**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

** **

**FORM 10-K**

** **

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

**OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For thefiscal year ended December 31, 2004**

 

**Commissionfile number 0-15010**

 

**MARTEN TRANSPORT, LTD.**

(Exact name ofregistrant as 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 to Section 12(b) of the Act:** |
|                                                             |       | **NONE**   |   |                                  |
|                                                             |       | ** ** |   |                                  |
| **Securities  registered pursuant to Section 12(g) of the Act:** |
| **COMMON  STOCK, PAR VALUE $.01 PER SHARE**                      |

 

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.  Yes  ý   No  o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of Registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the Registrant is anaccelerated filer (as defined in Exchange Act Rule 12b-2).  Yes  ý   No   o

 

As of June 30, 2004 (the last business day of theRegistrant’s most recently completed second fiscal quarter), the aggregatemarket value of the Common Stock of the Registrant (based upon the closing priceof the Common Stock at that date as reported by the Nasdaq National Market),excluding outstanding shares beneficially owned by directors and executiveofficers, was $181,153,362.

 

As of March 1, 2005, 14,308,635 shares of Common Stockof the Registrant were outstanding.

 

Part III of this Annual Report on Form 10-Kincorporates by reference information (to the extent specific sections arereferred to in this Report) from the Registrant’s Proxy Statement for theannual meeting to be held May 3, 2005, or 2005 Proxy Statement.

 

 

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**Table of Contents**

 
| ** **   | ** **                                                                                      | **Page**   |
|--------------|-------------------------------------------------------------------------------------------------|------------|
| ** **   | ** **                                                                                      | ** ** |
| **PART I**   |
| ** **   | ** **                                                                                      | ** ** |
| Item  1.     | Business                                                                                        | 1          |
| Item 2.      | Properties                                                                                      | 6          |
| Item 3.      | Legal Proceedings                                                                               | 6          |
| Item 4.      | Submission Of Matters To A Vote Of Security  Holders                                            | 6          |
| Item 4a.     | Executive Officers Of The Registrant                                                            | 7          |
|         |                                                                                            |       |
| **PART II**  |
| ** **   | ** **                                                                                      | ** ** |
| Item 5.      | Market For Registrant’s Common Equity And  Related Stockholder Matters                     | 9          |
| Item 6.      | Selected Financial Data                                                                         | 10         |
| Item 7.      | Management’s Discussion And Analysis Of  Financial Condition And Results of Operations     | 11         |
| Item 7a.     | Quantitative And Qualitative Disclosures  About Market Risk                                     | 23         |
| Item 8.      | Financial Statements And Supplementary Data                                                     | 24         |
| Item 9.      | Changes In And Disagreements With  Accountants On Accounting And Financial Disclosure           | 42         |
| Item 9a.     | Controls And Procedures                                                                         | 42         |
| Item 9b.     | Other Information                                                                               | 42         |
|         |                                                                                            |       |
| **PART III** |
| ** **   | ** **                                                                                      | ** ** |
| Item 10.     | Directors And Executive Officers Of The  Registrant                                             | 43         |
| Item 11.     | Executive Compensation                                                                          | 44         |
| Item 12.     | Security Ownership Of Certain Beneficial  Owners And Management And Related Stockholder Matters | 44         |
| Item 13.     | Certain Relationships And Related  Transactions                                                 | 44         |
| Item 14.     | Principal Accountant Fees And Services                                                          | 44         |
|         |                                                                                            |       |
| **PART IV**  |
| ** **   | ** **                                                                                      | ** ** |
| Item 15.     | Exhibits And Financial Statement Schedules                                                      | 45         |
|         |                                                                                            |       |
| **OTHER**    |
|         |                                                                                            |       |
|         | Signature  Page                                                                                 | 46         |
|         |                                                                                            |       |
|         | Exhibit Index                                                                                   | 48         |

 

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**FORWARD-LOOKINGINFORMATION**

** **

*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” or “estimate,” or other variations of theseor similar words, identify such statements. These statements by their nature involve substantial risks anduncertainties, and actual results may differ materially from those expressed insuch forward-looking statements. Important factors known to us that could cause such material differencesare identified in this Annual Report on Form 10-K under the heading “Forward-LookingStatements and Risk Factors” beginning on page 20.** **We undertake no obligation tocorrect or update any forward-looking statements, whether as a result of newinformation, future events, or otherwise. You are advised, however, to consult any future disclosures we make onrelated subjects in future filings with the Securities and Exchange Commission.*

 

*References in this Annual Reportto “we,” “us,” “our,” or the “Company” or similar terms refer to MartenTransport, Ltd. unless the context otherwise requires.*

 

**PART I**

 

# ***ITEM 1.         ***BUSINESS

# *** ***

**Overview**

 

We are one of the leadingtemperature-sensitive truckload carriers in the United States. We specialize intransporting food and other consumer packaged goods that require atemperature-controlled or insulated environment.  In 2004, we generated $380.0 million inoperating revenue. Of that revenue, approximately 80% resulted from haulingtemperature-sensitive products and 20% from hauling dry freight. We operatethroughout the United States and in parts of Canada, with substantially all ofour revenue generated from within the United States. Our primary traffic lanesare between the Midwest and the West Coast, Southwest, Southeast, and the EastCoast, as well as from California to the Pacific Northwest. In 2004, ouraverage length of haul was approximately 1,000 miles.

 

Our growth strategy is toexpand our business internally by offering shippers a high level of service andsignificant freight capacity. We market primarily to large shippers that offerconsistent volumes of freight in the lanes we prefer and are willing tocompensate us for a high level of service. With our fleet of 2,283 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.

 

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

 

We maintain a website at *www.marten.com.*  Weare not including the information contained on our website as a part of, norincorporating it by reference into, this Annual Report on Form 10-K.  We post on our website, free of charge,documents that we file with or furnish to the Securities and ExchangeCommission, including our Annual Reports on Form 10-K, Quarterly Reports onForm 10-Q, Current Reports on Form 8-K and proxy statements, as soon as reasonablypracticable after we electronically file such material with, or furnish suchmaterial to, the Securities and Exchange Commission.  We also provide a link on our website toForms 3, 4 and 5 that our officers, directors and 10% shareholders file withthe Securities and Exchange Commission pursuant to Section 16(a) of theSecurities Exchange Act of 1934.

 

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

 

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**Marketingand Operations**

 

We approach our businessas an integrated effort of marketing and operations. Our emphasis in marketingis directed to the temperature-sensitive truckload market, which is generallyservice-sensitive, as opposed to being solely price competitive. We targetlarge food and consumer packaged goods companies whose products requiretemperature-sensitive services and who ship multiple truckloads per week. Byemphasizing high-quality service, we seek to become a core carrier for ourcustomers. In 2004, our three largest customers were General Mills, Procter& Gamble and Kraft.

 

Our marketing efforts areconducted by a staff of approximately 80 sales, customer service andsupport personnel under the supervision of our senior management team.Marketing personnel travel within their regions to solicit new customers andmaintain contact with existing customers. Customer service managers regularlycontact customers to solicit additional business on a load-by-load basis.

 

Our operations and salespersonnel strive to improve our asset productivity by seeking freight thatallows for rapid turnaround times, minimizes non-revenue miles between loads,and carries a favorable rate structure. Once we have established a customerrelationship, customer service managers work closely with our fleet managers tomatch customer needs with our capacity and the location of revenue equipment.Fleet managers use our optimization system to assign loads and meet the routingneeds of our drivers while satisfying customer and operational requirements. Weattempt to route most of our trucks over selected operating lanes, which webelieve assists us in meeting customer requirements, balancing traffic,reducing non-revenue miles, and improving the reliability of deliveryschedules.

 

We deploy technology inour operations when we believe that it will allow us to operate moreefficiently and the investment is cost-justified. Examples of the technologieswe employ include:

 

•                  Satellite-basedtracking and messaging that allows us to communicate with our drivers, obtainload position updates, provide our customers with freight visibility, anddownload engine operating information such as fuel mileage and idling time.

 

•                  Freightoptimization software that assists us in selecting loads that match our overallcriteria, including profitability, repositioning, identifying capacity forexpedited loads, driver availability and home time, and other factors.

 

•                  Electronicdata interchange and Internet communication with customers concerning freighttendering, invoices, shipment status, and other information.

 

•                  Fuel-routingsoftware that optimizes the fuel stops for each trip to take advantage ofvolume discounts available in our fuel network.

 

We believe thisintegrated approach to our marketing and operations, coupled with our use oftechnology, has allowed us to provide our customers with a high level ofservice and support our revenue growth in an efficient manner. For example, wehad a non-revenue mile percentage of 6.7% during 2004, and a tractor tonon-driver employee ratio of 5.6-to-1 as of December 31, 2004. Both ofthese statistics, which have remained steady over the last several years, pointto the efficiency of our operations and we believe compare favorably to othertemperature-sensitive and dry van trucking companies.

 

**MajorCustomers**

 

An important part of ourgrowth strategy is to increase our business with large customers. Accordingly,a significant amount of our business is concentrated with a relatively smallnumber of customers. In 2004, our top 30 customers accounted for approximately77% of our revenue, and our top ten customers accounted for 52% of our revenue.Eight of our top ten customers have been significant customers for over tenyears. We are the largest or second largest temperature-sensitive carrier foreight of our top ten customers. Our three largest customers are General Mills,Procter & Gamble, and Kraft, and they accounted for 11%, 11%, 

 

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and 10% of our revenue,respectively, in 2004.  Procter &Gamble also accounted for 10% of our revenue in 2003 and 11% of our revenue in2002.  The revenue in 2004 includes theaccounts of MW Logistics, LLC, or MWL, beginning April 1, 2004 (see Note 1 tothe consolidated financial statements). We believe our relationships with thesekey customers are sound, but we are dependent upon them and the loss of some orall of their business could have a materially adverse effect on our results.

 

**Driversand Other Personnel**

 

We believe thatmaintaining a safe and productive professional driver group is essential toproviding excellent customer service and achieving profitability. Approximately281 of our drivers have driven more than one million miles for us without apreventable accident. Our turnover for all drivers, including company-employedand independent contractor drivers, was 63% for 2004.

 

We select drivers,including independent contractors, using our specific guidelines for safetyrecords, driving experience, and personal evaluations. We maintain stringentscreening, training, and testing procedures for our drivers to reduce thepotential for accidents and the corresponding costs of insurance and claims. Wetrain new drivers at our Wisconsin, Georgia, and Oregon terminals in all phasesof our policies and operations, as well as in safety techniques andfuel-efficient operation of the equipment. All new drivers also must pass DOTrequired tests prior to assignment to a vehicle.

 

We primarily paycompany-employed drivers a fixed rate per mile. The rate increases based onlength of service. Drivers also are eligible for bonuses based upon safe,efficient driving. We pay independent contractors on a fixed rate per mile.Independent contractors pay for their own fuel, insurance, maintenance, andrepairs.

 

Competition in thetrucking industry for qualified drivers is intense. Our operations have beenimpacted, and from time-to-time we have experienced under-utilization andincreased expense, as a result of the shortage of qualified drivers. We place ahigh priority on the recruitment and retention of an adequate supply ofqualified drivers.

 

As of December 31, 2004,we had approximately 2,179 employees. This total consists of approximately1,752 drivers, 155 mechanics and maintenance personnel, and 272 supportpersonnel, which includes management and administration. As of that date, wealso contracted with 557 independent contractors. None of our employees arerepresented by a collective bargaining unit. We consider relations with ouremployees to be good.

 

**RevenueEquipment**

 

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

 

As of December 31, 2004,we operated a fleet of 2,283 tractors, including 1,726 company-owned tractorsand 557 tractors supplied by independent contractors. The average age of ourcompany-owned tractor fleet at December 31, 2004 was approximately1.4 years.  Our policy is to replacemost of our company-owned tractors within 42 to 48 months after purchase.Freightliner and Peterbilt manufacture most of our company-owned tractors.Maintaining a relatively new and standardized fleet allows us to operate mostmiles while the tractors are under warranty to minimize repair and maintenancecosts. It also enhances our ability to attract drivers, increases fuel economy,and improves customer acceptance by minimizing service interruptions caused bybreakdowns. We adhere to a comprehensive maintenance program during the life ofour equipment. We perform most routine servicing and repairs at our terminalfacilities to reduce costly on-road repairs and out-of-route trips. We do nothave any agreements with tractor manufacturers pursuant to which they agree torepurchase the tractors or guarantee a residual value, and we therefore couldincur losses upon disposition if resale values of used tractors decline.

 

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We historically havecontracted with independent contractors to provide and operate a portion of ourtractor fleet. Independent contractors own their own tractors and areresponsible for all associated expenses, including financing costs, fuel,maintenance, insurance, and taxes. We believe that a combined fleet complementsour recruiting efforts and offers greater flexibility in responding tofluctuations in shipper demand. The percentage of our fleet provided byindependent contractors, which was 24% as of December 31, 2004, hasgenerally fluctuated between 20% and 30%.

 

As of December 31, 2004,we operated a fleet of 3,152 trailers. Most of our trailers are equipped withThermo-King refrigeration units, air ride suspensions, and anti-lock brakes.Most of our single van trailers are refrigerated, 53 feet long, and 102 incheswide. The average age of our trailer fleet at December 31, 2004 was approximately3.3 years. Our policy is to replace most of our company-owned trailerswithin six years after purchase.

 

**Insuranceand Claims**

 

We self-insure for aportion of our claims exposure resulting from workers’ compensation, autoliability, general liability, cargo and property damage claims, as well asemployees’ health insurance. We are responsible for our proportionate share ofthe legal expenses relating to such claims as well. We reserve currently foranticipated losses and expenses. We periodically evaluate and adjust ourinsurance and claims reserves to reflect our experience.  Our self-insured retention for auto liabilityclaims is $1.0 million per incident and for workers’ compensation claims is$750,000 per incident.  We havemaintained these self-insured retention levels for 2004.  We maintain insurance above the amounts forwhich we self-insure up to specified policy limits with licensed insurancecarriers. Insurance carriers have raised premiums for many businesses,including trucking companies. As a result, our insurance and claims expensecould increase, or we could raise our self-insured retention when our policiesare renewed. We believe that our policy of self-insuring up to set limits,together with our safety and loss prevention programs, are effective means ofmanaging insurance costs.

 

**Fuel**

 

Our operations areheavily dependent upon the use of diesel fuel. The price and availability ofdiesel fuel can vary and are subject to political, economic, and market factorsthat are beyond our control.  Fuel prices fluctuateddramatically and quickly at various times during the last three years and theyremain high based on historical standards. We actively manage our fuel costs by purchasing fuel in bulk in Mondoviand at our other maintenance facilities and have volume purchasing arrangementswith national fuel centers that allow our drivers to purchase fuel at adiscount while in transit.  During 2004,97% of our fuel purchases were made at these designated locations.

 

We further manage our exposure to changes in fuel prices through fuelsurcharge programs with our customers and other measures that we haveimplemented.  We have historicallybeen able to pass through most long-term increases in fuel prices and taxes tocustomers in the form of fuel surcharges. These fuel surcharges, which adjust with the cost of fuel, enable us torecover a substantial portion of the higher cost of fuel as prices increase,except for non-revenue miles, out-of-route miles or fuel used while the tractoris idling. As of December 31, 2004, we had no derivative financialinstruments to reduce our exposure to fuel price fluctuations.

 

**Competition**

 

We operate primarily inthe temperature-sensitive segment of the truckload market.  This market is highly competitive andfragmented. Wecompete with many other truckload carriers that provide temperature-sensitiveservice of varying sizes and, to a lesser extent, with less-than-truckloadcarriers, railroads, and other transportation companies, many of which havemore equipment, a wider range of services, and greater capital resources thanwe do or have other competitive advantages. In particular, several of thelargest truckload carriers that offer primarily dry-van service also offertemperature-sensitive service, and these carriers could attempt to increasetheir business in the temperature-sensitive market.  We also compete with other motor 

 

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carriers for the servicesof drivers, independent contractors, and management employees.  We believe that the principal competitivefactors in our business are service, freight rates, capacity, and financialstability.  As one of the largest andbest-capitalized carriers focused on the temperature-sensitive segment, webelieve we are well positioned 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.  The DOT adopted revised hours-of-serviceregulations for drivers that became effective in January 2004.  The current rules allow drivers to be on dutyfor 14 consecutive hours, compared with the former limit of 15 hours.  They are now able to drive up to 11 hoursfollowed by a 10-hour break, as compared with the former 10-hour drive timefollowed by an 8-hour break.  Under thecurrent rules, however, drivers normally may not go off the clock duringloading and unloading time, which is now included in the 14-hour limit.  There was no change to the rule thatprecludes drivers from driving after being on-duty for a maximum of 70 hours in8 consecutive days.  However, under thecurrent rules, drivers can only “restart” their 8-day clock by taking at least34 consecutive hours off duty.

 

In July 2004, the United States Court of Appeals forthe District of Columbia vacated the current hours-of-service regulations intheir entirety and remanded the matter to the Federal Motor Carriers SafetyAdministration, or FMCSA, for reconsideration. In October 2004, the Surface Transportation Extension Act of 2004 (PartV) extended the current hours-of-service regulations until the earlier of theFMCSA developing a revised set of regulations or September 30, 2005.

 

We believe that we are well equipped to minimize theeconomic impact of the current hours-of-service rules on our business.  We have negotiated delay time charges withthe majority of our customers.  Prior tothe effectiveness of the current rules, we also initiated discussions with manyof our customers regarding steps that they can take to assist us in managingour drivers’ non-driving activities, such as loading, unloading, or waiting,and we plan to continue to actively communicate with our customers regardingthese matters in the future.  Insituations where shippers are unable or unwilling to take these steps, weassess detention and other charges to offset losses in productivity resultingfrom the current hours-of-service regulations. The regulations did not significantly disrupt our operations ormaterially affect our results of operations for 2004.

