic share and $0.014 of earnings per diluted share).  All share-based compensation expense wasrecorded in salaries, wages and benefits expense.

 

Prior to the adoption of SFAS 123R, benefits of taxdeductions in excess of recognized compensation costs (excess tax benefits)were reported as operating cash flows. SFAS 123R requires that they be recorded as a financing cash inflowrather than a deduction of taxes paid in operating cash flows.  In 2008, 2007 and 2006, there was $456,000,$166,000 and $1.2 million, respectively, of excess tax benefits recognizedresulting from exercises of options granted prior to December 31, 2005.

 

As of December 31, 2008, there was a total of$1.5 million of unrecognized compensation expense related to unvestedservice-based option awards, which is expected to be recognized over aweighted-average period of 3.6 years, and $911,000 of unrecognized compensationexpense related to unvested performance-based option awards, which will berecorded in the periods in which our achievement of certain operating ratios isprobable through 2010.  As of December 31,2008, the performance condition was not considered probable of achievement.

 

Option activity in 2008 was as follows:

 
| ** **                            | ** ** | ** ** | ** ** | **Weighted**            | ** ** |
|---------------------------------------|------------|------------|------------|-------------------------|------------|
| ** **                            | ** ** | ** ** | ** ** | **Average**             | ** ** |
| ** **                            | ** ** | **Shares** | ** ** | **Exercise Price** | ** ** |
| Outstanding at December 31, 2007 |       | 616,897    |       | $                       | 12.46      |   |
| Granted                               |       | 171,600    |       | 17.55                   |       |
| Exercised                             |       | (85,734    | )          | 4.16                    |       |
| Forfeited                             |       | (7,400     | )          | 18.84                   |       |
| Outstanding at December 31, 2008 |       | 695,363    |       | $                       | 14.67      |   |
| Exercisable at December 31, 2008 |       | 382,063    |       | $                       | 10.41      |   |

 

The fair value of options granted in 2008 was $1.2million for service-based options and $170,000 for performance-basedoptions.  The fair value of optionsgranted in 2007 was $338,000 for service-based options and $93,000 forperformance-based options.  The fairvalue of options granted in 2006 was $1.4 million for service-based options and$767,000 for performance-based options. The total intrinsic value of options exercised in 2008, 2007 and 2006was $1.3 million, $564,000 and $3.4 million, respectively.  Intrinsic value is the difference between thefair value of the acquired shares at the date of exercise and the exerciseprice, multiplied by the number of options exercised.  Proceeds received from option exercises in2008, 2007 and 2006 were $356,000, $303,000 and $813,000, respectively.

 

48

----

Table of Contents

 

**MARTENTRANSPORT, LTD.**

 

**Notes toConsolidated Financial Statements (Continued)**

 

The following table summarizes information concerningoutstanding and exercisable option awards as of December 31, 2008:

 
| ** **                                  | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Range of Exercise Prices** | ** ** | **Shares**                   | ** ** | **Life(1)**                  | ** ** | **Price(2)** | ** ** | **Value(3)** | ** ** | **Shares** | ** ** | **Life(1)** | ** ** | **Price(2)** | ** ** | **Value(3)** | ** ** |
| Service-based options:                      |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| $3.84 - $5.78                               |       | 205,324                      |       | 2.5                          |       | $ | 4.63 |   | $ | 2,942 |   | 205,324 |   | 2.5 |   | $ | 4.63 |   | $ | 2,942 |   |
| $10.76                                      |       | 67,439                       |       | 4.8                          |       | 10.76 |   | 553 |   | 67,439 |   | 4.8 |   | 10.76 |   | 553 |   |
| $15.45 - $23.59                             |       | 323,100                      |       | 7.2                          |       | 19.79 |   | 286 |   | 109,300 |   | 7.5 |   | 21.06 |   | 55 |   |
|                                        |       | 595,863                      |       | 5.3                          |       | $ | 13.54 |   | $ | 3,781 |   | 382,063 |   | 4.3 |   | $ | 10.41 |   | $ | 3,550 |   |
| Performance-based options:                  |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| $15.45 - $23.59                             |       | 99,500                       |       | 7.6                          |       | $ | 21.46 |   | $ | 73 |   | — |   | — |   | $ | — |   | $ | — |   |

 

----

(1)   Represents theweighted-average remaining contractual life in years.

(2)   Represents theweighted-average exercise price.

(3)   Represents theaggregate intrinsic value based on our closing stock price on December 31,2008 for in-the-money options (in thousands).