 

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# ***ITEM 2.***                             PROPERTIES

# *** ***

Our executive offices andprincipal terminal are located on approximately seven acres in Mondovi,Wisconsin. This facility consists of 39,000 square feet of office space and21,000 square feet of equipment repair and maintenance space. In addition toour executive offices and terminal located in Mondovi, Wisconsin, we own andoperate facilities in or near the following cities at which we perform thefollowing designated operating activities:

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

 

In April 2002, we,together with Mitchell Ward, Randy Bowman and MWL were named as defendants in an adversaryproceeding in the United States Bankruptcy Court for the Eastern District ofTexas in the lawsuit styled*In reMitchell Ward Transport, Inc.*, debtor (Case No. 01-44661),*Marten Transport, Ltd., and MW Logistics, L.L.C.,Lindaver, trustee v. Ward, Bowman*. We own a 45% equity interest in MWL, a third-party provider oflogistics services to the transportation industry and a certified minorityowned business. The proceeding was instituted by the interim trustee of thebankruptcy estate of Mitchell Ward Trucking, Inc. The complaint alleged, amongother things, that Messrs Ward and Bowman breached their fiduciary duties tothe debtor by diverting business opportunities of the debtor to MWL, and thatwe conspired with the other defendants and tortiously interfered with existingand prospective contractual relations of the debtor.  On December 20, 2004, the UnitedStates Bankruptcy Court for the Eastern District of Texas approved a settlementagreement between us and the trusteeof the bankruptcy estate of Mitchell Ward Trucking, Inc., among others, underwhich the parties agreed to dismiss the lawsuit.  In settlement of thismatter, MWL madea one-time payment to the trusteeof the bankruptcy estate of Mitchell Ward Trucking, Inc. in the amount of$275,000.  The settlement will have no material impact on our Company.

 

# ***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, 2004.

 

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**ITEM 4A.       *EXECUTIVEOFFICERS OF THE REGISTRANT***

 

Our executive officers, with their ages and theoffices held as of March 1, 2005, are as follows:

 
| **Name**           | ** ** | **Age**    | ** ** | **Position**                                                                          |
|--------------------|------------|------------|------------|---------------------------------------------------------------------------------------|
| ** **         | ** ** | ** ** | ** ** | ** **                                                                            |
| Randolph L. Marten |       | 52         |       | Chairman of the Board,  President, Chief Executive Officer and Director               |
|               |       |       |       |                                                                                  |
| Darrell D. Rubel   |       | 59         |       | Executive Vice  President, Chief Financial Officer, Treasurer and Assistant Secretary |
|               |       |       |       |                                                                                  |
| Robert G. Smith    |       | 61         |       | Chief Operating Officer                                                               |
|               |       |       |       |                                                                                  |
| Timothy P. Nash    |       | 53         |       | Executive Vice  President of Sales and Marketing                                      |
|               |       |       |       |                                                                                  |
| Franklin J. Foster |       | 48         |       | Vice President of  Finance                                                            |
|               |       |       |       |                                                                                  |
| Susan M. Baier     |       | 36         |       | Vice President of  Information Systems                                                |
|               |       |       |       |                                                                                  |
| Donald J. Hinson   |       | 45         |       | Vice President of  Operations                                                         |

 

**Randolph L. Marten**has been a full-time employee of ours since 1974.  Mr. Marten has been a Director since October1980, our President since June 1986, our Chairman of the Board since August1993 and our Chief Executive Officer since January 2005.  Mr. Marten also served as our Chief OperatingOfficer from June 1986 until August 1998 and as a Vice President from October1980 to June 1986.

 

**Darrell D. Rubel**has been our Chief Financial Officer since January 1986, our Treasurer sinceJune 1986, our Assistant Secretary since August 1987 and our Executive VicePresident since May 1993.  Mr. Rubel alsoserved as a Director from February 1983 until May 2004, a Vice President fromJanuary 1986 until May 1993 and as our Secretary from June 1986 until August1987.

 

**Robert G. Smith** hasbeen our Chief Operating Officer since August 1998.  Mr. Smith also served as our Vice Presidentof Operations from June 1993 until May 1999 and as our Director of Operationsfrom September 1989 to June 1993.  Mr.Smith served as director of operations for Transport Corporation of America, anirregular-route truckload carrier, from January 1985 to September 1989.

 

**Timothy P. Nash** hasbeen our Executive Vice President of Sales and Marketing since November2000.  Mr. Nash also served as our VicePresident of Sales from November 1990 to November 2000 and as our RegionalSales Manager from July 1987 to November 1990. Mr. Nash served as a regional sales manager  for Overland Express, Inc., a  long-haul truckload carrier, from August 1986 to July 1987.

 

**Franklin J. Foster**has been our Vice President of Finance since December 1991 and served as ourDirector of Finance from January 1991 to December 1991.  Mr. Foster served as a vice president incommercial banking for First Bank National Association from October 1985 toJanuary 1991.

 

**Susan M. Baier** hasbeen our Vice President of Information Systems since June 1999 and an executiveofficer since November 2000.  Ms. Baieralso served as our Director of Information Systems from November 1995 to May1999 and in various professional capacities in our information systems areafrom April 1993 to November 1995. Previously, Ms. Baier served as a programmer analyst for MinnesotaMutual Life Insurance Company from June 1991 to April 1993.

 

**Donald J. Hinson**has been our Vice President of Operations since June 1999 and an executiveofficer since November 2000.  Mr. Hinsonalso served as our Director of Operations from November 1996 to May 

 

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1999 and in variousprofessional capacities in our operations area from April 1988 to November1996.  Previously, Mr. Hinson served invarious professional capacities in the operations area of Burlington MotorCarriers, Inc., a dry-van truckload carrier, from October 1984 to March 1988.

 

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**PART II**

 

# ***ITEM 5.***                             MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATEDSTOCKHOLDER MATTERS

# *** ***

Our common stock is listed on the Nasdaq NationalMarket under the symbol “MRTN.”  Thetable below shows the range of high and low bid prices on the Nasdaq NationalMarket for the quarters indicated.  Suchquotations reflect inter-dealer prices, without retail markups, markdowns orcommissions and, therefore, may not necessarily represent actual transactions.

 
| ** **                        | ** ** | **Common Stock Price** | ** ** |
|-----------------------------------|------------|------------------------|------------|
| ** **                        | ** ** | **High**               | ** ** | **Low** | ** ** |
| **Year  ended December 31, 2004** |       |                   |       |   |   |
| Fourth Quarter                    |       | **$**                  | **23.83**  |   | **$** | **16.57** |   |
| Third Quarter                     |       | **20.17**              |       | **16.49** |   |
| Second Quarter                    |       | **19.85**              |       | **16.40** |   |
| First Quarter                     |       | **20.86**              |       | **15.27** |   |
| **Year  ended December 31, 2003** |       |                   |       |   |   |
| Fourth Quarter                    |       | $                      | 18.83      |   | $ | 14.49 |   |
| Third Quarter                     |       | 17.43                  |       | 11.78 |   |
| Second Quarter                    |       | 11.96                  |       | 7.42 |   |
| First Quarter                     |       | 8.68                   |       | 6.93 |   |

 

The prices do not include adjustments for retailmark-ups, mark-downs or commissions.  On March1, 2005, we had 270 record stockholders, and approximately 1,094 beneficialstockholders.  On July 24, 2003, we effected athree-for-two stock split in the form of a 50% stock dividend. OnDecember 5, 2003, we effected a second three-for-two stock split in theform of a 50% stock dividend. The foregoing stock prices have been adjusted togive retroactive effect to the stock splits for all periods presented.

 

We have not paid a cash dividend on our common stocksince we became publicly traded in September 1986, and we do not expect to makeor declare any cash dividends in the foreseeable future.  We currently intend to continue to retainearnings to finance the growth of our business and reduce ourindebtedness.  Our ability to pay cashdividends is currently  limited byrestrictions contained in our revolving credit facility.  Our revolving credit facility prohibits usfrom paying, in any fiscal year, dividends in excess of 25% of our net incomefrom the prior fiscal year.  Futurepayments of cash dividends will depend on our financial condition, results ofoperations, capital commitments, restrictions under then-existing agreements,and other factors our Board of Directors deems relevant.

 

We had no unregistered sales of equity securitiesduring the fourth quarter of the year ended December 31, 2004.

 

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# ***ITEM 6.***                             SELECTED FINANCIAL DATA

# *** ***

The following selectedfinancial data should be read in conjunction with the consolidated financialstatements and notes under Item 8 of this Form 10-K.

 
| **(Dollars in thousands, except  per share amounts)** | ** ** | **2004**    | ** **  | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|-------------------------------------------------------|------------|-------------|-------------|----------|------------|----------|------------|----------|------------|----------|------------|
| **FOR THE  YEAR**                                     |       |        |        |     |       |     |       |     |       |     |       |
| Operating  revenue                                    | ** ** | **$**       | **380,048** |     | $          | 334,667  |       | $        | 293,096    |     | $          | 282,764 |   | $ | 260,797 |   |
| Operating income                                      | ** ** | **31,294**  |        | 20,336   |       | 11,861   |       | 15,107   |       | 18,691   |       |
| Net income                                            | ** ** | **17,536**  |        | 11,842   |       | 5,973    |       | 6,514    |       | 7,928    |       |
| Operating ratio                                       | ** ** | **91.8**    | **%**       | 93.9     | %          | 96.0     | %          | 94.7     | %          | 92.8     | %          |
|                                                  |       |        |        |     |       |     |       |     |       |     |       |
| **PER-SHARE  DATA**                                   |       |        |        |     |       |     |       |     |       |     |       |
| Basic earnings  per common share                      | ** ** | **$**       | **1.25**    |     | $          | 1.07     |       | $        | 0.63       |     | $          | 0.69 |   | $ | 0.84 |   |
| Diluted earnings  per common share                    | ** ** | **1.21**    |        | 1.02     |       | 0.61     |       | 0.68     |       | 0.84     |       |
| Book value                                            | ** ** | **11.74**   |        | 10.50    |       | 8.30     |       | 7.66     |       | 7.00     |       |
|                                                  |       |        |        |     |       |     |       |     |       |     |       |
| **AT YEAR  END**                                      |       |        |        |     |       |     |       |     |       |     |       |
| Total assets                                          | ** ** | **$**       | **288,074** |     | $          | 249,595  |       | $        | 216,018    |     | $          | 210,293 |   | $ | 212,073 |   |
| Long-term debt                                        | ** ** | **30,257**  |        | 27,857   |       | 63,629   |       | 75,116   |       | 89,901   |       |
| Stockholders’  equity                            | ** ** | **167,921** |        | 144,534  |       | 79,220   |       | 72,399   |       | 65,845   |       |

 

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# ***ITEM7.***                             MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

**Overview**

 

We generatesubstantially all of our revenue by transporting freight for our customers.Generally, we are paid by the mile for our services. We also derive revenuefrom fuel surcharges, loading and unloading activities, equipment detention,and other accessorial services. The main factors that affect our revenue arethe revenue per mile we receive from our customers, the percentage of miles forwhich we are compensated, and the number of miles we generate with ourequipment. These factors relate, among other things, to the United Stateseconomy, inventory levels, the level of truck capacity in thetemperature-sensitive market, and specific customer demand.  We monitor our revenue production primarilythrough revenue per tractor per week. We also analyze our rates per total andloaded miles, non-revenue miles percentage, and the miles per tractor wegenerate.

 

In discussing our results of operations, we have included in certaininstances a discussion of revenue, before fuel surcharge and MWL revenue, or “freightrevenue.”  We do this because we believethat eliminating these sources of revenue provides a more consistent basis forcomparing our results of operations from period to period.

 

Our operating results for 2004 reflect improved average freight revenueper total mile compared with 2003. Freight demand improved reflecting a combination of modestly improvedeconomic conditions, the continuing industry-wide constraint in the capacity oftractors with qualified drivers and our strategic emphasis on providingcustomers with high levels of service and significant tractor capacity. In2004, we increased our operating revenue 13.6% and our freight revenue 8.0%compared with 2003. We were able to increase our freight revenue by increasingour freight rates and our detention charges, and by increasing our businesswith existing and new customers.  Weincreased our average operating revenue per tractor per week 9.4% in 2004, andour average freight revenue per tractor per week 4.0%, due to a 7.3%improvement in average freight revenue per total mile, partially offset by a3.1% decrease in average miles per tractor. Our weighted average number of tractors increased 3.8% in 2004.  However, an increase in our number ofunseated tractors caused our weighted average number of seated tractors toincrease by only 0.4% in 2004.

 

Our profitability on the expense side is impacted by variable costs oftransporting freight for our customers, fixed costs and expenses containingboth fixed and variable components.  Thevariable costs include fuel expense, driver-related expenses, such as wages,benefits, training, and recruitment, and independent contractor costs, whichare recorded under purchased transportation. Expenses that have both fixed and variable components includemaintenance and tire expense and our total cost of insurance and claims.  These expenses generally vary with the mileswe travel, but also have a controllable component based on safety, fleet age,efficiency, and other factors.  Our mainfixed costs relate to the acquisition and financing of long-term assets, suchas revenue equipment and operating terminals. 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 and quickly at various times during 2003 and2004. We manage our exposure to changes in fuel prices primarily through fuelsurcharge programs with our customers, as well as volume fuel purchasing arrangementswith national fuel centers and bulk purchases of fuel at our terminals.  The transportation industry is currentlyexperiencing substantial difficulty in attracting and retaining qualifieddrivers.  During the third quarter of2004, we increased our driver incentives and continued to offer drivercompensation that we believe ranks near the top of the industry.  Like other companies in our industry, ourinsurance costs have increased dramatically over the last few years.  In order to control increases in insurancepremiums, we maintain a self-insured retention limit for autoliability claims of $1.0 million per incident and for workers’ compensationclaims of $750,000 per incident.

 

Additionally, we operate in a highly competitive and regulated industrythat is currently responding to significant regulatory changes regardingdrivers’hours-of-service.  The United StatesDepartment of Transportation, or DOT, adopted revised hours-of-serviceregulations effective in January 2004. In response, we negotiated delay time charges with the majority of ourcustomers.  In July 2004, the UnitedStates Court of Appeals for the District of Columbia vacated the newhours-of-service regulations in their entirety and 

 

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remanded the matter to the Federal Motor Carriers SafetyAdministration, or FMCSA, for reconsideration. In October 2004, the Surface Transportation Extension Act of 2004(Part V) extended thecurrent hours-of-service regulations until the earlier of the FMCSA developinga revised set of regulations or September 30, 2005.  The regulations did not have a significantimpact on our operations or financial results for 2004.

 

By increasing ourrevenue and controlling our expenses, we improved our operating ratio(operating expenses as a percentage of operating revenue) to 91.8% in 2004 from93.9% in 2003.  We increased our earningsper diluted share to $1.21 in 2004 from $1.02 in 2003, on a 25.0% increase inweighted average shares outstanding attributable primarily to our publicoffering of common stock completed during the third quarter of 2003.

 

Our business requires substantial, ongoing capital investments,particularly for new tractors and trailers. At December 31, 2004, we hadapproximately $30.3 million of long-term debt, including current maturities,and $167.9 million in stockholders’ equity. In 2004, we spent approximately $72.3 million, net of trade-ins, topurchase 704 tractors and 812 trailers. We lowered the average age of our tractor fleet to 1.4 years as ofDecember 31, 2004 from 1.9 years as of December 31, 2003.  We also recognized a gain of $2.2 million onthe sale of used equipment in 2004.  Weestimate that capital expenditures, net of trade-ins, will be approximately $50million for 2005, primarily for new revenue equipment. We expect to fund thesecapital expenditures with cash flows from operations and, if necessary,borrowings under our $45 million revolving credit facility.

 

**Results of Operations**

 

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

 

The following table sets forth for the periodsindicated the dollar and percentage increase or decrease of the items in ourconsolidated statements of operations, and those items as a percentage ofoperating revenue:

 
| ** **                               | ** ** | **Dollar Change** | ** ** | **Percentage Change** | ** ** | **Percentage of  Operating Revenue** | ** ** |
|------------------------------------------|------------|-------------------|------------|-----------------------|------------|--------------------------------------|------------|
| **(Dollars  in thousands)**              | ** ** | **2004 vs.2003**  | ** ** | **2004 vs. 2003**     | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| Operating revenue                        |       | $                 | 45,381     |                  | 13.6       | %                                    | 100.0      | % | 100.0 | % |
| Operating expenses (income):             |       |              |       |                  |       |                                 |       |   |   |
| Salaries, wages and benefits             |       | 6,284             |       | 6.2                   |       | 28.2                                 |       | 30.2 |   |
| Purchased transportation                 |       | 6,725             |       | 9.5                   |       | 20.5                                 |       | 21.3 |   |
| Fuel and fuel taxes                      |       | 14,541            |       | 25.8                  |       | 18.7                                 |       | 16.8 |   |
| Supplies and maintenance                 |       | 264               |       | 1.1                   |       | 6.6                                  |       | 7.4 |   |
| Depreciation                             |       | 2,711             |       | 9.0                   |       | 8.6                                  |       | 9.0 |   |
| Operating taxes and licenses             |       | 606               |       | 10.6                  |       | 1.7                                  |       | 1.7 |   |
| Insurance and claims                     |       | 3,398             |       | 22.3                  |       | 4.9                                  |       | 4.5 |   |
| Communications and utilities             |       | (158              | )          | (4.8                  | )          | 0.8                                  |       | 1.0 |   |
| Gain on disposition of revenue equipment |       | (1,581            | )          | (>100              | )          | (0.6                                 | )          | (0.2 | ) |
| Other                                    |       | 1,633             |       | 22.3                  |       | 2.4                                  |       | 2.2 |   |
| Total operating expenses                 |       | 34,423            |       | 11.0                  |       | 91.8                                 |       | 93.9 |   |
| Operating income                         |       | 10,958            |       | 53.9                  |       | 8.2                                  |       | 6.1 |   |
| Other expenses (income):                 |       |              |       |                  |       |                                 |       |   |   |
| Interest expense                         |       | (679              | )          | (24.7                 | )          | 0.5                                  |       | 0.8 |   |
| Interest income                          |       | 24                |       | 1.6                   |       | (0.4                                 | )          | (0.5 | ) |
| Income before income taxes               |       | 11,613            |       | 60.8                  |       | 8.1                                  |       | 5.7 |   |
| Provision for income taxes               |       | 5,919             |       | 81.6                  |       | 3.5                                  |       | 2.2 |   |
| Net income                               |       | $                 | 5,694      |                  | 48.1       | %                                    | 4.6        | % | 3.5 | % |

 

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Our operating revenue increased $45.4 million, or 13.6%, to $380.0 millionin 2004 from $334.7 million in 2003. Freight revenue (operating revenue less fuel surcharge and MWL revenue)increased $25.6 million, or 8.0%, to $346.2 million in 2004 from $320.6 millionin 2003.  Freight revenue excludes $26.9million of fuel surcharge revenue in 2004 and $14.1 million in 2003, along with$7.0 million of MWL revenue in 2004. There was no MWL revenue recorded in 2003.  We were able to increase our freight revenueby increasing our freight rates, our detention charges and our business withexisting and new customers.  Our averageoperating revenue per tractor per week increased 9.4% in 2004 from 2003.  Our average freight revenue per tractor perweek increased 4.0% in 2004 from 2003, due to a 7.3% increase in averagefreight revenue per total mile partially offset by a 3.1% decrease in averagemiles per tractor.  Our weighted averagenumber of tractors increased 3.8% in 2004 from 2003.  However, an increase in our number ofunseated tractors caused our weighted average number of seated tractors toincrease by only 0.4% in 2004 from 2003.

 

Salaries, wages and benefits consist of compensation for our employees,including both driver and non-driver employees, employees’ health insurance,401(k) plan contributions, and other fringe benefits.  These expenses vary depending upon the ratioof company drivers to independent contractors, our efficiency, our experiencewith employees’ health insurance claims, changes in health care premiums, andother factors. The increase in salaries, wages and benefits resulted primarilyfrom an increase in the size of our company-owned fleet, partially offset by adecrease in our employees’ health insurance expense due to favorable claimsexperience causing a decrease of $517,000 in the estimated costs of ourself-insured medical claims in 2004.

 

Purchased transportation consists of paymentsto independent contractor providers of revenue equipment and to carriers fortransportation services arranged by MWL. This category will vary depending upon the ratio of company driversversus independent contractors, the amount of fuel surcharges passed through toindependent contractors and the amount paid to carriers by MWL.  Payments to carriers for transportationservices arranged by MWL were $4.1 million in 2004.  No payments to carriers by MWL were recordedin 2003.  The amount of fuel surchargespassed through to independent contractors increased $3.2 million in 2004.  Purchased transportation expense, excludingfuel surcharges passed through to independent contractors and MWL carrierpayments, decreased $648,000, or 1.0%, in 2004 from 2003.  This decrease was primarily due to a decreasein the number of independent contractor-owned tractors in our fleet, partiallyoffset by a 1 cent per mile increase in the amount paid to independentcontractors effective April 1, 2004.

 

Fuel and fuel taxes, which we refer to as fuel expense, net of fuelsurcharge revenue of $26.9 million in 2004 and $14.1 million in 2003, increased$1.7 million, or 4.1%, to $44.0 million in 2004 from $42.3 million in 2003. Ourfuel prices, which remain high based on historical standards, significantlyincreased to an average of $1.71 per gallon in 2004 from an average of $1.40per gallon in 2003. We have fuel surcharge provisions in substantially all ofour transportation contracts and attempt to recover these increased expensesthrough fuel surcharges and higher rates. We expect our fuel costs to increase in the future because we believethat government mandated emissions standards, which became effectiveOctober 1, 2002, have resulted in less fuel-efficient engines, and thatmore restrictive emissions standards that take effect in 2007 will result infurther declines in engine efficiency.

 

Depreciation relates to owned tractors, trailers, communications units,and terminal facilities. Gains or losses on dispositions of revenue equipmentare set forth in a separate line item, rather than included in this category.The increase in depreciation was due to an increase in the relative percentageof company-owned tractors to independent contractor-owned tractors in 2004.This increase was more than offset by higher freight revenue per tractor in2004 which more efficiently spread this fixed cost.  Our annual cost of tractor and trailerownership may increase in future periods as a result of higher prices of newequipment, which would result in greater depreciation over the useful life.

 

Insurance and claims consist of the costs ofinsurance premiums and the accruals we make for claims within our self-insuredretention amounts, primarily for personal injury, property damage, physicaldamage to our equipment, 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 2004 was comprised of a $2.7million increase in the cost of self-insured accident claims and a $676,000increase in insurance premiums.  We havemaintained the self-insured retention limit for our auto liability claims at$1.0 million per incident and for our workers’ 

 

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compensation claims at $750,000 per incident in2004. Our significant self-insured retention exposes us to the possibility ofsignificant fluctuations in claims expense between periods depending on thefrequency, severity, and timing of claims and to adverse financial results ifwe incur large or numerous losses.  Inthe event of an uninsured claim above our insurance coverage, or an increase inthe frequency or severity of claims within our self-insured retention, ourfinancial condition and results of operations could be materially and adverselyaffected.

 

In 2004, increases in the market value for usedrevenue equipment along with additional planned revenue equipment trades causedour gain on disposition of revenue equipment to increase to $2.2 million from$640,000 in 2003.  Future gains or losseson disposition of revenue equipment are impacted by the market for used revenueequipment which is beyond our control.

 

Other expense includes professional fees,driver recruiting and retention costs, trailer and drop yard rental, and othermiscellaneous expenses.  The increase inother expense as a percentage of operating revenue was impacted by an increaseof $759,000 in legal fees and a reversal in 2003 of a $370,000 accrual for astate sales tax claim which was dismissed in 2003.

 

As a result of the foregoing factors, weimproved our operating expenses as a percentage of operating revenue, or “operatingratio,” to 91.8% in 2004 from 93.9% in 2003.

 

Interest expense consists of interest on ourrevolving credit facility and senior unsecured notes.  These expenses are partially offset byinterest income from the financing we provide to independent contractors underour tractor purchase program and from our investment in short-term marketablesecurities.  The decrease in net interestexpense was primarily the result of lower average debt balances outstanding in2004.

 

Our effective income tax rate was 42.9% in 2004compared with 38.0% in 2003, because we increased our federal and statedeferred income tax liabilities by a total of $1.5 million during the fourthquarter of 2004 as a result of an increase in our statutory federal and stateincome tax rates basedupon projected future taxable income. Weexpect our effective income tax rate to be approximately 39% in 2005.

 

As a result of the factors described above, netincome increased 48.1%, to $17.5 million in 2004 from $11.8 million in 2003.Net earnings per share increased to $1.21 per diluted share in 2004 from $1.02per diluted share in 2003, despite a 25.0% increase in weighted average sharesoutstanding attributable primarily to our public offering of common stockcompleted during the third quarter of 2003.

 

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*Comparison of Year EndedDecember 31, 2003 to Year Ended December 31, 2002*

 

The following table sets forth for the periodsindicated the dollar and percentage increase or decrease of the items in ourconsolidated statements of operations, and those items as a percentage ofoperating revenue:

 
| ** **                                      | ** ** | **Dollar Change** | ** ** | **Percentage Change** | ** ** | **Percentage of  Operating Revenue** | ** ** |
|-------------------------------------------------|------------|-------------------|------------|-----------------------|------------|--------------------------------------|------------|
| **(Dollars  in thousands)**                     | ** ** | **2003 vs. 2002** | ** ** | **2003 vs. 2002**     | ** ** | **2003**                             | ** ** | **2002** | ** ** |
| Operating revenue                               |       | $                 | 41,571     |                  | 14.2       | %                                    | 100.0      | % | 100.0 | % |
| Operating expenses (income):                    |       |              |       |                  |       |                                 |       |   |   |
| Salaries, wages and benefits                    |       | 11,082            |       | 12.3                  |       | 30.2                                 |       | 30.7 |   |
| Purchased transportation                        |       | 3,774             |       | 5.6                   |       | 21.3                                 |       | 23.0 |   |
| Fuel and fuel taxes                             |       | 13,032            |       | 30.1                  |       | 16.8                                 |       | 14.8 |   |
| Supplies and maintenance                        |       | 3,046             |       | 14.0                  |       | 7.4                                  |       | 7.4 |   |
| Depreciation                                    |       | 2,340             |       | 8.4                   |       | 9.0                                  |       | 9.5 |   |
| Operating taxes and licenses                    |       | 561               |       | 10.9                  |       | 1.7                                  |       | 1.8 |   |
| Insurance and claims                            |       | 336               |       | 2.3                   |       | 4.5                                  |       | 5.1 |   |
| Communications and utilities                    |       | 324               |       | 10.8                  |       | 1.0                                  |       | 1.0 |   |
| Loss (gain) on disposition of revenue equipment |       | (666              | )          | (>100              | )          | (0.2                                 | )          | — |   |
| Other                                           |       | (733              | )          | (9.1                  | )          | 2.2                                  |       | 2.8 |   |
| Total operating expenses                        |       | 33,096            |       | 11.8                  |       | 93.9                                 |       | 96.0 |   |
| Operating income                                |       | 8,475             |       | 71.5                  |       | 6.1                                  |       | 4.0 |   |
| Other expenses (income):                        |       |              |       |                  |       |                                 |       |   |   |
| Interest expense                                |       | (726              | )          | (20.9                 | )          | 0.8                                  |       | 1.2 |   |
| Interest income                                 |       | (265              | )          | (21.2                 | )          | (0.5                                 | )          | (0.4 | ) |
| Income before income taxes                      |       | 9,466             |       | 98.3                  |       | 5.7                                  |       | 3.3 |   |
| Provision for income taxes                      |       | 3,597             |       | 98.3                  |       | 2.2                                  |       | 1.2 |   |
| Net income                                      |       | $                 | 5,869      |                  | 98.3       | %                                    | 3.5        | % | 2.0 | % |

 

Our operating revenueincreased $41.6 million, or 14.2%, to $334.7 million in 2003 from $293.1million in 2002.  Freight revenue(operating revenue less fuel surcharge revenue) increased $33.0 million, or11.5%, to $320.6 million in 2003 from $287.6 million in 2002.  Freight revenue excludes $14.1 million offuel surcharge revenue in 2003 and $5.5 million in 2002.  We were able to increase our freight revenueby increasing our business with existing and new customers, increasing the sizeof our fleet, operating our fleet more efficiently and increasing our freightrates.  Our weighted average number oftractors increased 8.5% in 2003 from 2002. Our average operating revenue per tractor per week increased 5.2% in2003 from 2002.  Our average freightrevenue per tractor per week increased 2.7% in 2003 from 2002, due to a 1.5%increase in average miles per tractor combined with a 1.2% increase in averagefreight revenue per total mile.

 

In 2003, salaries,wages and benefits decreased as a percentage of operating revenue but increasedas a percentage of freight revenue to 31.5% in 2003 from 31.3% in 2002.  The increase in salaries, wages and benefitsresulted primarily from the increase in the size of our company-owned fleet and$1.7 million of additional compensation earned by our non-driver employeesunder our incentive compensation program in 2003.  These increases were partially offset by adecrease in our employees’ health insurance expense due to a decrease in theestimated costs of our self-insured medical claims of $702,000, primarilycaused by an increase in the participants’ deductible levels in 2003 from 2002,and a planned reduction in our student driver training expense from 2002.

 

The increase inpurchased transportation was due to a $2.5 million increase in fuel surchargespassed through to independent contractors and an increase in the average numberof independent contractors from 2002.  Asa percentage of operating revenue, purchased transportation decreased to 21.3%in 2003 from 23.0% in 2002.  As apercentage of freight revenue, purchased transportation, net of fuel surchargespassed through to 

 

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independent contractors, decreased to 21.0% in 2003 from 22.9% in 2002,primarily because of a decrease in the percentage of independentcontractor-owned tractors in our fleet.

 

Fuel expense, net offuel surcharge revenue of $14.1 million in 2003 and $5.5 million in 2002,increased $4.5 million, or 11.8%, to $42.3 million in 2003 from $37.8 millionin 2002.  As a percentage of freightrevenue, fuel expense, net of fuel surcharge revenue, increased to 13.2% in2003 from 13.1% in 2002.  This slightpercentage increase is a reflection of our ability to manage fuel price increasesthrough our fuel surcharge program.  Ourfuel prices, which remain high based on historical standards, increased 12.0%to an average of $1.40 per gallon in 2003 from an average of $1.25 per gallonin 2002.

 

The increase insupplies and maintenance resulted from our larger fleet and the higherpercentage of company-owned tractors in our fleet, for which we bear allmaintenance expenses.  We did not changeour maintenance policy and our tractor and trailer fleets remainedapproximately the same ages.

 

Depreciation decreasedas a percentage of operating revenue in 2003 from 2002, primarily because ourtrailer to tractor ratio decreased and higher freight revenue per tractor moreefficiently spread this fixed cost.  Thismore than offset an increase in the relative percentage of company-ownedvehicles to independent contractor vehicles.

 

The increase ininsurance and claims was caused by a $486,000 increase in insurance premiumswhich was partially offset by a $150,000 decrease in the cost of self-insured accidentand cargo claims.

 

In 2003, the marketvalue for used tractors improved while the market value for used trailers wasconsistent with 2002.  As a result, ourgain on disposition of revenue equipment increased to $640,000 in 2003.  We incurred a loss of $26,000 on dispositionof revenue equipment in 2002.

 

The decrease in otherexpense was primarily due to the reversal of a $370,000 accrual, which wasprimarily established in 2002, for a state sales tax claim dismissed during thethird quarter of 2003.  Excluding theeffect of the accrual and related reversal, other expense in 2003 wasconsistent with 2002.

 

As a result of theforegoing factors, we improved our operating expenses as a percentage ofoperating revenue, or “operating ratio,” to 93.9% in 2003 from 96.0% in 2002.

 

The decrease in netinterest expense was primarily the result of lower average debt balancesoutstanding during the second half of 2003, including the repayment of theoutstanding balance due under our revolving credit facility, an increase ininterest income from financing provided to independent contractors and earningsfrom short-term marketable securities.

 

Our effective incometax rate was 38.0% in each of 2003 and 2002.

 

As a result of thefactors described above, net income increased 98.3%, to $11.8 million in 2003from $6.0 million in 2002.  Net earningsper share improved to $1.02 per diluted share in 2003 from $0.61 per dilutedshare in 2002, despite an 18.5% increase in weighted average sharesattributable primarily to our public offering of common stock completed duringthe third quarter of 2003.

 

**Liquidity and Capital Resources**

 

Our business requiressubstantial, ongoing capital investments, particularly for new tractors andtrailers. Our primary sources of liquidity have been funds provided byoperations, our unsecured senior notes, our revolving credit facility, and ourpublic offering of common stock completed during the third quarter of 2003. Aportion of our tractor fleet is provided by independent contractors who own andoperate their own equipment. We have no capital expenditure requirementsrelating to those drivers who own their tractor or obtain financing throughthird parties. However, to the extent we purchase tractors and extend financingto the independent contractors through our tractor purchase program, we have anassociated capital expenditure requirement.

 

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The table below reflects our net cash flows provided by operatingactivities, net cash flows used for investing activities, and total long-termdebt, including current maturities, for the years indicated.

 
| **(In thousands)**                                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net cash flows provided by operating activities              |       | $        | 50,890     |     | $          | 39,551   |       | $ | 38,207 |   |
| Net cash flows used for investing activities                 |       | 77,986   |       | 38,094   |       | 29,375   |       |
| Long-term debt, including current maturities, at December 31 |       | 30,257   |       | 27,857   |       | 63,629   |       |
|                                                              |            |          |            |          |            |          |            |  |  |  |

 

In 2004, we spent approximately $72.3 million, net of trade-ins, topurchase 704 tractors and 812 trailers. We lowered the average age of our tractor fleet to 1.4 years from 1.9years as of December 31, 2003.  We alsorecognized a gain of $2.2 million on the sale of used equipment in 2004.  We estimate that capital expenditures, net oftrade-ins, will be approximately $50 million for 2005, primarily for newrevenue equipment.  We expect to fundthese capital expenditures with cash flows from operations and, if necessary,borrowings under our revolving credit facility. We believe our sources of liquidity are adequate to meet our current andanticipated needs for at least the next twelve months.  Over the longer term, based upon anticipatedcash flows, current borrowing availability, and sources of financing we expectto be available to us, we do not anticipate any significant liquidityconstraints in the foreseeable future.

 

During the fourth quarter of 2004, we purchased a maintenance facilityin Indiana for $1.7 million and spent $797,000 to expand our executive officesand principal terminal in Wisconsin, using cash flows from our operations.