 

Nonvested optionawards as of December 31, 2008 and changes during 2008 were as follows:

 
| ** **                          | ** ** | ** ** | ** ** | ** **          | ** ** | **Weighted**        | ** ** |
|-------------------------------------|------------|------------|------------|---------------------|------------|---------------------|------------|
| ** **                          | ** ** | ** ** | ** ** | ** **          | ** ** | **Average**         | ** ** |
| ** **                          | ** ** | ** ** | ** ** | **Weighted**        | ** ** | **Remaining**       | ** ** |
| ** **                          | ** ** | ** ** | ** ** | **Average**         | ** ** | **Contractual**     | ** ** |
| ** **                          | ** ** | ** ** | ** ** | **Grant Date** | ** ** | **Life**            | ** ** |
| ** **                          | ** ** | **Shares** | ** ** | **Fair Value** | ** ** | **(in Years)** | ** ** |
| Service-based options:              |       |       |       |                |       |                |       |
| Nonvested at December 31, 2007 |       | 147,986    |       | $                   | 8.61       |                | 8.2        |   |
| Granted                             |       | 150,100    |       | 7.76                |       | 6.9                 |       |
| Vested                              |       | (79,286    | )          | 7.93                |       | 7.3                 |       |
| Forfeited                           |       | (5,000     | )          | 7.72                |       | 8.7                 |       |
| Nonvested at December 31, 2008 |       | 213,800    |       | $                   | 8.29       |                | 7.0        |   |
|                                |       |       |       |                |       |                |       |
| Performance-based options:          |       |       |       |                |       |                |       |
| Nonvested at December 31, 2007 |       | 78,000     |       | $                   | 9.51       |                | 8.4        |   |
| Granted                             |       | 21,500     |       | 7.90                |       | 8.1                 |       |
| Nonvested at December 31, 2008 |       | 99,500     |       | $                   | 9.16       |                | 7.6        |   |

 

The total fair value of options which vested during2008, 2007 and 2006 was $629,000, $419,000 and $227,000, respectively.

 

49

----

Table of Contents

 

**MARTENTRANSPORT, LTD.**

 

**Notes toConsolidated Financial Statements (Continued)**

 

***RetirementSavings Plan***- We sponsor a defined contribution retirement savings plan under Section 401(k) ofthe Internal Revenue Code.  Employees areeligible for the plan after one year of service. Participants are able tocontribute up to the limit set by law, which in 2008 was $15,500 forparticipants less than age 50 and $20,500 for participants age 50 andabove.  We contribute 35% of each participant’scontribution, up to a total of 6% contributed. Our contribution vests at the rate of 20% per year for the secondthrough sixth years of service.  Inaddition, we may make elective contributions as determined by the board ofdirectors.  Elective contributions werenot made in 2008, 2007 or 2006.  Totalexpense recorded for the plan was $1.0 million in 2008, $1.3 million in 2007and $1.1 million in 2006.

 

***StockPurchase Plans***- An Employee Stock Purchase Plan and an Independent Contractor Stock PurchasePlan are sponsored to encourage employee and independent contractor ownershipof our common stock. Eligible participants specify the amount of regularpayroll or contract payment deductions and voluntary cash contributions thatare used to purchase shares of our common stock.  The purchases are made at the market price onthe open market.  We pay the broker’scommissions and administrative charges for purchases of common stock under theplans.

 

**9.  Fair Value Measurements**

 

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157, “Fair Value Measurements,” (SFAS157).  This statement provides a singledefinition for fair value, establishes a framework for measuring fair value andexpands disclosures about fair value measurements.  Under SFAS 157, fair value is defined as theexit price, or the amount that would be received to sell an asset or paid totransfer a liability in an orderly transaction between market participants asof the measurement date.  SFAS 157 alsoestablishes a hierarchy for inputs used in measuring fair value that maximizesthe use of observable inputs and minimizes the use of unobservable inputs byrequiring that the most observable inputs be used when available.  Observable inputs are inputs market participantswould use in valuing the asset or liability developed based on market dataobtained from independent sources. Unobservable inputs are inputs that reflect a company’s assumptionsabout the factors market participants would use in valuing the asset orliability developed based upon the best information available in thecircumstances.