 

Wehave outstanding Series A Senior Unsecured Notes with an aggregate principalbalance of $14.3 million at December 31, 2004. These notes mature in October2008, require annual principal payments of $3.57 million that began in October2002, and bear interest at a fixed rate of 6.78%. We also have outstandingSeries B Senior Unsecured Notes with an aggregate principal balance of $8.6million at December 31, 2004. These notes mature in April 2010, require annualprincipal payments of $1.43 million that began in April 2004, and bear interestat a fixed rate of 8.57%.

 

We maintain an unsecured committed creditfacility (“credit facility”) in the amount of $45.0 million with two banks. AtDecember 31, 2004, the facility had an outstanding principal balance of $7.4million, outstanding letters of credit of $4.4 million, and remaining borrowingavailability of $33.2 million. This facility matures in April 2006 and bearsinterest at a variable rate based on the London Interbank Offered Rate or the agentbank’s Prime Rate, in each case plus applicable margins.  The interest rate for the facility was 5.25%at December 31, 2004.

 

Our credit facility prohibits us from paying,in any fiscal year, dividends in excess of 25% of our net income from the priorfiscal year. The debt agreements discussed above also contain restrictivecovenants which, among other matters, require us to maintain certain financialratios, including debt-to-equity, minimum tangible net worth, cash flowleverage, interest coverage, and fixed charge coverage. We were in compliancewith all of these covenants at December 31, 2004.

 

We had $10.3 million in direct financingreceivables from independent contractors under our tractor purchase program asof December 31, 2004, compared with $8.6 million in receivables as ofDecember 31, 2003. These receivables, which are collateralized by thetractors financed, are used to attract and retain qualified independentcontractors. We deduct payments from the independent contractors’ settlementsweekly and, as a result, have experienced minimal collection issues for thesereceivables.

 

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The following is a summary of our contractual obligations as ofDecember 31, 2004:

 
| **** ****                                                      | **** **** | ****Payments Due by Period**** | **** **** |
|---------------------------------------------------------------------|----------------|--------------------------------|----------------|
| ****(In  thousands)****                                             | **** **** | ****2005****                   | **** **** | ****2006  and  2007**** | ** ** | ****2008  and  2009**** | ** ** | ****Thereafter**** | ** ** | ****Total**** | ** ** |
| ****Purchase obligations for revenue********and other equipment**** | **** **** | ****$****                      | ****33,960**** | **** **** | ****$**** | ****—**** | **** **** | ****$**** | ****—**** | **** **** | ****$**** | ****—**** | **** **** | ****$**** | 33,960 | **** **** |
| ****Long-term debt obligations****                                  | **** **** | ****5,000****                  | **** **** | ****17,400**** | **** **** | ****6,429**** | **** **** | ****1,428**** | **** **** | ****30,257**** | **** **** |
| ****Operating lease obligations****                                 | **** **** | ****223****                    | **** **** | ****264**** | **** **** | ****49**** |   | — | **** **** | ****536**** | **** **** |
| ****Total****                                                       | **** **** | ****$****                      | ****39,183**** | **** **** | ****$**** | ****17,664**** | **** **** | ****$**** | ****6,478**** | **** **** | ****$**** | ****1,428**** | **** **** | ****$**** | 64,753 | **** **** |

** **

**Related Parties**

 

MWL, our 45% owned affiliate, is a third-party provider of logisticsservices to the transportation industry. In 2004, 2003 and 2002, we received $22.6 million, $13.8 million and$6.3 million, respectively, of our revenue from transportation servicesarranged by MWL. We have applied the provisions of FASB Interpretation No. 46, “Consolidationof Variable Interest Entities,” as revised, to our investment in MWL effectiveMarch 31, 2004.  As a result, theaccounts of MWL are included in our consolidated balance sheet as of December31, 2004, and in our consolidated statement of operations beginning April 1,2004. We accounted for our investment in MWL’s operating results using theequity method of accounting prior to April 1, 2004.

 

We purchase fuel and obtain tires and related services from BauerBuilt, Incorporated, or BBI. Jerry M. Bauer, one of our directors, is thepresident and a stockholder of BBI.  Wepaid BBI $924,000 in 2004, $805,000 in 2003 and $721,000 in 2002 for fuel andtire services. In addition, we paid $1.4 million in 2004, $2.3 million in 2003and $1.5 million in 2002 to tire manufacturers for tires that we purchased fromthe tire manufacturers but were provided by BBI. BBI received commissions fromthe tire manufacturers related to these purchases.  Other than any benefit received from hisownership interest, Mr. Bauer receives no compensation or other benefits fromour business with BBI.

 

During 2004, we paidDurand Builders Service, Inc. $493,000 for various construction projects.  Larry B. Hagness, one of our directors, isthe president and owner of Durand Builders Service, Inc.  Other than any benefit received from hisownership interest, Mr. Hagness receives no compensation or other benefits fromthese transactions.

 

****Off-BalanceSheet Arrangements****

 

****We did not have any material off-balance sheet arrangementsat December 31, 2004.****

 

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

 

Most of our operating expenses are inflation-sensitive, with inflationgenerally producing increased costs of operations. During the past three years,the most significant effects of inflation have been on revenue equipmentprices, accident claims, health insurance, and employee compensation. Weattempt to limit the effects of inflation through increases in freight ratesand cost control efforts.

 

In addition toinflation, fluctuations in fuel prices can affect our profitability. We requiresubstantial amounts of fuel to operate our tractors and power thetemperature-control units on our trailers. Substantially all of our contractswith customers contain fuel surcharge provisions. Although we historically havebeen able to pass through most long-term increases in fuel prices and taxes tocustomers in the form of surcharges and higher rates, increases usually are notfully recovered. Fuel prices were high throughout 2003 and 2004, which hasincreased our cost of operating. The elevated level of fuel prices is expectedto continue in 2005.

 

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****Seasonality****

 

Our tractor productivity generally decreases during the winter seasonbecause inclement weather impedes operations and some shippers reduce theirshipments. At the same time, operating expenses generally increase, with fuelefficiency declining because of engine idling and harsh weather creating higheraccident frequency, increased claims, and more equipment repairs.

 

**Critical Accounting Policies**

 

We believe that the following critical accounting policies affect ourmore significant judgments and estimates used in the preparation of ourconsolidated financial statements.

 

*Insurance and Claims.* We self-insure, in part, for lossesrelating to workers’ compensation, auto liability, general liability, cargo andproperty damage claims, along with employees’ health insurance with varyingrisk retention levels. We maintain insurance coverage for per-incident andtotal losses in excess of these risk retention levels in amounts we consideradequate based upon historical experience and our ongoing review. However, wecould suffer a series of losses within our self-insured retention limits orlosses over our policy limits, which could negatively affect our financialcondition and operating results. We have maintained the self-insured retentionlimit for our auto liability claims at $1.0 million per incident and on ourworkers’ compensation claims at $750,000 per incident.  We have $4.4 million in letters of credit toguarantee settlement of claims under agreements with our insurance carriers andregulatory authorities. The insurance and claims accruals in our consolidatedbalance sheets were $13.7 million as of December 31, 2004, and $12.1 million asof December 31, 2003. We reserve currently for the estimated cost of theuninsured portion of pending claims. We periodically evaluate and adjust thesereserves based on our evaluation of the nature and severity of outstandingindividual claims and our estimate of future claims development based on historicalclaims development factors. We believe that our claims development factors havehistorically been reasonable, as indicated by the adequacy of our insurance andclaims accruals compared to settled claims. Actual results could differ fromthese current estimates. If our claims settlement experience worsened causingour historical claims development factors to increase by 5%, our estimatedoutstanding loss reserves as of December 31, 2004 would have needed to increaseby approximately $1.7 million.

 

*Property and Equipment.* The transportation industry requiressignificant capital investments. Our net property and equipment was $215.7million as of December 31, 2004 and $169.8 million as of December 31, 2003. Ourdepreciation expense was $32.8 million for 2004, $30.0 million for 2003 and$27.7 million for 2002. We compute depreciation of our property and equipmentfor financial reporting purposes based on the cost of each asset, reduced byits estimated salvage value, using the straight-line method over its estimateduseful life. We determine and periodically evaluate our estimate of theprojected salvage values and useful lives primarily by considering the marketfor used equipment, prior useful lives, and changes in technology. We have notchanged our policy regarding salvage values as a percentage of initial cost oruseful lives of tractors and trailers within the last ten years. We believethat our policies and past estimates have been reasonable. Actual results coulddiffer from these estimates.  A 5% decreasein estimated salvage values would have decreased our net property and equipmentas of December 31, 2004 by approximately $5.1 million, or 2.4%.

 

*Impairment of Assets.* Long-lived assets are reviewed forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. Recoverability of assets tobe held and used is measured by a comparison of the carrying amount of an assetto future net undiscounted cash flows expected to be generated by the asset. Ifsuch assets 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.

 

**Recent Accounting Pronouncements**

 

In December 2004, the Financial Accounting Standards Board, or FASB,issued Statement of Financial Accounting Standards, or SFAS, No. 123 (revised2004), “Share-Based Payment.”  SFAS No.123, 

 

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as revised, requires entities to recognize the grant-date fair value ofstock options and other equity-based compensation issued to employees in theincome statement.  The statement eliminatesentities’ ability to account for share-based compensation transactions usingthe intrinsic value method of accounting in Accounting Principles Board, orAPB, Opinion No. 25, “Accounting for Stock Issued to Employees,” which waspermitted under SFAS No. 123, as originally issued.  SFAS No. 123, as revised, is effective as ofthe beginning of the first interim or annual reporting period beginning afterJune 15, 2005.  Accordingly, we willrecognize the grant-date fair value of stock options in our consolidatedstatements of operations beginning in our third quarter of 2005.  As shown in Note 1 to the consolidatedfinancial statements, the average stock-based employee compensation expense,net of related tax effects, for 2002 through 2004 was $185,000.  Therefore, the adoption of this pronouncementis not expected to have a significant impact on our results of operations orfinancial position. However, the ultimate amount of increased compensationexpense will be dependent on whether we adopt SFAS No. 123, as revised, usingthe modified prospective or retrospective method, the number of option sharesgranted during the year, their timing and vesting period, and the method usedto calculate the fair value of the awards, among other factors.

 

In December 2004, the FASB issued SFAS No. 153, “Exchanges ofNonmonetary Assets: an Amendment of APB Opinion No. 29.”  The amendments made by SFAS No. 153 are basedon the principle that exchanges of nonmonetary assets should be measured basedon the fair value of the assets exchanged. The amendments also eliminate the narrow exception for nonmonetaryexchanges of similar productive assets and replace it with a broader exceptionfor exchanges of nonmonetary assets that do not have commercial substance.  SFAS No. 153 is effective for nonmonetaryasset exchanges occurring in fiscal periods beginning after June 15, 2005.  The adoption of this pronouncement is notexpected to have a significant impact on our results of operations or financialposition.

 

**Forward-Looking Statements and Risk Factors**

 

This Annual Report on Form 10-K contains certain forward-lookingstatements. Such statements are made pursuant to the safe harbor provisions ofthe Private Securities Litigation Reform Act of 1995. Any statements not ofhistorical fact may be considered forward-looking statements. Written wordssuch as “may,” “expect,” “believe,” “anticipate,” “plan,” “goal,” or “estimate,”or other variations of these or similar words, identify such statements. Thesestatements by their nature involve substantial risks and uncertainties, andactual results may differ materially, depending on a variety of factors andrisks, including but not limited to those discussed below.

 

*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 upon a number offactors that may have a materially adverse effect on the results of ouroperations, many of which are beyond our control. These factors includedifficulty in attracting and retaining qualified drivers and independentcontractors, significant increases or rapid fluctuations in fuel prices, excesscapacity in the trucking industry, strikes or other work stoppages, surplusesin the market for used equipment, interest rates, fuel taxes, license andregistration fees, insurance premiums, and self-insurance levels.  We also 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 or threatenedarmed conflicts or terrorist attacks and subsequent events on the economy or onconsumer confidence in the United States, or the impact, if any, on our futureresults of operations. In addition, our results of operations may be affectedby seasonal factors.

 

*We operate in a highly competitive and fragmentedindustry, and numerous competitive factors could impair our ability to maintainour current profitability. *We compete with many other truckloadcarriers that provide temperature-sensitive service of varying sizes and, to alesser 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 competitive advantages.In particular, several of the largest truckload carriers that offer primarilydry-van service also offer temperature-sensitive service, and these carrierscould attempt to increase their business in the temperature-sensitive market.Many of our competitors periodically reduce their freight rates to gainbusiness, especially during times of reduced growth rates in the 

 

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economy, which may limit our ability to maintain or increase freightrates or maintain significant growth in our business. In addition, manycustomers reduce the number of carriers they use by selecting so-called “corecarriers” as approved service providers, or conduct bids from multiple carriersfor their shipping needs, and in some instances we may not be selected as acore carrier or to provide service under such bids.

 

*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 significant portion of our revenue is generated from our majorcustomers. For 2004, our top 30 customers, based on revenue, accounted forapproximately 77% of our revenue; our top ten customers accounted forapproximately 52% of our revenue; our top five customers accounted forapproximately 40% of our revenue; and our top two customers accounted forapproximately 22% of our revenue. We do not expect these percentages to changematerially for 2005. Generally, we enter into one-year contracts with our majorcustomers, the majority of which do not contain any firm obligations to shipwith us. We cannot assure you that, upon expiration of existing contracts,these customers will continue to use our services or that, if they do, theywill continue at the same levels. In addition, our volumes and rates with ourcustomers could decrease as a result of bid processes or other factors. Areduction in or termination of our services by one or more of our majorcustomers could have a materially adverse effect on our business and operatingresults.

 

*Ongoing insurance and claims expenses couldsignificantly affect our earnings. *Our future insurance and claims expensemight exceed historical levels, which could reduce our earnings. We self-insurefor a portion of our claims exposure resulting from workers’ compensation, autoliability, general liability, cargo and property damage claims, as well asemployees’ health insurance. We also are responsible for our legal expensesrelating to such claims. We reserve currently for anticipated losses andexpenses. We periodically evaluate and adjust our claims reserves to reflectour experience. However, ultimate results may differ from our estimates, whichcould result in losses over our reserved amounts. Our self-insuredretention for auto liability claims is $1.0 million per incident and forworkers’ compensation claims is $750,000 per incident.  We have maintained these self-insuredretention levels for 2004.  The increase in self-insured retentioncould increase our claims expense or make our claims expense more volatiledepending on the frequency, severity, and timing of claims. Accordingly, thenumber or severity of claims for which we are self-insured, or the timing ofsuch claims within a given period, could have a materially adverse effect onour operating results.

 

We maintain insurance above the amounts for which we self-insure withlicensed insurance carriers. Although we believe the aggregate insurance limitsshould be sufficient to cover reasonably expected claims, it is possible thatone or more claims could exceed our aggregate coverage limits. Insurancecarriers 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 in attractingdrivers could affect our profitability and ability to grow. *From time-to-time, the transportation industry experiences substantialdifficulty in attracting and retaining qualified drivers, including independentcontractors.  Currently, competition fordrivers is intense. Competition for drivers has increased compared with thepast two years, and we have experienced greater difficulty in attractingsufficient numbers of qualified drivers. In addition, due in part to current economic conditions, including thecost of fuel and insurance, the available pool of independent contractordrivers is smaller than it has been historically. Accordingly, we may facedifficulty in attracting and retaining drivers for all of our current tractorsand for those we plan to add. Additionally, we may face difficulty in increasing the number of ourindependent contractor drivers, which is one of our principal sources ofplanned growth. In addition, our industry suffers from high turnover rates ofdrivers. Our turnover rate requires us to recruit a substantial number ofdrivers. Moreover, our turnover rate could increase. If we are unable tocontinue to attract drivers and contract with independent contractors, we couldbe required to adjust our driver compensation package or let trucks sit idle.In addition, our compensation of drivers and independent contractors is subjectto market forces, and we may increase their compensation in futureperiods.  An increase in our expenses orin the number of tractors without drivers could materially and adversely affectour growth and profitability.

 

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*Fluctuations in the price or availability of fuel mayincrease our cost of operation, which could materially and adversely affect ourprofitability. *We require large amounts of diesel fuelto operate 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, volume purchasing arrangements with truck stopchains, and bulk purchases of fuel at our terminals to control our fuelexpenses. There can be no assurance that we will be able to collect fuelsurcharges or enter into successful hedges in the future. Fluctuations in fuelprices, or a shortage of diesel fuel, could adversely affect our results ofoperations.

 

*Seasonality and the impact of weather can affect ourprofitability. *Our tractor productivity generallydecreases during the winter season because inclement weather impedes operationsand some shippers reduce their shipments. At the same time, operating expensesgenerally increase, with fuel efficiency declining because of engine idling andharsh weather creating higher accident frequency, increased claims, and moreequipment repairs.

 

*We 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. The DOT adopted revisedhours-of-service regulations effective in January 2004.  In response, we negotiated delay time chargeswith the majority of our customers.  Theregulations did not have a significant impact on our operations or financialresults for 2004.   In July 2004, theUnited States Court of Appeals for the District of Columbia vacated the newhours-of-service regulations in their entirety and remanded the matter to theFederal Motor Carriers Safety Administration, or FMCSA, forreconsideration.  In October 2004, theSurface Transportation Extension Act of 2004 (Part V) extended the currenthours of service regulations until the earlier of the FMCSA developing arevised set of regulations or September 30, 2005.  Significant uncompensated shortfalls in ourutilization due to compliance with the future regulations could adverselyimpact our profitability.

 

*The engines used in our newer tractors are subject tonew emissions control regulations, which may substantially increase ouroperating expenses. *The Environmental Protection Agency, orEPA, adopted new emissions control regulations, which require progressivereductions in exhaust emissions from diesel engines through 2007, for enginesmanufactured in October 2002, and thereafter. The new regulations decrease theamount of emissions that can be released by truck engines and affect tractorsproduced after the effective date of the regulations. Compliance with theseregulations has increased the cost of our new tractors, lowered fuel mileage,and increased our operating expenses. Some manufacturers have significantlyincreased new equipment prices, in part to meet new engine design requirementsimposed by the EPA, and eliminated or sharply reduced the price of repurchasecommitments. These adverse effects combined with the uncertainty as to thereliability of the vehicles equipped with the newly designed diesel engines andthe residual values that will be realized from the disposition of thesevehicles could increase our costs or otherwise adversely affect our business oroperations. Furthermore, even more restrictive EPA engine design requirementswill take effect in 2007.  Compliancewith the 2007 EPA standards is expected to result in further declines in fueleconomy, and may result in further increases in the cost of new tractors.

 

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**ITEM 7A.       *QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK***

 

We are exposed to a variety of market risks,most importantly the effects of the price and availability of diesel fuel andchanges in interest rates.

 

**Commodity Price Risk**

 

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.

 

We presently use fuel surcharges to address therisk of high fuel prices. Fuel surcharge programs are widely accepted among ourcustomers, though they can vary somewhat from customer-to-customer. We believefuel surcharges are effective at mitigating the risk of high fuel prices,although we do not recover the full amount of fuel price increases.

 

**Interest Rate Risk**

 

Our market risk is also affected by changes in interest rates. We havehistorically maintained a combination of fixed rate and variable rateobligations to manage our interest rate exposure. Fixed rate obligations exposeus to the risk that interest rates might fall. Variable rate obligations exposeus to the risk that interest rates might rise. We did not have any interestrate swaps at December 31, 2004, although we may enter into such swaps in thefuture if we deem appropriate.

 

Our fixed rate obligations consist of amounts outstanding under ourunsecured senior notes. The $14.3 million outstanding at December 31, 2004,under our Series A Senior Notes, bears interest at a fixed annual rate of6.78%. The $8.6 million outstanding at December 31, 2004, under our Series BSenior Notes, bears interest at a fixed annual rate of 8.57%. Based on suchoutstanding amounts, a one percentage point decline in interest rates wouldhave the effect of increasing the premium we pay over market interest rates byapproximately $229,000 annually.

 

Our variable rate obligations consist of borrowings under our revolvingcredit facility. Our revolving credit facility carries a variable interest ratebased on the London Interbank Offered Rate or the agent bank’s Prime Rate, ineach case plus applicable margins. The interest rate for the facility was 5.25%at December 31, 2004. As of December 31, 2004, we had borrowed $7.4million under the credit facility. Based on such outstanding amount, a onepercentage point increase in interest rates would cost us $74,000 in additionalgross interest cost on an annual basis.

 

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

# *** ***

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

 

The management of MartenTransport, Ltd. (the “Company”) is responsible for establishing and maintainingadequate internal control over financial reporting.  The Company’s internal control system wasdesigned to provide reasonable assurance to the Company’s management and boardof directors regarding the preparation and fair presentation of publishedfinancial statements.

 

All internal controlsystems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined to beeffective can provide only reasonable assurance with respect to financialstatement preparation and presentation.

 

The Company’s managementassessed the effectiveness of the Company’s internal control over financialreporting as of December 31, 2004.  Inmaking this assessment, management used the criteria set forth by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO) in *Internal Control—Integrated Framework*.  Based on our assessment the Company believesthat, as of December 31, 2004, the Company’s internal control over financialreporting is effective based on those criteria.

 

The Company’s independentregistered public accounting firm has issued an audit report on our assessmentof the Company’s internal control over financial reporting.  This report appears on page 25.

 

February 25, 2005

 

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**Reportof****Independent RegisteredPublic Accounting Firm**

 

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

* *

*We have audited management’s assessment, includedin the accompanying Management’s Annual Report on Internal Control Over FinancialReporting, that Marten Transport, Ltd. and subsidiary (the “Company”)maintained effective internal control over financial reporting as of December31, 2004, based on the criteria established in*InternalControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO).  The Company’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting.  Ourresponsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the Company’s internal control over financialreporting based on our audit.

* *

*We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects.  Our audit includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances.  We believe that our audit provides areasonable basis for our opinion.*

* *

*A company’s internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples.  A company’s internal controlover financial reporting includes those policies and procedures that(1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assetsof the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.*

* *

*Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.*

* *

*In our opinion, management’s assessment that theCompany maintained effective internal control over financial reporting as ofDecember 31, 2004, is fairly stated, in all material respects, based on thecriteria established in*Internal Control—Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO).  Also, in our opinion, the Company maintained,in all material respects, effective internal control over financial reportingas of December 31, 2004, based on the criteria established in InternalControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO).

* *

*We also have audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theconsolidated balance sheets of Marten Transport, Ltd. and subsidiary as ofDecember 31, 2004 and 2003, and the related consolidated statements ofoperations, stockholders’ equity and comprehensive income, and cash flows foreach of the years in the three-year period ended December 31, 2004, and ourreport dated February 25, 2005 expressed an unqualified opinion on thoseconsolidated financial statements.*

* *

KPMG LLP

 

Minneapolis, Minnesota

**February25, 2005**

 

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**Report of Independent Registered Public AccountingFirm**

** **

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

 

We have audited theaccompanying consolidated balance sheets of Marten Transport, Ltd. andsubsidiary (the “Company”) as of December 31, 2004 and 2003, and therelated consolidated statements of operations, stockholders’ equity andcomprehensive income, and cash flows for each of the years in the three-yearperiod ended December 31, 2004.  Inconnection with our audits of the consolidated financial statements, we havealso audited the financial statement schedule for each of the years in thethree-year period ended December 31, 2004, listed in Item 15(a)(2) of this Form10-K.  These consolidated financialstatements and financial statement schedule are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements and financial statement schedule based on ouraudits.

 

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

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Marten Transport, Ltd. andsubsidiary as of December 31, 2004 and 2003, and the results of theiroperations and their cash flows for each of the years in the three-year periodended December 31, 2004, in conformity with U.S. generally accepted accountingprinciples. In addition, in our opinion, the financial statement schedulereferred to above, when considered in relation to the basic consolidatedfinancial statements taken as a whole, presents fairly, in all materialrespects, the information set forth therein.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Marten Transport Ltd.’s internal controlover financial reporting as of December 31, 2004, based on criteria establishedin *Internal Control*–*Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO), andour report dated February 25, 2005 expressed an unqualified opinion onmanagement’s assessment of, and the effective operation of, internal controlover financial reporting.

 

KPMG LLP

 

Minneapolis, Minnesota

February 25, 2005

 

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**MARTENTRANSPORT, LTD.**

 

**ConsolidatedBalance Sheets**

 
| ** **                                                                                                                                                                            | ** ** | **December 31,** | ** **  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|-------------|
| **(In thousands, except share  information)**                                                                                                                                         | ** ** | **2004**         | ** **  | **2003** | ** ** |
| **ASSETS**                                                                                                                                                                            |       |             |        |   |   |
| **Current  assets:**                                                                                                                                                                  |       |             |        |   |   |
| Marketable  securities                                                                                                                                                                | ** ** | **$**            | **62**      |   | $ | 19,219 |   |
| Receivables:                                                                                                                                                                          |       |             |        |   |   |
| Trade, less  allowances of $909 and $793, respectively                                                                                                                                | ** ** | **39,090**       |        | 34,582 |   |
| Other                                                                                                                                                                                 | ** ** | **8,372**        |        | 7,337 |   |
| Prepaid expenses  and other                                                                                                                                                           | ** ** | **11,869**       |        | 10,034 |   |
| Deferred income  taxes                                                                                                                                                                | ** ** | **5,856**        |        | 3,048 |   |
| Total current  assets                                                                                                                                                                 | ** ** | **65,249**       |        | 74,220 |   |
| **Property  and equipment:**                                                                                                                                                          |       |             |        |   |   |
| Revenue  equipment                                                                                                                                                                    | ** ** | **283,245**      |        | 247,822 |   |
| Buildings and  land                                                                                                                                                                   | ** ** | **10,467**       |        | 8,013 |   |
| Office equipment  and other                                                                                                                                                           | ** ** | **9,053**        |        | 7,667 |   |
| Less accumulated  depreciation                                                                                                                                                        | ** ** | **(87,067**      | **)**       | (93,684 | ) |
| Net property and  equipment                                                                                                                                                           | ** ** | **215,698**      |        | 169,818 |   |
| **Other  assets**                                                                                                                                                                     | ** ** | **7,127**        |        | 5,557 |   |
| ** **                                                                                                                                                                            |       | **$**            | **288,074** |   | $ | 249,595 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                        |       |             |        |   |   |
| **Current  liabilities:**                                                                                                                                                             |       |             |        |   |   |
| Checks issued in  excess of cash balances                                                                                                                                             | ** ** | **$**            | **2,849**   |   | $ | 549 |   |
| Accounts payable                                                                                                                                                                      | ** ** | **4,579**        |        | 3,683 |   |
| Insurance and  claims accruals                                                                                                                                                        | ** ** | **13,654**       |        | 12,052 |   |
| Accrued  liabilities                                                                                                                                                                  | ** ** | **12,292**       |        | 13,379 |   |
| Current  maturities of long-term debt                                                                                                                                                 | ** ** | **5,000**        |        | 5,000 |   |
| Total current  liabilities                                                                                                                                                            | ** ** | **38,374**       |        | 34,663 |   |
| **Long-term  debt,** less current maturities                                                                                                                                          | ** ** | **25,257**       |        | 22,857 |   |
| **Deferred  income taxes**                                                                                                                                                            | ** ** | **56,522**       |        | 47,541 |   |
| Total  liabilities                                                                                                                                                                    | ** ** | **120,153**      |        | 105,061 |   |
| **Commitments  and contingencies** (Note 12)                                                                                                                                          |       |             |        |   |   |
| **Stockholders’  equity:**                                                                                                                                                       |       |             |        |   |   |
| Preferred stock,  $.01 par value per share; 2,000,000 shares authorized; no shares issued and  outstanding                                                                            | ** ** | —           |        | — |   |
| Common stock,  $.01 par value per share; 23,000,000 shares authorized; 14,307,027 shares, at  December 31, 2004, and 13,759,776 shares, at December 31, 2003, issued and  outstanding | ** ** | **143**          |        | 138 |   |
| Additional  paid-in capital                                                                                                                                                           | ** ** | **70,111**       |        | 64,265 |   |
| Retained  earnings                                                                                                                                                                    | ** ** | **97,667**       |        | 80,131 |   |
| Total  stockholders’ equity                                                                                                                                                      | ** ** | **167,921**      |        | 144,534 |   |
| ** **                                                                                                                                                                            |       | **$**            | **288,074** |   | $ | 249,595 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

27

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**MARTENTRANSPORT, LTD.**

 

**ConsolidatedStatements of Operations**

 
| ** **                                        | ** ** | **For the years ended December 31,** | ** **  |
|---------------------------------------------------|------------|--------------------------------------|-------------|
| **(In thousands, except per share  information)** | ** ** | **2004**                             | ** **  | **2003** | ** ** | **2002** | ** ** |
| **Operating  revenue**                            | ** ** | **$**                                | **380,048** | ** ** | $ | 334,667 |   | $ | 293,096 | ** ** |
| **Operating  expenses (income):**                 |       |                                 | ** **  |   |   |   |   |
| Salaries, wages  and benefits                     | ** ** | **107,307**                          | ** **  | 101,023 |   | 89,941 |   |
| Purchased  transportation                         | ** ** | **77,858**                           | ** **  | 71,133 |   | 67,359 |   |
| Fuel and fuel  taxes                              | ** ** | **70,912**                           | ** **  | 56,371 |   | 43,339 |   |
| Supplies and  maintenance                         | ** ** | **25,102**                           | ** **  | 24,838 |   | 21,792 |   |
| Depreciation                                      | ** ** | **32,757**                           | ** **  | 30,046 |   | 27,706 |   |
| Operating taxes  and licenses                     | ** ** | **6,303**                            | ** **  | 5,697 |   | 5,136 |   |
| Insurance and  claims                             | ** ** | **18,604**                           | ** **  | 15,206 |   | 14,870 |   |
| Communications  and utilities                     | ** ** | **3,168**                            | ** **  | 3,326 |   | 3,002 |   |
| Loss (gain) on  disposition of revenue equipment  | ** ** | **(2,221**                           | **)**       | (640 | ) | 26 |   |
| Other                                             | ** ** | **8,964**                            | ** **  | 7,331 |   | 8,064 |   |
|                                              |       | **348,754**                          | ** **  | 314,331 |   | 281,235 |   |
| **Operating  income**                             | ** ** | **31,294**                           | ** **  | 20,336 |   | 11,861 |   |
| **Other  expenses (income):**                     |       |                                 | ** **  |   |   |   |   |
| Interest expense                                  | ** ** | **2,074**                            | ** **  | 2,753 |   | 3,479 |   |
| Interest income                                   | ** ** | **(1,493**                           | **)**       | (1,517 | ) | (1,252 | ) |
|                                              |       | **581**                              | ** **  | 1,236 |   | 2,227 |   |
| **Income  before income taxes**                   | ** ** | **30,713**                           | ** **  | 19,100 |   | 9,634 |   |
| **Provision  for income taxes**                   | ** ** | **13,177**                           | ** **  | 7,258 |   | 3,661 |   |
| **Net  income**                                   | ** ** | **$**                                | **17,536**  | ** ** | $ | 11,842 |   | $ | 5,973 |   |
| **Basic  earnings per common share**              | ** ** | **$**                                | **1.25**    | ** ** | $ | 1.07 |   | $ | 0.63 |   |
| **Diluted  earnings per common share**            | ** ** | **$**                                | **1.21**    | ** ** | $ | 1.02 |   | $ | 0.61 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

28

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**MARTENTRANSPORT, LTD.**

 

**ConsolidatedStatements of Stockholders’ Equity and Comprehensive Income**

 
| **(In  thousands)**                                         | ** ** | ** ** | ** ** | ** ** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Total  Stockholders’  Equity** | ** ** | **Comprehensive  Income** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|------------|------------|----------------------------------|------------|------------------------|------------|---------------------------------------------|------------|---------------------------------------|------------|---------------------------|------------|
| **Common  Stock**                                           |
| **Shares**                                                  | ** ** | **Amount** |
| Balance at  December 31, 2001                               |       | 9,455      |       | $          | 95         |                             | $          | 10,228                 |       | $                                           | 62,330     |                                  | $          | (254                      | )          | $ | 72,399 |   |   |   |
| Net income                                                  |       | —     |       | —     |       | —                           |       | 5,973                  |       | —                                      |       | 5,973                                 |       | $                         | 5,973      |   |
| Issuance of  common stock from stock option exercises       |       | 89         |       | —     |       | 535                              |       | —                 |       | —                                      |       | 535                                   |       |                      |       |
| Tax benefit of  stock option exercises                      |       | —     |       | —     |       | 59                               |       | —                 |       | —                                      |       | 59                                    |       |                      |       |
| Unrealized gain  on qualifying cash flow hedges, net of tax |       | —     |       | —     |       | —                           |       | —                 |       | 254                                         |       | 254                                   |       | 254                       |       |
| Comprehensive  income                                       |       |       |       |       |       |                             |       |                   |       |                                        |       |                                  |       | 6,227                     |       |
| Balance at  December 31, 2002                               |       | 9,544      |       | 95         |       | 10,822                           |       | 68,303                 |       | —                                      |       | 79,220                                |       |                      |       |
| Net income                                                  |       | —     |       | —     |       | —                           |       | 11,842                 |       | —                                      |       | 11,842                                |       | 11,842                    |       |
| Issuance of  common stock from offering                     |       | 4,050      |       | 41         |       | 52,062                           |       | (14                    | )          | —                                      |       | 52,089                                |       |                      |       |
| Issuance of common  stock from stock option exercises       |       | 166        |       | 2          |       | 1,024                            |       | —                 |       | —                                      |       | 1,026                                 |       |                      |       |
| Tax benefit of  stock option exercises                      |       | —     |       | —     |       | 357                              |       | —                 |       | —                                      |       | 357                                   |       |                      |       |
| Comprehensive  income                                       |       |       |       |       |       |                             |       |                   |       |                                        |       |                                  |       | 11,842                    |       |
| Balance at  December 31, 2003                               |       | 13,760     |       | 138        |       | 64,265                           |       | 80,131                 |       | —                                      |       | 144,534                               |       |                      |       |
| Net income                                                  |       | —     |       | —     |       | —                           |       | 17,536                 |       | —                                      |       | 17,536                                |       | 17,536                    |       |
| Issuance of  common stock from stock option exercises       |       | 547        |       | 5          |       | 3,234                            |       | —                 |       | —                                      |       | 3,239                                 |       |                      |       |
| Tax benefit of  stock option exercises                      |       | —     |       | —     |       | 2,612                            |       | —                 |       | —                                      |       | 2,612                                 |       |                      |       |
| Comprehensive  income                                       |       |       |       |       |       |                             |       |                   |       |                                        |       |                                  |       | $                         | 17,536     |   |
| Balance at  December 31, 2004                               |       | 14,307     |       | $          | 143        |                             | $          | 70,111                 |       | $                                           | 97,667     |                                  | $          | —                    |       | $ | 167,921 |   |   |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

29

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**MARTENTRANSPORT, LTD.**

 