 

We adopted the provisions of SFAS 157 (as impacted byFSP Nos. 157-1 and 157-2) effective January 1, 2008 with respect to fairvalue measurements of (a) nonfinancial assets and liabilities that arerecognized or disclosed at fair value in our consolidated financial statementson a recurring basis (at least annually) and (b) all financial assets andliabilities.  The financial assets andliabilities that are re-measured and reported at fair value for each reportingperiod include our marketable securities. There were no fair value measurements with respect to nonfinancialassets or liabilities that are recognized or disclosed at fair value in ourconsolidated financial statements on a recurring basis in 2008.  SFAS 157 as it relates to fair valuemeasurement requirements for non-financial assets and liabilities that are notremeasured at fair value on a recurring basis is effective for 2009.  The adoption of SFAS 157 did not and is notexpected to have a significant impact on our financial condition, results ofoperations or cash flows.

 

The following table presents information about ourfinancial assets and liabilities that are measured at fair value on a recurringbasis as of December 31, 2008, and indicates the fair value hierarchy ofthe valuation techniques utilized to determine such fair value.  The hierarchy is broken down into threelevels.  Level 1 inputs are quoted prices(unadjusted) in active markets for identical assets or liabilities.  Level 2 inputs include data points that areobservable such as quoted prices for similar assets or liabilities in activemarkets, quoted prices for identical or similar assets or liabilities inmarkets that are not active, and inputs (other than quoted prices) such asinterest rates and yield curves that are observable for the asset or liability,either directly or

 

50

----

Table of Contents

 

**MARTENTRANSPORT, LTD.**

 

**Notes toConsolidated Financial Statements (Continued)**

 

indirectly.  Level 3 inputs are unobservable data pointsfor the asset or liability, and include situations where there is little, ifany, market activity for the asset or liability.

 
| ** **              | ** ** | **Asset Balance as  of December 31,** | ** ** | **Fair Value Measurements Using:** | ** ** |
|-------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------|------------|
| **(In thousands)** | ** ** | **2008**                                                  | ** ** | **Level 1**                                  | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Marketable securities   |       | $                                                         | 2,604      |                                              | $          | 2,604 |   | $ | — |   | $ | — |   |
|                         |            |                                                           |            |                                                   |            |  |  |  |  |  |  |  |  |

 

Our investment in short-term marketable securities isin a mutual fund which is valued daily based upon quoted prices in an activemarket.

 

The carrying amounts of accounts receivable, directfinancing leases receivable and accounts payable approximate fair value becauseof the short maturity of these instruments. The fair value of our total long-term debt is estimated to be $2.9million at December 31, 2008, and $45.0 million at December 31,2007.  The fair value was estimated bydiscounting future cash flows using a current borrowing rate for similarlong-term debt instruments.

 

**10.  Commitments and Contingencies**

 

We are committed to: (a) purchase $3.5 million ofnew revenue equipment in 2009; (b) building construction expenditures of$2.2 million in 2009; and (c) operating lease obligation expenditurestotaling $1.1 million through 2013.

 

We are involved in legal actions that arise in theordinary course of business.  Althoughthe outcomes of any such legal actions cannot be predicted, in the opinion ofmanagement, the resolution of any currently pending or threatened actions willnot have a material adverse effect upon our financial position or results ofoperations.

 

**11. Business Segments**

 

Our presentation includes two reportable segments —Truckload and Logistics.  The primarysource of our operating revenue is truckload revenue, which we generate bytransporting freight for our customers and report within our Truckloadsegment.  Generally, we are paid by themile for our services.  We also derivetruckload revenue from fuel surcharges, loading and unloading activities,equipment detention and other ancillary services.

 

Our operating revenue also includes revenue reportedwithin our Logistics segment, which consists of revenue from our internalbrokerage and intermodal operations, both launched in 2005, and through our 45%interest in MWL, a third-party provider of logistics services to thetransportation industry.  Brokerageservices involve arranging for another company to transport freight for ourcustomers while we retain the billing, collection and customer managementresponsibilities.  Intermodal servicesinvolve the transport of our trailers on railroad flatcars for a portion of atrip, with the balance of the trip using our tractors or, to a lesser extent,contracted carriers.