**ConsolidatedStatements of Cash Flows**

 
| ** **                                                                        | ** ** | **For the years ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| **(In thousands)**                                                                | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
| **CASH  FLOWS PROVIDED BY OPERATING ACTIVITIES:**                                 |       |                                 | ** ** |   |   |   |   |
| Operations:                                                                       |       |                                 | ** ** |   |   |   |   |
| Net income                                                                        | ** ** | **$**                                | **17,536** | ** ** | $ | 11,842 |   | $ | 5,973 |   |
| Adjustments to  reconcile net income to net cash flows from operating activities: |       |                                 | ** ** |   |   |   |   |
| Depreciation                                                                      | ** ** | **32,757**                           | ** ** | 30,046 |   | 27,706 |   |
| Loss (gain) on  disposition of revenue equipment                                  | ** ** | **(2,221**                           | **)**      | (640 | ) | 26 |   |
| Deferred tax  provision                                                           | ** ** | **6,173**                            | ** ** | 4,224 |   | 4,379 |   |
| Tax benefit of  stock option exercises                                            | ** ** | **2,612**                            | ** ** | 357 |   | 59 |   |
| Changes in other  current operating items:                                        |       |                                 | ** ** |   |   |   |   |
| Receivables                                                                       | ** ** | **(5,543**                           | **)**      | (4,731 | ) | (4,714 | ) |
| Prepaid expenses  and other                                                       | ** ** | **(1,835**                           | **)**      | (2,202 | ) | (344 | ) |
| Accounts payable                                                                  | ** ** | **896**                              | ** ** | (1,236 | ) | (512 | ) |
| Other current  liabilities                                                        | ** ** | **515**                              | ** ** | 1,891 |   | 5,634 |   |
| Net cash  provided by operating activities                                        | ** ** | **50,890**                           | ** ** | 39,551 |   | 38,207 |   |
| **CASH  FLOWS USED FOR INVESTING ACTIVITIES:**                                    |       |                                 | ** ** |   |   |   |   |
| Revenue  equipment additions                                                      | ** ** | **(102,989**                         | **)**      | (55,196 | ) | (39,768 | ) |
| Proceeds from  revenue equipment dispositions                                     | ** ** | **30,686**                           | ** ** | 16,194 |   | 11,201 |   |
| Buildings and  land, office equipment and other additions, net                    | ** ** | **(4,113**                           | **)**      | (394 | ) | (260 | ) |
| Net change in  other assets                                                       | ** ** | **(1,570**                           | **)**      | 1,302 |   | (548 | ) |
| Net cash used  for investing activities                                           | ** ** | **(77,986**                          | **)**      | (38,094 | ) | (29,375 | ) |
| **CASH  FLOWS USED FOR FINANCING ACTIVITIES:**                                    |       |                                 | ** ** |   |   |   |   |
| Purchases of  marketable securities                                               | ** ** | **(70,153**                          | **)**      | (81,287 | ) | — |   |
| Sales of  marketable securities                                                   | ** ** | **89,310**                           | ** ** | 62,068 |   | — |   |
| Borrowings under  credit facility                                                 | ** ** | **58,400**                           | ** ** | 35,200 |   | 70,300 |   |
| Repayment of  borrowings under credit facility and long-term debt                 | ** ** | **(56,000**                          | **)**      | (70,972 | ) | (81,787 | ) |
| Issuance of  common stock from offering                                           | ** ** | **—**                           | ** ** | 52,089 |   | — |   |
| Issuance of  common stock from stock option exercises                             | ** ** | **3,239**                            | ** ** | 1,026 |   | 535 |   |
| Change in net  checks issued in excess of cash balances                           | ** ** | **2,300**                            | ** ** | 419 |   | 130 |   |
| Net cash  provided by (used for) financing activities                             | ** ** | **27,096**                           | ** ** | (1,457 | ) | (10,822 | ) |
| **NET  CHANGE IN CASH**                                                           | ** ** | **—**                           | ** ** | — |   | (1,990 | ) |
| **CASH:**                                                                         |       |                                 | ** ** |   |   |   |   |
| Beginning of  year                                                                | ** ** | **—**                           | ** ** | — |   | 1,990 |   |
| End of year                                                                       | ** ** | **$**                                | **—** | ** ** | $ | **—** |   | $ | — |   |
|                                                                              |       |                                 | ** ** |   |   |   |   |
| **SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:**                            |       |                                 | ** ** |   |   |   |   |
| Cash paid  (received) for:                                                        |       |                                 | ** ** |   |   |   |   |
| Interest                                                                          | ** ** | **$**                                | **2,131**  | ** ** | $ | 2,937 |   | $ | 3,583 |   |
| Income taxes                                                                      | ** ** | **$**                                | **4,613**  | ** ** | $ | 538 |   | $ | (1,288 | ) |
| ** **                                                                        |       |                                 | ** ** |   |   |   |   |
| **SUPPLEMENTAL  DISCLOSURE OF NONCASH INVESTING ACTIVITIES:**                     |       |                                 | ** ** |   |   |   |   |
| Lease  receivables from disposition of revenue equipment                          | ** ** | **$**                                | **—** | ** ** | $ | **—** |   | $ | 3,002 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

30

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**MARTEN TRANSPORT, LTD.**

** **

**Notes toConsolidated Financial Statements**

 

**1.  Summary of Significant Accounting Policies**

 

**Nature ofbusiness:** Marten Transport, Ltd. is a long-haul truckloadcarrier providing protective service transportation of time- andtemperature-sensitive materials and general commodities to customers in theUnited States and Canada.

 

**Principlesof consolidation: **Theaccompanying consolidated financial statements include the accounts of MartenTransport, Ltd. and its 45% owned affiliate, MW Logistics, LLC (“MWL”).  MWL is a third-party provider of logisticsservices to the transportation industry. We have applied the provisions of FASB Interpretation No. 46, “Consolidationof Variable Interest Entities,” as revised, to our investment in MWL effectiveMarch 31, 2004.  As a result, theaccounts of MWL are included in our consolidated balance sheet as ofDecember 31, 2004, and in our consolidated statements of operationsbeginning April 1, 2004.  Allmaterial intercompany accounts and transactions have been eliminated inconsolidation.  Prior to April 1,2004, we accounted for our investment in MWL using the equity method ofaccounting.  We recorded our share of theequity losses of MWL in the amount of $6,000 for the three months ended March31, 2004, $63,000 for the year ended December 31, 2003 and $304,000 for theyear ended December 31, 2002.

 

**Marketablesecurities:**  We investavailable 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.

 

**Propertyand equipment:** Additions and improvements to property andequipment 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.

 

Depreciation is computedbased on the cost of the asset, reduced by its estimated salvage value, usingthe straight-line method for financial reporting purposes.  Accelerated methods are used for income taxreporting purposes.  Following is asummary of estimated useful lives for financial reporting purposes:

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

 

Long-lived assets arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and usedis measured by a comparison of the carrying amount of an asset to future netundiscounted cash flows expected to be generated by the asset.  If such assets are considered to be impaired,the impairment to be recognized is measured by the amount by which the carryingamount of the assets exceed the fair value of the assets.  Assets to be disposed of are reported at thelower of the carrying amount or fair value less the costs to sell.

 

**Netinvestment in direct financing leases:**We have directfinancing tractor lease receivables from independent contractors, which expireover the next five years.

 

**Tires inservice:** The cost of original equipment and replacement tiresplaced in service is capitalized. Amortization is calculated based on cost,less estimated salvage value, using the straight-line method over 24 months.The current portion of capitalized tires in service is included in prepaidexpenses and other in the accompanying consolidated balance sheets. Thelong-term portion of capitalized tires in service and the

 

31

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estimated salvage valueare included in revenue equipment in the accompanying consolidated balancesheets. The cost of recapping tires is charged to operations.

 

**Incometaxes: **Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax basis.  Deferred taxassets and liabilities are measured using enacted tax rates expected to applyto taxable income in the years in which those temporary differences areexpected to be recovered or settled. The effect on deferred tax assets andliabilities of a change in tax rates is recognized in income in the period thatincludes the enactment date.  We havereflected the necessary deferred tax assets and liabilities in the accompanyingconsolidated balance sheets.  We believethe future tax deductions will be realized principally through future reversalsof existing taxable temporary differences and future taxable income.

 

**Insuranceand claims:**  Weself-insure, in part, for losses relating to workers’ compensation, autoliability, 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 in amountswe 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 $4.4 million in letters of credit toguarantee settlement of claims.

 

**Revenuerecognition: **We recordrevenue and related expenses on the date shipment of freight is completed.  We earned 11%, 11% and 10% of our revenue in2004 from three single customers whose trade receivables represented 8%, 7% and10%, respectively, of our trade receivables as of December 31, 2004.  We earned 10% of our revenue in 2003 from asingle customer whose trade receivables represented 8% of our trade receivablesas of December 31, 2003.  We earned11% of our revenue in 2002 from a single customer.

 

**Earningsper 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.

 

32

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**Accountingfor stock-based compensation: **Wehave adopted the disclosure provisions of Statement of Financial AccountingStandards No. 148, “Accounting for Stock-Based Compensation – Transition andDisclosure.”  Statement No. 148 amendsthe disclosure requirements of Statement of Financial Accounting Standards No.123, “Accounting for Stock-Based Compensation.” As of December 31, 2004, we have one stock-based employee compensationplan, which is described more fully in Note 9. We account for this plan under the recognition and measurementprinciples of Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees,” and related Interpretations.  No stock-based employee compensation cost isreflected in net income, as all options granted under these plans had anexercise price equal to the market value of the underlying common stock on the dateof grant.  The following table illustratesthe effect on net income and earnings per share if we had applied the fairvalue recognition provisions of Statement No. 123:

 
| **(In thousands, except per share  amounts)**                                                                                                 | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| Net income, as  reported                                                                                                                      | ** ** | **$**      | **17,536** | ** ** | $          | 11,842   |       | $ | 5,973 |   |
| Deduct: total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects | ** ** | **(157**   | **)**      | (182       | )          | (217     | )          |
| Pro forma net  income                                                                                                                         | ** ** | **$**      | **17,379** | ** ** | $          | 11,660   |       | $ | 5,756 |   |
|                                                                                                                                          |       | ** ** | ** ** |       |       |     |       |
| Earnings per  common share:                                                                                                                   |       | ** ** | ** ** |       |       |     |       |
| Basic-as  reported                                                                                                                            | ** ** | **$**      | **1.25**   | ** ** | $          | 1.07     |       | $ | 0.63 |   |
| Basic-pro forma                                                                                                                               | ** ** | **$**      | **1.24**   | ** ** | $          | 1.05     |       | $ | 0.60 |   |
| Diluted-as  reported                                                                                                                          | ** ** | **$**      | **1.21**   | ** ** | $          | 1.02     |       | $ | 0.61 |   |
| Diluted-pro  forma                                                                                                                            | ** ** | **$**      | **1.20**   | ** ** | $          | 1.01     |       | $ | 0.59 |   |

 

The weighted-average fairvalue as of the date of grant was $5.24 per share for options granted during2003 and $2.98 per share for options granted during 2002.  No options were granted in 2004.  The fair value was estimated as of the dateof grant using the Black-Scholes option pricing model with the following weighted-averageassumptions:

 
| ** **                                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Expected option  life in years              |       | —   |       | 6        |       | 6        |       |
| Risk-free  interest rate percentage         |       | —   |       | 3.3      |       | 4.2      |       |
| Expected stock  price volatility percentage |       | —   |       | 33       |       | 32       |       |
| Expected  dividend payments                 |       | —   |       | —   |       | —   |       |

** **

**Segment reporting: **We have adopted theprovisions of Statement of Financial Accounting Standards No. 131, “Disclosuresabout Segments of an Enterprise and Related Information” (Statement No.131).  Statement No. 131 establishesaccounting standards for segment reporting. We operate in a single segment—long-haul truckload carriage providingprotective service transportation of time- and temperature-sensitive materialsand general commodities.

 

**Recent accounting pronouncements: **In December 2004, the Financial Accounting Standards Board, or FASB,issued Statement of Financial Accounting Standards, or SFAS, No. 123 (revised2004), “Share-Based Payment.”  SFAS No.123, as revised, requires entities to recognize the grant-date fair value ofstock options and other equity-based compensation issued to employees in theincome statement.  The statementeliminates entities’ ability to account for share-based compensationtransactions using the intrinsic value method of accounting in AccountingPrinciples Board, or APB, Opinion No. 25, “Accounting for Stock Issued toEmployees,” which was permitted under SFAS No. 123, as originally issued.  SFAS No. 123, as revised, is effective as ofthe beginning of the first interim or annual reporting period beginning afterJune 15, 2005.  Accordingly, we willrecognize the grant-date fair value of stock options in our consolidatedstatements of operations beginning in our third quarter of 2005.  As shown above within Note 1, the averagestock-based employee compensation expense, net of related tax effects, for 2002through 2004 was $185,000.  Therefore,the adoption of this pronouncement is not expected to have a significant impacton our results of operations or

 

33

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financial position. However, the ultimate amount of increasedcompensation expense will be dependent on whether we adopt SFAS No. 123, asrevised, using the modified prospective or retrospective method, the number ofoption shares granted during the year, their timing and vesting period, and themethod used to calculate the fair value of the awards, among other factors.

 

In December 2004, the FASB issued SFAS No. 153, “Exchanges ofNonmonetary Assets: an Amendment of APB Opinion No. 29.”  The amendments made by SFAS No. 153 are basedon the principle that exchanges of nonmonetary assets should be measured basedon the fair value of the assets exchanged. The amendments also eliminate the narrow exception for nonmonetaryexchanges of similar productive assets and replace it with a broader exceptionfor exchanges of nonmonetary assets that do not have commercial substance.  SFAS No. 153 is effective for nonmonetaryasset exchanges occurring in fiscal periods beginning after June 15, 2005.  The adoption of this pronouncement is notexpected to have a significant impact on our results of operations or financialposition.

 

**Use ofestimates:** We must make estimates and assumptions to preparethe consolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America.  These estimates and assumptions affect thereported amounts of assets and liabilities and the disclosure of contingentassets and liabilities in the consolidated financial statements.  These estimates are primarily related to insuranceand claims accruals and depreciation. Ultimate results could differ from these estimates.

 

**2.  Details of Consolidated Balance SheetAccounts**

 

**Prepaidexpenses and other:**  Asof December 31, prepaid expenses and other consisted of the following:

 
| **(In thousands)**         | ** ** | **2004**  | ** ** | **2003** | ** ** |
|----------------------------|------------|-----------|------------|----------|------------|
| License fees               | ** ** | **$**     | **4,249**  |     | $          | 4,218 |   |
| Tires in service           | ** ** | **3,261** |       | 2,793    |       |
| Parts and tires  inventory | ** ** | **1,410** |       | 1,377    |       |
| Insurance  premiums        | ** ** | **1,010** |       | 167      |       |
| Other                      | ** ** | **1,939** |       | 1,479    |       |
|                       |       | **$**     | **11,869** |     | $          | 10,034 |   |

 

**Netinvestment in direct financing leases:**  As of December 31, the components of the netinvestment in direct financing lease receivables from independent contractorsconsisted of the following:

 
| **(In thousands)**                           | ** ** | **2004**   | ** ** | **2003** | ** ** |
|----------------------------------------------|------------|------------|------------|----------|------------|
| Total minimum  lease payments to be received | ** ** | **$**      | **12,972** |     | $          | 10,612 |   |
| Less: unearned  income                       | ** ** | **(2,652** | **)**      | (2,052   | )          |
| Net investment  in direct financing leases   | ** ** | **$**      | **10,320** |     | $          | 8,560 |   |

 

The current portion ofour net investment in direct financing leases is included in other receivablesin the accompanying consolidated balance sheets.  The long-term portion of our net investmentin direct financing leases is included in other assets in the accompanyingconsolidated balance sheets.

 

34

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As of December 31, 2004,minimum lease payments to be received for each of the five succeeding fiscalyears are as follows: $4,757,000 in 2005, $3,362,000 in 2006, $2,362,000 in2007, $1,719,000 in 2008 and $772,000 in 2009.

 

**Accruedliabilities:**  As ofDecember 31, accrued liabilities consisted of the following:

* *
| **(In thousands)**       | ** ** | **2004**  | ** ** | **2003**   | ** ** |
|--------------------------|------------|-----------|------------|------------|------------|
| Salaries and  wages      | ** ** | **$**     | **3,941**  | ** ** | $          | 4,679 |   |
| Accrued payables         | ** ** | **3,555** | ** ** | 3,278      |       |
| Vacation                 | ** ** | **2,727** | ** ** | 2,544      |       |
| Federal highway  use tax | ** ** | **570**   | ** ** | 558        |       |
| Current income  taxes    | ** ** | **261**   | ** ** | 923        |       |
| Other                    | ** ** | **1,238** | ** ** | 1,397      |       |
|                     |       | **$**     | **12,292** | ** ** | $          | 13,379 |   |

 

**3.  Long-Term Debt**

 

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

 
| **(In thousands)**                                                                                                                                                                                                                                                                                                       | ** ** | **2004**      | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|----------|------------|
| Series A Senior  Unsecured Notes maturing in October 2008 with annual principal payments of  $3.57 million which began in October 2002 and bearing fixed interest at 6.78%                                                                                                                                               | ** ** | **$**         | **14,286** |     | $          | 17,857 |   |
| Series B Senior  Unsecured Notes maturing in April 2010 with annual principal payments of  $1.43 million beginning in April 2004 and bearing fixed interest at 8.57%                                                                                                                                                     | ** ** | **8,****571** |       | 10,000   |       |
| Unsecured  committed credit facility in the amount of $45 million with banks maturing in  April 2006 and bearing variable interest based upon either the London  Interbank Offered Rate or the banks’ Prime Rate, in each case plus applicable  margins (5.25% interest rate for the facility at December 31, 2004) | ** ** | **7,400**     |       | —   |       |
| Total long-term  debt                                                                                                                                                                                                                                                                                                    | ** ** | **30,257**    |       | 27,857   |       |
| Less current  maturities of long-term debt                                                                                                                                                                                                                                                                               | ** ** | **5,000**     |       | 5,000    |       |
| Long-term debt,  less current maturities                                                                                                                                                                                                                                                                                 | ** ** | **$**         | **25,257** |     | $          | 22,857 |   |

 

At December 31, 2004, theunsecured committed credit facility (“credit facility”) had an outstandingprincipal balance of $7.4 million, outstanding letters of credit of $4.4million, and remaining borrowing availability of $33.2 million.