 

51

----

Table of Contents

 

**MARTENTRANSPORT, LTD.**

 

**Notes toConsolidated Financial Statements (Continued)**

 

The following table sets forth for the years indicatedour operating revenue, operating income and operating ratio by segment.  We do not prepare separate balance sheets bysegment and, as a result, assets are not separately identifiable by segment.

 
| **(Dollars in thousands)**                            | ** ** | **2008**    | ** **  | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------|------------|-------------|-------------|----------|------------|----------|------------|
| Operating revenue:                                              |       |        |        |     |       |     |       |
| Truckload revenue, net of fuel surcharge revenue                | ** ** | **$**       | **384,264** |     | $          | 406,754  |       | $ | 402,327 |   |
| Truckload fuel surcharge revenue                                | ** ** | **123,922** |        | 83,786   |       | 75,323   |       |
| Total Truckload revenue                                         | ** ** | **508,186** |        | 490,540  |       | 477,650  |       |
|                                                            |       |        |        |     |       |     |       |
| Logistics revenue, net of intermodal fuel surcharge  revenue(1) |       | **90,194**  |        | 66,163   |       | 39,298   |       |
| Intermodal fuel surcharge revenue                               | ** ** | **8,719**   |        | 3,314    |       | 1,942    |       |
| Total Logistics revenue                                         | ** ** | **98,913**  |        | 69,477   |       | 41,240   |       |
|                                                            |       |        |        |     |       |     |       |
| Total operating revenue                                         | ** ** | **$**       | **607,099** |     | $          | 560,017  |       | $ | 518,890 |   |
|                                                            |       |        |        |     |       |     |       |
| Operating income:                                               |       |        |        |     |       |     |       |
| Truckload                                                       | ** ** | **$**       | **26,055**  |     | $          | 22,689   |       | $ | 37,500 |   |
| Logistics                                                       | ** ** | **6,650**   |        | 5,112    |       | 3,669    |       |
| Total operating income                                          | ** ** | **$**       | **32,705**  |     | $          | 27,801   |       | $ | 41,169 |   |
|                                                            |       |        |        |     |       |     |       |
| Operating ratio(2)                                              |       |        |        |     |       |     |       |
| Truckload                                                       | ** ** | **94.9**    | **%**       | 95.4     | %          | 92.1     | %          |
| Logistics                                                       | ** ** | **93.3**    | **%**       | 92.6     | %          | 91.1     | %          |
| Consolidated operating ratio                                    | ** ** | **94.6**    | **%**       | 95.0     | %          | 92.1     | %          |

 

----

(1)   Logistics revenueis net of $16.8 million, $17.1 million and $16.5 million of inter-segmentrevenue in 2008, 2007 and 2006, respectively, for loads transported by ourtractors and arranged by MWL that have been eliminated in consolidation.

 

(2)   Operating expensesas a percentage of operating revenue.

 

During 2008, more than 99% of our revenue wasgenerated within the United States. We earned 19% and 10% of our revenue in2008 from two single customers whose trade receivables represented 16% and 10%,respectively, of our trade receivables as of December 31, 2008. We earned18% of our revenue in 2007 from a single customer whose trade receivablesrepresented 12% of our trade receivables as of December 31, 2007. Weearned 17% of our revenue in 2006 from a single customer.

 

52

----

Table of Contents

 

**MARTENTRANSPORT, LTD.**

 

**Notes toConsolidated Financial Statements (Continued)**

 

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

 

The following is a summary of the quarterly results ofoperations for 2008 and 2007:

 
| **2008 Quarters (In thousands, except per share amounts)** | ** ** | **First** | ** **  | **Second** | ** ** | **Third**   | ** ** | **Fourth** | ** **  |
|-----------------------------------------------------------------------------------------------|------------|-----------|-------------|------------|------------|-------------|------------|------------|-------------|
| Operating revenue                                                                             | ** ** | **$**     | **143,374** | ** ** | **$**      | **159,994** | ** ** | **$**      | **163,377** | ** ** | **$** | **140,354** | ** ** |
| Operating income                                                                              | ** ** | **5,482** | ** **  | **6,428**  | ** ** | **10,528**  | ** ** | **10,267** | ** **  |
| Net income                                                                                    | ** ** | **2,653** | ** **  | **3,469**  | ** ** | **6,127**   | ** ** | **5,822**  | ** **  |
| Basic earnings per common share                                                               | ** ** | **0.12**  | ** **  | **0.16**   | ** ** | **0.28**    | ** ** | **0.27**   | ** **  |
| Diluted earnings per common share                                                             | ** ** | **0.12**  | ** **  | **0.16**   | ** ** | **0.28**    | ** ** | **0.27**   | ** **  |
|                                                                                               |            |           |             |            |            |             |            |            |             |  |  |  |  |

 
| **2007 Quarters (In thousands, except per share amounts)** | ** ** | **First** | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------|------------|------------|------------|-----------|------------|------------|------------|
| Operating revenue                                                                             |       | $         | 131,416    |       | $          | 138,821   |       | $          | 144,969    |   | $ | 144,811 |   |
| Operating income                                                                              |       | 8,390     |       | 8,041      |       | 5,696     |       | 5,674      |       |
| Net income                                                                                    |       | 4,594     |       | 4,344      |       | 3,065     |       | 2,965      |       |
| Basic earnings per common share                                                               |       | 0.21      |       | 0.20       |       | 0.14      |       | 0.14       |       |
| Diluted earnings per common share                                                             |       | 0.21      |       | 0.20       |       | 0.14      |       | 0.14       |       |
|                                                                                               |            |           |            |            |            |           |            |            |            |  |  |  |  |