 

Our credit facilityprohibits us from paying, in any fiscal year, dividends in excess of 25% of ournet income from the prior fiscal year. The debt agreements also contain restrictive covenants which, amongother matters, require us to maintain certain financial ratios, includingdebt-to-equity, minimum tangible net worth, cash flow leverage, interestcoverage, and fixed charge coverage.  Wewere in compliance with all such debt covenants at December 31, 2004.

 

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Maturities of long-termdebt at December 31, 2004, are as follows:

 
| **(In thousands)** | ** ** | **Amount** | ** ** |
|--------------------|------------|------------|------------|
| 2005               |       | $          | 5,000      |   |
| 2006               |       | 12,400     |       |
| 2007               |       | 5,000      |       |
| 2008               |       | 5,000      |       |
| 2009               |       | 1,429      |       |
| Thereafter         |       | 1,428      |       |
|               |       | $          | 30,257     |   |
|                    |            |            |            |  |  |

 

**4.  Related Party Transactions**

 

The following relatedparty transactions occurred during the three years ended December 31, 2004:

 

(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 that company $924,000 in 2004,$805,000 in 2003 and $721,000 in 2002 for fuel and tire services.  In addition, we paid $1.4 million in 2004,$2.3 million in 2003 and $1.5 million in 2002 to tire manufacturers for tiresthat we purchased from the tire manufacturers but were provided by the samecompany.  The same company receivedcommissions from the tire manufacturers related to these purchases.  We also had accounts payable to the samecompany of $57,000 as of December 31, 2004 and $69,000 as of December 31, 2003.

 

(b) During 2004, we paid$493,000 for various construction projects to a company in which one of ourdirectors is the president and owner.  Wealso had accounts payable to the same company of $9,000 as of December 31,2004.

 

(c) We providetransportation services to MWL, a 45% owned affiliate.  MWL is a third-party provider of logisticsservices to the transportation industry. In 2004, 2003 and 2002, we received $22.6 million, $13.8 million and$6.3 million, respectively, of our revenue from transportation services arrangedby MWL.

 

36

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**5.  Income Taxes**

 

The components of theprovision (benefit) for income taxes consisted of the following:

 
| **(In thousands)** | ** ** | **2004**  | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------|------------|-----------|------------|----------|------------|----------|------------|
| Current:           |       |      |       |     |       |     |       |
| Federal            | ** ** | **$**     | **5,443**  |     | $          | 2,520    |       | $ | (576 | ) |
| State              | ** ** | **1,561** |       | 514      |       | 14       |       |
|               |       | **7,004** |       | 3,034    |       | (562     | )          |
| Deferred:          |       |      |       |     |       |     |       |
| Federal            | ** ** | **5,028** |       | 3,664    |       | 3,605    |       |
| State              | ** ** | **1,145** |       | 560      |       | 618      |       |
|               |       | **6,173** |       | 4,224    |       | 4,223    |       |
| Total provision    | ** ** | **$**     | **13,177** |     | $          | 7,258    |       | $ | 3,661 |   |

 

The statutory federalincome tax rate is reconciled to the effective income tax rate as follows:

 
| ** **                                             | ** ** | **2004**   | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Statutory  federal income tax rate                     |       | **35**     | **%**      | 35       | %          | 35       | %          |
| Increase in  taxes arising from:                       |       | ** ** | ** ** |     |       |     |       |
| State income  taxes, net of federal income tax benefit |       | **6**      | ** ** | 4        |       | 4        |       |
| Federal deferred  income tax rate increase             |       | **4**      | ** ** | —   |       | —   |       |
| Benefit of lower  tax bracket                          |       | **(1**     | **)**      | (1       | )          | (1       | )          |
| Decrease in  accrual for tax contingencies             |       | **(1**     | **)**      | —   |       | —   |       |
| Effective tax  rate                                    |       | **43**     | **%**      | 38       | %          | 38       | %          |

 

Our effective income taxrate was 42.9% in 2004 compared with 38.0% in 2003, because we increased ourfederal and state deferred income tax liabilities by a total of $1.5 millionduring the fourth quarter of 2004 as a result of an increase in our statutoryfederal and state income tax rates based upon projected future taxable income.

 

As of December 31, thenet deferred tax liability consisted of the following:

 
| **(In thousands)**                                                                                      | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Deferred tax  assets:                                                                                   |       |       |       |       |       |
| Reserves and  accrued liabilities for financial reporting in excess of tax                              | ** ** | **$**      | **6,173**  |       | $          | 5,275 |   |
| State income tax  deduction for financial reporting in excess of tax                                    | ** ** | **2,739**  |       | 2,272      |       |
| Net operating  loss carryforwards                                                                       |       | —     |       | 51         |       |
| Other                                                                                                   | ** ** | **50**     |       | —     |       |
|                                                                                                    |       | **8,962**  |       | 7,598      |       |
| Deferred tax  liabilities:                                                                              |       |       |       |       |       |
| Tax depreciation  in excess of depreciation for financial reporting                                     | ** ** | **59,361** |       | 48,677     |       |
| Capital lease  receivables for financial reporting in excess of tax                                     | ** ** | **267**    |       | 1,176      |       |
| Prepaid licenses  and use tax expensed for income tax purposes and capitalized for financial  reporting |       | —     |       | 2,227      |       |
| Other                                                                                                   |       | —     |       | 11         |       |
|                                                                                                    |       | **59,628** |       | 52,091     |       |
| Net deferred tax  liability                                                                             | ** ** | **$**      | **50,666** | ** ** | $          | 44,493 |   |

 

37

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We have not provided avaluation allowance against deferred tax assets at December 31, 2004 or2003.  We believe the deferred tax assetswill be realized principally through future reversals of existing taxabletemporary differences and future taxable income.

 

**6.  Earnings Per Common Share**

 

Basic and dilutedearnings per common share were computed as follows:

 
| **(In thousands, except per share amounts)**                                         | ** ** | **2004**   | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Numerator:                                                                           |       |       |       |     |       |     |       |
| Net income                                                                           | ** ** | **$**      | **17,536** |     | $          | 11,842   |       | $ | 5,973 |   |
| Denominator:                                                                         |       |       |       |     |       |     |       |
| Basic earnings  per common share - weighted-average shares                           | ** ** | **14,058** |       | 11,094   |       | 9,529    |       |
| Effect of  dilutive stock options                                                    | ** ** | **452**    |       | 510      |       | 261      |       |
| Diluted earnings  per common share - weighted-average shares and assumed conversions | ** ** | **14,510** |       | 11,604   |       | 9,790    |       |
| Basic earnings  per common share                                                     | ** ** | **$**      | **1.25**   |     | $          | 1.07     |       | $ | 0.63 |   |
| Diluted earnings  per common share                                                   | ** ** | **$**      | **1.21**   |     | $          | 1.02     |       | $ | 0.61 |   |

 

All outstanding optionswere included in the calculation of diluted earnings per share in 2004 and2003.  Options totaling 16,875 shares in2002 were outstanding but were not included in the calculation of dilutedearnings per share because their exercise prices were greater than the averagemarket price of the common shares and, therefore, including the options in thedenominator would be antidilutive, or decrease the number of weighted-averageshares.

 

**7.  Amended andRestated Certificate of Incorporation**

 

In August 2003, our stockholders approved an Amended and Restated Certificateof Incorporation that increased the number of authorized shares of capitalstock from 10 million shares consisting solely of common stock, $.01 par value,to 25 million shares of capital stock consisting of 23 million shares of commonstock, $.01 par value, and 2 million shares of undesignated preferred stock,$.01 par value. The Board may fix the rights, preferences, and privileges ofthe preferred stock, along with the voting powers (full or limited or no votingpowers), such preferences and relative participating, optional, or otherspecial rights, and such qualifications, limitations, or restrictions,including dividend rights, conversion rights, redemption privileges, andpreferences on liquidation or dissolution of each class or series of preferredstock. The preferred stock could have voting or conversion rights that couldadversely affect the voting power or other rights of holders of our commonstock. The issuance of preferred stock also could have the effect, undercertain circumstances, of delaying, deferring, or preventing a change ofcontrol of our company. At December 31, 2004 there were no preferred sharesoutstanding.

 

**8.  Stock Issuance**

 

We issued 4.05 millionshares of our common stock in a public offering completed during the thirdquarter of 2003. The stock issuance resulted in net proceeds to us ofapproximately $52.1 million, which were recorded as an increase to ourstockholders’equity.

 

**9.  Employee Benefits**

 

***StockIncentive Plans****-*Under ourStock Incentive Plan adopted in 1995, officers, directors and  employees may be granted incentive andnon-statutory stock options.  Incentivestock option prices must be at least the fair market value of our common stockon the date of grant.  Non-statutorystock option prices must

 

38

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be at least 85% of thefair market value of our common stock on the date the option is granted.  Stock options expire within 10 years afterthe date of grant. The plan also allows for stock appreciation rights,restricted stock awards, performance units and stock bonuses, none of whichhave been awarded as of December 31, 2004. The maximum number of shares of common stock available for issuanceunder the plan is 1,687,500 shares.

 

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

 
| ** **                      | ** ** | **2004**      | ** ** | **2003**                               | ** ** | **2002**   | ** ** |
|---------------------------------|------------|---------------|------------|----------------------------------------|------------|------------|------------|
| ** **                      | ** ** | **Shares**    | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Outstanding,  beginning of year |       | **1,048,688** | ** ** | **$**                                  | **6.86**   |       | 1,116,347  |   | $ | 6.15 |   | 1,104,195 |   | $ | 6.01 |   |
| Granted                         |       | **—**    | ** ** | **—**                             |       | 101,252    |       | 13.66 |   | 101,252 |   | 7.54 |   |
| Exercised                       |       | **(547,251**  | **)**      | **5.92**                               |       | (165,536   | )          | 6.19 |   | (89,100 | ) | 6.02 |   |
| Forfeited                       |       | **(1,125**    | **)**      | **6.55**                               |       | (3,375     | )          | 6.55 |   | — |   | — |   |
| Outstanding, end  of year       |       | **500,312**   | ** ** | **7.89**                               |       | 1,048,688  |       | 6.86 |   | 1,116,347 |   | 6.15 |   |
| Exercisable, end  of year       |       | **350,687**   | ** ** | **6.89**                               |       | 824,813    |       | 6.13 |   | 893,597 |   | 6.03 |   |
|                                 |            |               |            |                                        |            |            |            |  |  |  |  |  |  |  |  |  |

 

The followingtable summarizes information regarding stock options outstanding andexercisable as of December 31, 2004:

 
| ** **                                   | ** ** | **Range of Exercise Price** | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|
| ** **                                   | ** ** | **$5.22 to  $8.68**         | ** ** | **$16.15** | ** ** | **Total** | ** ** |
| Options  outstanding:                        |       |                        |       |   |   |   |   |
| Number of shares                             |       | 432,812                     |       | 67,500 |   | 500,312 |   |
| Weighted-average  remaining contractual life |       | 5.8 years                   |       | 8.8 years |   | 6.2 years |   |
| Weighted-average  exercise price             |       | $                           | 6.60       |   | $ | 16.15 |   | $ | 7.89 |   |
| Options  exercisable:                        |       |                        |       |   |   |   |   |
| Number of shares                             |       | 337,187                     |       | 13,500 |   | 350,687 |   |
| Weighted-average  exercise price             |       | $                           | 6.52       |   | $ | 16.15 |   | $ | 6.89 |   |

 

***RetirementSavings Plan****-*We sponsor adefined contribution retirement savings plan under Section 401(k) of theInternal 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 2004 was $13,000 forparticipants less than age 50 and $16,000 for participants age 50 and above.  We contribute 25% of each participant’scontribution, up to a total of 4% 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 2004, 2003 or 2002.  Totalexpense recorded for the plan was $404,000 in 2004, $343,000 in 2003 and$300,000 in 2002.

 

***StockPurchase Plans****-*An EmployeeStock Purchase Plan and an Independent Contractor Stock Purchase Plan aresponsored to encourage employee and independent contractor ownership of ourcommon stock. Eligible participants specify the amount of regular payroll orcontract payment deductions and voluntary cash contributions that are used topurchase shares of our common stock.  Thepurchases are made at the market price on the open market.  We pay the broker’s commissions andadministrative charges for purchases of common stock under the plans.

 

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**10.  Accounting for Derivative Instruments andHedging Activities**

 

In January 2001, weadopted Statement of Financial Accounting Standards No. 133, “Accounting forDerivative Instruments and Hedging Activities.” Statement No. 133, as amended, establishes accounting and reportingstandards requiring the recording of each derivative instrument in the balancesheet as either an asset or liability measured at fair value.  Changes in the derivative instrument’s fairvalue must be recognized currently in earnings unless specific hedge accountingcriteria are met.  For hedges which meetthe criteria, the derivative instrument’s gains and losses, to the extenteffective, may be recognized in accumulated other comprehensive income (loss)included in stockholders’ equity, rather than current earnings.

 

Previously, we utilizedcommodity swap agreements to partially hedge our exposure to diesel fuel pricefluctuations, but all such agreements have expired by December 31, 2002.  These agreements met the specific hedgeaccounting criteria and therefore constituted cash flow hedges.  The effective portion of the cumulative gainor loss on the derivative instruments has been reported as a component ofaccumulated other comprehensive loss and was recognized into current earningsin the same period or periods during which the hedged transactions affectedcurrent earnings.  No ineffectiveness wasrecognized in current earnings during 2002. During 2002, accumulated other comprehensive loss was reversed by $410,000($254,000 net of income taxes) to reflect an unrealized gain and expiration ofthe remaining notional amount on our commodity swap agreements fromJanuary 1, 2002 to December 31, 2002. We did not enter into any commodity swap agreements during 2004 or 2003.

 

**11.  Fair Value of Financial Instruments**

 

The carrying amounts ofmarketable securities, accounts receivable, direct financing leases receivableand accounts payable approximate fair value because of the short maturity ofthese instruments.  The fair value of ourtotal long-term debt is estimated to be $31.9 million at December 31, 2004, and$30.0 million at December 31, 2003.  Thefair value was estimated using discounted cash flow analysis.  Current borrowing rates for similar long-termdebt were used in this analysis.

 

**12.  Commitments and Contingencies**

 

We are committed to:(a) purchase $34.0 million of new revenue equipment in 2005; and(b) operating lease obligations totaling $536,000 through 2009.

 

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

 

40

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

 

The following is asummary of the quarterly results of operations for 2004 and 2003:

 
| **2004 Quarters (In thousands, except per share amounts)** | ** ** | **First** | ** ** | **Second** | ** ** | **Third**  | ** ** | **Fourth** | ** ** | **Total**  | ** ** |
|------------------------------------------------------------|------------|-----------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| Operating revenue                                          | ** ** | **$**     | **84,530** | ** ** | **$**      | **91,907** | ** ** | **$**      | **97,892** | ** ** | **$**      | **105,719** | ** ** | **$** | **380,048** | ** ** |
| Operating income                                           | ** ** | **4,589** | ** ** | **7,882**  | ** ** | **7,850**  | ** ** | **10,973** | ** ** | **31,294** | ** ** |
| Net income                                                 | ** ** | **2,732** | ** ** | **4,814**  | ** ** | **4,784**  | ** ** | **5,206**  | ** ** | **17,536** | ** ** |
| Basic earnings per common share                            | ** ** | **0.20**  | ** ** | **0.34**   | ** ** | **0.34**   | ** ** | **0.37**   | ** ** | **1.25**   | ** ** |
| Diluted earnings per common share                          | ** ** | **0.19**  | ** ** | **0.33**   | ** ** | **0.33**   | ** ** | **0.36**   | ** ** | **1.21**   | ** ** |
|                                                            |            |           |            |            |            |            |            |            |            |            |            |  |  |  |  |  |

 
| **2003 Quarters (In thousands, except per share amounts)** | ** ** | **First** | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** | **Total** | ** ** |
|------------------------------------------------------------|------------|-----------|------------|------------|------------|-----------|------------|------------|------------|-----------|------------|
| Operating revenue                                          |       | $         | 79,321     |       | $          | 84,206    |       | $          | 85,903     |      | $          | 85,237 |   | $ | 334,667 |   |
| Operating income                                           |       | 2,656     |       | 6,043      |       | 5,891     |       | 5,746      |       | 20,336    |       |
| Net income                                                 |       | 1,397     |       | 3,537      |       | 3,436     |       | 3,472      |       | 11,842    |       |
| Basic earnings per common share                            |       | 0.15      |       | 0.37       |       | 0.30      |       | 0.25       |       | 1.07      |       |
| Diluted earnings per common share                          |       | 0.14      |       | 0.35       |       | 0.29      |       | 0.24       |       | 1.02      |       |
|                                                            |            |           |            |            |            |           |            |            |            |           |            |  |  |  |  |  |

 

**14.  Subsequent Event**

 

In March 2005, our Boardof Directors adopted the Marten Transport, Ltd. 2005 Stock Incentive Plan (the “2005Plan”), subject to stockholder approval at the annual meeting to be heldMay 3, 2005.  Under the 2005 Plan,all of our employees and any subsidiary employees, as well as all of ournon-employee directors, consultants, advisors and independent contractors, maybe granted incentive and non-statutory stock options and restricted stock awards.  If approved by our stockholders, the maximumnumber of shares of common stock that will be available for issuance under the2005 Plan is approximately 2.4 million shares. The 2005 Plan is intended toreplace our 1995 Stock Incentive Plan (the “1995 Plan”), which terminates byits terms in March 2005.  Any awardsissued under the 1995 Plan that remain outstanding will continue according totheir terms.