 

The diluted earnings per common share for the 2008quarters exceeds the diluted earnings per common share for the year due todifferences in rounding.

** **

**53**

----

**Tableof Contents**

** **
| **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, 2008, involvinga change of accountants or disagreements on accounting and financialdisclosure.

 

**ITEM9A.**        *CONTROLS AND PROCEDURES*

** **

As required by Rule 13a-15 under the SecuritiesExchange Act of 1934 (“Exchange Act”), we have carried out an evaluation of theeffectiveness 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 our ChiefExecutive Officer and our Chief Financial Officer. Based upon that evaluation,our Chief Executive Officer and our Chief Financial Officer concluded that ourdisclosure controls and procedures were effective as of December 31, 2008.There were no changes in our internal control over financial reporting thatoccurred during the period covered by this report that have materiallyaffected, or that are reasonably likely to materially affect, our internalcontrol over financial reporting. We intend to periodically evaluate our disclosurecontrols and procedures as required by the Exchange Act Rules.

 

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

 

**ITEM9B.**        *OTHER INFORMATION*

** **

None.

 

54

----

Tableof Contents

 

**PART III**

** **

**ITEM10.**                           *DIRECTORS, EXECUTIVE OFFICERS ANDCORPORATE GOVERNANCE*

** **

A.                                   Directors of the Registrant.

 

The information in the “Election of Directors—InformationAbout Nominees” and “Election of Directors—Other Information About Nominees”sections of our 2009 Proxy Statement is incorporated in this Report byreference.

 

B.                                     Executive Officers of the Registrant.

 

Information about our executive officers is includedin this Report under Item 4A, “Executive Officers of the Registrant.”

 

C.                                     Compliance with Section 16(a) ofthe Exchange Act.

 

The information in the “Section 16(a) BeneficialOwnership Reporting Compliance” section of our 2009 Proxy Statement is incorporatedin this Report by reference.

 

D.                                    Procedure for Director Nominations bySecurity Holders.

 

There have been no material changes to the proceduresby which security holders may recommend nominees to our board of directors.

 

E.                                      Audit Committee Financial Expert.

 

The information in the “Election of Directors—Boardand Board Committees” section of our 2009 Proxy Statement is incorporated inthis Report by reference.

 

F.                                      Identification of the Audit Committee.

 

The information in the “Election of Directors—Boardand Board Committees” section of our 2009 Proxy Statement is incorporated inthis Report by reference.

 

G.                                     Code of Ethics for Senior FinancialManagement.

 

Our Code of Ethics for Senior Financial Managementapplies to all of our executive officers, including our principal executiveofficer, principal financial officer and controller, and meets the requirementsof the Securities and Exchange Commission. We have posted our Code of Ethics for Senior Financial Management on ourwebsite at *www.marten.com*.  We intend to disclose any amendments to andany waivers from a provision of our Code of Ethics for Senior FinancialManagement on our website within five business days following such amendment orwaiver.

 

55

----

Table of Contents

 

**ITEM11.**                           *EXECUTIVE COMPENSATION*

** **

The information in the “Election of Directors—DirectorCompensation” and “Compensation and Other Benefits” sections of our 2009 ProxyStatement is incorporated in this Report by reference.

 

**ITEM 12.**                           *SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT AND RELATEDSTOCKHOLDER MATTERS*

** **

The information in the “Security Ownership of CertainBeneficial Owners and Management” and “Compensation and Other Benefits—EquityCompensation Plan Information” sections of our 2009 Proxy Statement isincorporated in this Report by reference.

 

**ITEM13.**                           *CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS, AND DIRECTOR INDEPENDENCE*

** **

The information in the “Related Party Transactions”and “Election of Directors—Board and Board Committees” sections of our 2009Proxy Statement is incorporated in this Report by reference.

 

**ITEM14.**                           *PRINCIPAL ACCOUNTANT FEES ANDSERVICES*

** **

The information in the “Fees of Independent Auditors”section of our 2009 Proxy Statement is incorporated in this Report byreference.