 

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# ***ITEM 9.***          CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

# *** ***

No reports on Form8-K have been required to be filed within the twenty-four months prior toDecember 31, 2004, involving a change of accountants or disagreements onaccounting and financial disclosure.

 

**ITEM9A.****                    *CONTROLS AND PROCEDURES***

 

As required by Rule13a-15 under the 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 of theperiod covered by this report.  Thisevaluation was carried out under the supervision and with the participation ofour management, including our President and Chief Executive Officer and ourExecutive Vice President, Chief Financial Officer and Treasurer.  Based upon that evaluation, our President andChief Executive Officer and our Executive Vice President, Chief FinancialOfficer and Treasurer, concluded that our disclosure controls and procedureswere effective as of December 31, 2004. There were no changes in our internal control over financial reportingthat occurred during the period covered by this report that have materiallyaffected, or that are reasonably likely to materially affect, our internalcontrol over financial reporting.  Weintend to periodically evaluate our disclosure controls and procedures asrequired by the Exchange Act Rules.

 

We have includedManagement’s Annual Report on Internal Control Over Financial Reporting in Item8 above.

 

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

 

None.

 

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**PART III**

 

# ***ITEM 10.***                      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

# *** ***

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 2005 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) of the Exchange Act.

 

The information in the “Section 16(a) BeneficialOwnership Reporting Compliance” section of our 2005 Proxy Statement isincorporated in this Report by reference.

 

D.    Audit Committee Financial Expert.

 

The information in the “Election of Directors—Boardand Board Committees” section of our 2005 Proxy Statement is incorporated inthis Report by reference.

 

E.     Identification of the Audit Committee.

 

The information in the “Election of Directors—Boardand Board Committees” section of our 2005 Proxy Statement is incorporated inthis Report by reference.

 

F.     Code of Ethics for Senior Financial Management.

 

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

 

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

# *** ***

The information in the “Election of Directors—DirectorCompensation” and “Compensation and Other Benefits” sections of our 2005 ProxyStatement is incorporated in this Report by reference.

 

# ***ITEM 12.      ***SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT AND RELATED STOCKHOLDER MATTERS

# *** ***

The information in the “Security Ownership of CertainBeneficial Owners and Management” and “Compensation and Other Benefits — EquityCompensation Plan Information” sections of our 2005 Proxy Statement isincorporated in this Report by reference.

 

# ***ITEM 13.***                      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

# *** ***

The information in the “Certain Transactions” sectionof our 2005 Proxy Statement is incorporated in this Report by reference.

 

# ***ITEM 14.***                      PRINCIPAL ACCOUNTANT FEES AND SERVICES

# *** ***

The information in the “Feesof Independent Auditors” section of our 2005 Proxy Statement is incorporated inthis Report by reference.

 

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**PART IV**

 

# ***ITEM 15.***                      EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

# *** ***

| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                  | ** ** | **Page** |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **(a)**    | **1.**     | **Financial Statements  (See Part II, Item 8 of this Report):**                                                                                                                                                                                                                                                                             |       |     |
|       |       |                                                                                                                                                                                                                                                                                                                                        |       |     |
|       |       | Management’s  Annual Report on Internal Control Over Financial Reporting                                                                                                                                                                                                                                                               |       | 24       |
|       |       |                                                                                                                                                                                                                                                                                                                                        |       |     |
|       |       | Report  of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                                    |       | 25       |
|       |       |                                                                                                                                                                                                                                                                                                                                        |       |     |
|       |       | Report  of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                                    |       | 26       |
|       |       |                                                                                                                                                                                                                                                                                                                                        |       |     |
|       |       | Consolidated Balance Sheets  as of December 31, 2004 and 2003                                                                                                                                                                                                                                                                               |       | 27       |
|       |       |                                                                                                                                                                                                                                                                                                                                        |       |     |
|       |       | Consolidated  Statements of Operations for the years ended December 31, 2004, 2003 and 2002                                                                                                                                                                                                                                                 |       | 28       |
|       |       |                                                                                                                                                                                                                                                                                                                                        |       |     |
|       |       | Consolidated  Statements of Stockholders’ Equity and Comprehensive Income for the years  ended December 31, 2004, 2003 and 2002                                                                                                                                                                                                   |       | 29       |
|       |       |                                                                                                                                                                                                                                                                                                                                        |       |     |
|       |       | Consolidated  Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002                                                                                                                                                                                                                                                 |       | 30       |
|       |       |                                                                                                                                                                                                                                                                                                                                        |       |     |
|       |       | Notes to  Consolidated Financial Statements                                                                                                                                                                                                                                                                                                 |       | 31-41    |
|       |       |                                                                                                                                                                                                                                                                                                                                        |       |     |
| ** ** | **2.**     | **Financial Statement Schedules  (Consolidated Financial Statement Schedule Included in Part IV of this  Report):**                                                                                                                                                                                                                         |       |     |
|       |       |                                                                                                                                                                                                                                                                                                                                        |       |     |
|       |       | Schedule II –  Valuation and Qualifying Accounts and Reserves                                                                                                                                                                                                                                                                          |       | 47       |
|       |       |                                                                                                                                                                                                                                                                                                                                        |       |     |
|       |       | Schedules not listed  above have been omitted as the required information is inapplicable or the  information is presented in the consolidated financial statements or related  notes.                                                                                                                                                      |       |     |
|       |       |                                                                                                                                                                                                                                                                                                                                        |       |     |
| ** ** | **3.**     | **Exhibits:**                                                                                                                                                                                                                                                                                                                               |       |     |
|       |       |                                                                                                                                                                                                                                                                                                                                        |       |     |
| * *   | * *   | *The exhibits to this Report are  listed in the Exhibit Index on pages 48 through 50. A copy of any of the  exhibits listed will be sent at a reasonable cost to any shareholder as of  March 17, 2005. Requests should be sent to Darrell D. Rubel, Executive Vice  President and Chief Financial Officer, at our corporate headquarters.* | * *   | * * |
| * *   | * *   | * *                                                                                                                                                                                                                                                                                                                                    | * *   | * * |
| * *   | * *   | *The following is a list of each  management contract or compensatory plan or arrangement required to be filed  as an exhibit to this Report under Item 14(c):*                                                                                                                                                                             | * *   | * * |
| * *   | * *   | * *                                                                                                                                                                                                                                                                                                                                    | * *   | * * |
|       |       | (1)           Marten Transport, Ltd. 1986  Incentive Stock Option Plan, as amended.                                                                                                                                                                                                       |       |     |
|       |       |                                                                                                                                                                                                                                                                                                                                        |       |     |
|       |       | (2)           Marten Transport, Ltd. 1986  Non-Statutory Stock Option Plan, as amended.                                                                                                                                                                                                   |       |     |
|       |       |                                                                                                                                                                                                                                                                                                                                        |       |     |
|       |       | (3)           Marten Transport, Ltd. 1995 Stock  Incentive Plan.                                                                                                                                                                                                                          |       |     |
|       |       |                                                                                                                                                                                                                                                                                                                                        |       |     |
|       |       | (4)           2005 Incentive Compensation Plan  Summary.                                                                                                                                                                                                                                  |       |     |
|       |       |                                                                                                                                                                                                                                                                                                                                        |       |     |
|       |       | (5)           2005 Non-employee Director Compensation  Summary                                                                                                                                                                                                                            |       |     |

 

45

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**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 14, 2005 | MARTEN TRANSPORT, LTD.                                                             |
|-----------------------|------------------------------------------------------------------------------------|
|                  |                                                                               |
|                  |                                                                               |
|                  | By                                                                                 | /s/ Randolph L. Marten |
|                  | Randolph L.  Marten  Chairman of the Board, President and Chief  Executive Officer |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this Report has been signed below on March 14, 2005, bythe following persons on behalf of the Registrant and in the capacitiesindicated.

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

 

46

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**SCHEDULEII**

 

**MARTENTRANSPORT, LTD.**

** **

**Valuationand Qualifying Accounts and Reserves**

**(Inthousands)**

 
| **Description**                   | ** ** | **Balance at  Beginning of  Year** | ** ** | **Charged to  Costs and  Expenses** | ** ** | **Deductions** | ** ** | **Balance at  End of Year** | ** ** |
|-----------------------------------|------------|------------------------------------|------------|-------------------------------------|------------|----------------|------------|-----------------------------|------------|
|                              |       |                               |       |                                |       |           |       |                        |       |
| Insurance and  claims accruals:   |       |                               |       |                                |       |           |       |                        |       |
| Year ended  December 31, 2004     |       | $                                  | 12,052     |                                | $          | 22,884         |       | $                           | (21,282    | )(1) | $ | 13,654 |   |
| Year ended  December 31, 2003     |       | 12,915                             |       | 20,111                              |       | (20,974        | )(1)       | 12,052                      |       |
| Year ended  December 31, 2002     |       | 8,984                              |       | 21,726                              |       | (17,795        | )(1)       | 12,915                      |       |
|                              |       |                               |       |                                |       |           |       |                        |       |
| Allowance for  doubtful accounts: |       |                               |       |                                |       |           |       |                        |       |
| Year ended  December 31, 2004     |       | 793                                |       | 120                                 |       | (4             | )(2)       | 909                         |       |
| Year ended  December 31, 2003     |       | 892                                |       | 120                                 |       | (219           | )(2)       | 793                         |       |
| Year ended  December 31, 2002     |       | 868                                |       | 120                                 |       | (96            | )(2)       | 892                         |       |
|                                   |            |                                    |            |                                     |            |                |            |                             |            |  |  |  |  |

 

----

(1)          Claims payments

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

 

See independent auditors’report.

 

47

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**MARTENTRANSPORT, LTD.**

**EXHIBIT INDEX TO ANNUAL REPORT**

**ONFORM 10-K**

**For theYear Ended December 31, 2004**

 
| **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          |       | Bylaws of the Company                                                                                                                   |       | Incorporated by  reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K, filed  on January 25, 2002 (File No. 0-15010).                    |
|         |       |                                                                                                                                    |       |                                                                                                                                                          |
| 4.1          |       | Specimen form of the  Company’s Common Stock Certificate                                                                           |       | Incorporated by  reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-1  (File No. 33-8108).                                       |
|         |       |                                                                                                                                    |       |                                                                                                                                                          |
| 4.2          |       | Amended and Restated  Certificate of Incorporation effective August 11, 2003                                                            |       | See Exhibit 3.1 above.                                                                                                                                        |
|         |       |                                                                                                                                    |       |                                                                                                                                                          |
| 4.3          |       | Bylaws of the Company                                                                                                                   |       | See Exhibit 3.2 above.                                                                                                                                        |
|         |       |                                                                                                                                    |       |                                                                                                                                                          |
| 10.1         |       | Marten Transport, Ltd.  1986 Incentive Stock Option Plan, as amended                                                                    |       | Incorporated by  reference to Exhibit 10.1 of the Company’s Annual Report on Form 10-K for the  year ended December 31, 1986 (File No. 0-15010).         |
|         |       |                                                                                                                                    |       |                                                                                                                                                          |
| 10.2         |       | Marten Transport, Ltd.  1986 Non-Statutory Stock Option Plan, as amended                                                                |       | Incorporated by  reference to Exhibit 10.2 of the Company’s Annual Report on Form 10 - K for  the year ended December 31, 1987 (File No. 0-15010).       |
|         |       |                                                                                                                                    |       |                                                                                                                                                          |
| 10.3         |       | 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).   |
|         |       |                                                                                                                                    |       |                                                                                                                                                          |
| 10.4         |       | 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). |
|         |       |                                                                                                                                    |       |                                                                                                                                                          |
| 10.5         |       | Credit Agreement dated  October 30, 1998, between the Company and U.S. Bank National Association                                        |       | Incorporated by  reference to Exhibit 10.13 of the Company’s Quarterly Report on Form 10-Q for  the quarter ended September 30, 1998 (File No. 0-15010). |

 

48

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| **Item No.** | ** ** | **Item**                                                                                                                                                 | ** ** | **Filing Method**                                                                                                                                            |
|--------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                                     |       |                                                                                                                                                         |
| 10.6         |       | Stock Redemption  Agreement, dated June 30, 1999, between the Company and Darrell D. Rubel, as  Personal Representative of the Estate of Roger R. Marten |       | Incorporated by  reference to Exhibit 10.15 of the Company’s Quarterly Report on Form 10-Q for  the quarter ended June 30, 1999 (File No. 0-15010).     |
|         |       |                                                                                                                                                     |       |                                                                                                                                                         |
| 10.7         |       | First Amendment to  Credit Agreement, dated January 3, 2000, between the Company, U.S. Bank  National Association and The Northern Trust Company         |       | Incorporated by  reference to Exhibit 10.16 of the Company’s Annual Report on Form 10-K for  the year ended December 31, 1999 (File No. 0-15010).       |
|         |       |                                                                                                                                                     |       |                                                                                                                                                         |
| 10.8         |       | Second Amendment to  Credit Agreement, dated January 19, 2000, between the Company, U.S. Bank  National Association and The Northern Trust Company       |       | Incorporated by  reference to Exhibit 10.17 of the Company’s Annual Report on Form 10-K for  the year ended December 31, 1999 (File No. 0-15010).       |
|         |       |                                                                                                                                                     |       |                                                                                                                                                         |
| 10.9         |       | Third Amendment to  Credit Agreement, dated April 5, 2000, between the Company, U.S. Bank  National Association and The Northern Trust Company           |       | Incorporated by  reference to Exhibit 10.18 of the Company’s Quarterly Report on Form 10-Q for  the quarter ended March 31, 2000 (File No. 0-15010).    |
|         |       |                                                                                                                                                     |       |                                                                                                                                                         |
| 10.10        |       | Note Purchase  Agreement, dated April 6, 2000, between the Company and The Prudential  Insurance Company of America                                      |       | Incorporated by  reference to Exhibit 10.19 of the Company’s Quarterly Report on Form 10-Q for  the quarter ended March 31, 2000 (File No. 0-15010).    |
|         |       |                                                                                                                                                     |       |                                                                                                                                                         |
| 10.11        |       | Fourth Amendment to  Credit Agreement, dated May 31, 2000, between the Company, U.S. Bank National  Association and The Northern Trust Company           |       | Incorporated by  reference to Exhibit 10.20 of the Company’s Quarterly Report on Form 10-Q for  the quarter ended June 30, 2000 (File No. 0-15010).     |
|         |       |                                                                                                                                                     |       |                                                                                                                                                         |
| 10.12        |       | Fifth Amendment to  Credit Agreement, dated December 6, 2000, between the Company, U.S. Bank  National Association and The Northern Trust Company        |       | Incorporated by  reference to Exhibit 10.20 of the Company’s Annual Report on Form 10-K for  the year ended December 31, 2000 (File No. 0-15010).       |
|         |       |                                                                                                                                                     |       |                                                                                                                                                         |
| 10.13        |       | Sixth Amendment to  Credit Agreement, dated January 14, 2002, between the Company, U.S. Bank  National Association and The Northern Trust Company        |       | Incorporated by  reference to Exhibit 10.16 of the Company’s Annual Report on Form 10-K for  the year ended December 31, 2001 (File No. 0-15010).       |
|         |       |                                                                                                                                                     |       |                                                                                                                                                         |
| 10.14        |       | Seventh Amendment to  Credit Agreement, dated March 29, 2003, between the Company, U.S. Bank  National Association and The Northern Trust Company        |       | Incorporated by  reference to Exhibit 10.17 of the Company’s Quarterly Report on Form 10-Q for  the quarter ended March 31, 2003 (File No. 0-15010).    |
|         |       |                                                                                                                                                     |       |                                                                                                                                                         |
| 10.15        |       | Eighth Amendment to  Credit Agreement, dated June 27, 2003, between the Company, U.S. Bank  National Association and The Northern Trust Company          |       | Incorporated by  reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for  the quarter ended September 30, 2003 (File No. 0-15010). |

 

49

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| **Item No.** | ** ** | **Item**                                                                                                                                                                                                                                                                       | ** ** | **Filing Method**                                                                                                    |
|--------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                                                                                                                                                           |       |                                                                                                                 |
| 10.16        |       | 2005 Incentive  Compensation Plan Summary                                                                                                                                                                                                                                      |       | Incorporated by  reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K filed  February 1, 2005. |
|         |       |                                                                                                                                                                                                                                                                           |       |                                                                                                                 |
| 10.17        |       | 2005 Non-employee  Director Compensation Summary                                                                                                                                                                                                                               |       | Filed with this Report.                                                                                              |
|         |       |                                                                                                                                                                                                                                                                           |       |                                                                                                                 |
| 23.1         |       | Consent of KPMG LLP                                                                                                                                                                                                                                                            |       | Filed with this Report.                                                                                              |
|         |       |                                                                                                                                                                                                                                                                           |       |                                                                                                                 |
| 31.1         |       | Certification pursuant to Item 601(b)(31) of Regulation S-K, as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by  Randolph L. Marten, the Registrant’s President (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 Darrell  D. Rubel, the Registrant’s Executive Vice President, Chief Financial Officer  and Treasurer (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.                                                                                              |

 

50

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