 

56

----

Table of Contents

 

**PART IV**

** **

**ITEM15.**                           *EXHIBITS AND FINANCIAL STATEMENTSCHEDULES*

 
| ** ** | ** ** | ** **                                                                                                                                                                             | **Page**   |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|       |       |                                                                                                                                                                                   |       |
| **(a)**    | **1.**     | **Financial  Statements (See Part II, Item 8 of this Report):**                                                                                                                   |       |
|       |       |                                                                                                                                                                                   |       |
|       |       | Management’s Annual Report on Internal Control Over  Financial Reporting                                                                                                          | 32         |
|       |       |                                                                                                                                                                                   |       |
|       |       | Report of Independent Registered Public Accounting  Firm                                                                                                                               | 33         |
|       |       |                                                                                                                                                                                   |       |
|       |       | Consolidated Balance Sheets as of December 31,  2008 and 2007                                                                                                                     | 34         |
|       |       |                                                                                                                                                                                   |       |
|       |       | Consolidated Statements of Operations for the years  ended December 31, 2008, 2007 and 2006                                                                                       | 35         |
|       |       |                                                                                                                                                                                   |       |
|       |       | Consolidated Statements of Stockholders’ Equity for  the years ended December 31, 2008, 2007 and 2006                                                                        | 36         |
|       |       |                                                                                                                                                                                   |       |
|       |       | Consolidated Statements of Cash Flows for the years  ended December 31, 2008, 2007 and 2006                                                                                       | 37         |
|       |       |                                                                                                                                                                                   |       |
|       |       | Notes to Consolidated Financial Statements                                                                                                                                             | 38         |
|       |       |                                                                                                                                                                                   |       |
| ** ** | **2.**     | **Financial Statement Schedules  (Consolidated Financial Statement****Schedule Included in  Part IV of this Report):**                                                            | ** ** |
|       |       |                                                                                                                                                                                   |       |
|       |       | Schedule II — Valuation and  Qualifying Accounts and Reserves                                                                                                                     | 60         |
|       |       |                                                                                                                                                                                   |       |
|       |       | 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. |       |

 

57

----

Table ofContents

 
| ** ** | **3.** | **Exhibits:**                                                                                                                                                                                                                                                                                                                  |                                                                                                 |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                                                                           |                                                                                                 |
|       |   | The exhibits to  this Report are listed in the Exhibit Index on pages 61 through 63.  A copy of any of the exhibits listed will be sent at a reasonable cost to any  shareholder as of March 10, 2009. 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 15(a)(3):                                                                                                                                                               |
|       |   |                                                                                                                                                                                                                                                                                                                           |                                                                                                 |
|       |   | (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)                                                                                                                                                                                                                                                                                                                            | Named Executive  Officers’ Compensation Summary.                                                |
|       |   |                                                                                                                                                                                                                                                                                                                           |                                                                                                 |
|       |   | (5)                                                                                                                                                                                                                                                                                                                            | 2009  Non-employee Director Compensation Summary.                                                    |
|       |   |                                                                                                                                                                                                                                                                                                                           |                                                                                                 |
|       |   | (6)                                                                                                                                                                                                                                                                                                                            | Form of  Amended and Restated Change in Control Severance Agreement.                            |
|       |   |                                                                                                                                                                                                                                                                                                                           |                                                                                                 |
|       |   | (7)                                                                                                                                                                                                                                                                                                                            | Form of  First Amendment to Amended and Restated Change in Control Severance Agreement          |
|       |   |                                                                                                                                                                                                                                                                                                                           |                                                                                                 |
|       |   | (8)                                                                                                                                                                                                                                                                                                                            | Amended and  Restated 2006 Executive Officer Incentive Bonus Plan.                                   |
|       |   |                                                                                                                                                                                                                                                                                                                           |                                                                                                 |
|       |   | (9)                                                                                                                                                                                                                                                                                                                            | Non-Driver  Employee Performance Incentive Bonus Plan.                                               |
|       |   |                                                                                                                                                                                                                                                                                                                           |                                                                                                 |
|       |   | (10)                                                                                                                                                                                                                                                                                                                           | Form of  Non-employee Director Non-statutory Stock Option Agreement.                            |
|       |   |                                                                                                                                                                                                                                                                                                                           |                                                                                                 |
|       |   | (11)                                                                                                                                                                                                                                                                                                                           | Form of  Performance Based Non-Statutory Stock Option Agreement for 2005 Stock  Incentive Plan. |
|       |   |                                                                                                                                                                                                                                                                                                                           |                                                                                                 |
|       |   | (12)                                                                                                                                                                                                                                                                                                                           | 2009 Non-Driver  Employee Bonus Plan.                                                                |
|            |        |                                                                                                                                                                                                                                                                                                                                |                                                                                                      |  |

 

58

----

Table of Contents

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, Marten Transport, Ltd., the Registrant,has duly caused this Report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
| Dated:  March 13, 2009 | MARTEN  TRANSPORT, LTD. |
|-----------------------------|-------------------------|
|                        |                    |
|                        |                    |
|                        | By                      | /s/ Randolph L.  Marten |
|                        |                    | Randolph L.  Marten |
|                        |                    | Chairman of the  Board and  Chief Executive Officer |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this Report has been signed below on March 13, 2009,by the following persons on behalf of the Registrant and in the capacitiesindicated.

 
| **Signature**            | ** ** | **Title**                                       |
|--------------------------|------------|-------------------------------------------------|
|                     |       |                                            |
|                     |       |                                            |
| /s/ Randolph L.  Marten  |       | Chairman of the  Board, Chief Executive Officer |
| Randolph L.  Marten      |       | 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/ Robert L.  Demorest  |       | Director                                        |
| Robert L.  Demorest      |       |                                            |
|                     |       |                                            |
|                     |       |                                            |
| /s/ G. Larry  Owens      |       | Director                                        |
| G. Larry Owens           |       |                                            |

 

59

----

Table ofContents

 

**SCHEDULE II**

**MARTEN TRANSPORT, LTD.**

** **

**Valuation and Qualifying Accounts and Reserves(In thousands)**

 
| ** **                        | ** ** | **Balance at**   | ** ** | **Charged to** | ** ** | ** **     | ** ** | ** **                | ** ** |
|-----------------------------------|------------|-----------------------|------------|---------------------|------------|----------------|------------|---------------------------|------------|
| ** **                        | ** ** | **Beginning of** | ** ** | **Costs and**  | ** ** | ** **     | ** ** | **Balance at**       | ** ** |
| **Description**                   | ** ** | **Year**              | ** ** | **Expenses**        | ** ** | **Deductions** | ** ** | **End of Year** | ** ** |
| Insurance and claims accruals:    |       |                  |       |                |       |           |       |                      |       |
| Year ended December 31, 2008 |       | $                     | 17,431     |                | $          | 37,271         |       | $                         | (33,316    | )(1) | $ | 21,386 |   |
| Year ended December 31, 2007 |       | 16,073                |       | 30,865              |       | (29,507        | )(1)       | 17,431                    |       |
| Year ended December 31, 2006 |       | 13,126                |       | 28,338              |       | (25,391        | )(1)       | 16,073                    |       |
|                              |       |                  |       |                |       |           |       |                      |       |
| Allowance for doubtful accounts:  |       |                  |       |                |       |           |       |                      |       |
| Year ended December 31, 2008 |       | 315                   |       | 78                  |       | (13            | )(3)       | 380                       |       |
| Year ended December 31, 2007 |       | 861                   |       | (534                | )(2)       | (12            | )(3)       | 315                       |       |
| Year ended December 31, 2006 |       | 928                   |       | —              |       | (67            | )(3)       | 861                       |       |
|                                   |            |                       |            |                     |            |                |            |                           |            |  |  |  |  |

 

----

(1)                                  Claimspayments

(2)                                  Revisionof estimate

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

 

See report of independent registered public accountingfirm.

 

60

----

Table of Contents

 

**MARTEN TRANSPORT, LTD.**

**EXHIBIT INDEX TO ANNUAL REPORT**

**ON FORM 10-K**

**For the Year Ended December 31, 2008**

 
| **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, as amended                                                                                                            |       | Incorporated by reference to Exhibit 3.3 of the  Company’s Annual Report on Form 10-K for the fiscal year ended  December 31, 2007 (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              |       | 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).     |

 

61

----

Table of Contents

 
| 10.4   |   | 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). |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                             |   |                                                                                                                                                                         |
| 10.5   |   | 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.                                           |
|   |   |                                                                                                                                                                                                                             |   |                                                                                                                                                                         |
| 10.6   |   | Executive Officer Performance Incentive Bonus Plan                                                                                                                                                                               |   | Incorporated by reference to Exhibit 10.2 of  the Company’s Current Report on Form 8-K filed April 4, 2006.                                              |
|   |   |                                                                                                                                                                                                                             |   |                                                                                                                                                                         |
| 10.7   |   | Non-Driver Employee Performance Incentive Bonus Plan                                                                                                                                                                             |   | Incorporated by reference to Exhibit 10.3 of  the Company’s Current Report on Form 8-K filed April 4, 2006.                                              |
|   |   |                                                                                                                                                                                                                             |   |                                                                                                                                                                         |
| 10.8   |   | Form of Non-employee Director Non-statutory  Stock Option Agreement                                                                                                                                                         |   | Incorporated by reference to Exhibit 10.26 of  the Company’s Quarterly Report on Form 10-Q for the quarter ended  June 30, 2006 (File No. 0-15010). |
|   |   |                                                                                                                                                                                                                             |   |                                                                                                                                                                         |
| 10.9   |   | Credit Agreement, dated as of August 31, 2006,  by and among Marten Transport, Ltd., as borrower, the banks party thereto as  lenders, and U.S. Bank National Association, as agent for the lenders                         |   | Incorporated by reference to Exhibit 10.1 of  the Company’s Current Report on Form 8-K filed September 6, 2006.                                          |
|   |   |                                                                                                                                                                                                                             |   |                                                                                                                                                                         |
| 10.10  |   | First Amendment to Credit Agreement, effective as of  January 1, 2007, by and among Marten Transport, Ltd., as borrower, the  banks party thereto as lenders, and U.S. Bank National Association, as agent  for the lenders |   | Incorporated by reference to Exhibit 10.1 of  the Company’s Current Report on Form 8-K filed January 5, 2007.                                            |
|   |   |                                                                                                                                                                                                                             |   |                                                                                                                                                                         |
| 10.11  |   | Form of Performance Based Non-Statutory Stock  Option Agreement for 2005 Stock Incentive Plan                                                                                                                               |   | Incorporated by reference to Exhibit 10.2 of  the Company’s Current Report on Form 8-K filed February 16, 2007.                                          |
|   |   |                                                                                                                                                                                                                             |   |                                                                                                                                                                         |
| 10.12  |   | Amended and Restated 2006 Executive Officer  Incentive Bonus Plan                                                                                                                                                                |   | Incorporated by reference to Exhibit 10.3 of  the Company’s Current Report on Form 8-K filed February 16, 2007.                                          |
|   |   |                                                                                                                                                                                                                             |   |                                                                                                                                                                         |
| 10.13  |   | Form of Amended and Restated Change in Control  Severance Agreement                                                                                                                                                         |   | Incorporated by reference to Exhibit 10.1 of  the Company’s Current Report on Form 8-K filed August 15, 2007.                                            |

 

62

----

Table of Contents

 
| 10.14  |   | Second Amendment to Credit Agreement, effective as  of November 30, 2007, by and among Marten Transport, Ltd., as borrower,  the banks party thereto as lenders, and U.S. Bank National Association, as  agent for the lenders            |   | Incorporated by reference to Exhibit 10.14 of  the Company’s Annual Report on Form 10-K for the year ended  December 31, 2007 (File No. 0-15010).   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                           |   |                                                                                                                                                                         |
| 10.15  |   | Separation Agreement and Release, dated  December 28, 2007 between the Company and Donald J. Hinson                                                                                                                                       |   | Incorporated by reference to Exhibit 10.15 of  the Company’s Annual Report on Form 10-K for the year ended  December 31, 2007 (File No. 0-15010).   |
|   |   |                                                                                                                                                                                                                                           |   |                                                                                                                                                                         |
| 10.16  |   | Named Executive Officers’ Compensation Summary                                                                                                                                                                                            |   | Incorporated by reference to Exhibit 10.17 of  the Company’s Quarterly Report on Form 10-Q for the quarter ended  June 30, 2008 (File No. 0-15010). |
|   |   |                                                                                                                                                                                                                                           |   |                                                                                                                                                                         |
| 10.17  |   | 2009 Non-employee Director Compensation Summary                                                                                                                                                                                                |   | Filed with this Report.                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                           |   |                                                                                                                                                                         |
| 10.18  |   | Form of First Amendment to Amended and Restated  Change in Control Severance Agreement                                                                                                                                                    |   | Filed with this Report.                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                           |   |                                                                                                                                                                         |
| 10.19  |   | 2009 Non-Driver Employee Bonus Plan                                                                                                                                                                                                            |   | 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 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.                                                                                                                                                      |

 

63

----