SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2001
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number 0-24960
Covenant Transport, Inc.
(Exact name of registrant as specified in its charter)
Nevada 88-0320154
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
400 Birmingham Hwy.
Chattanooga, TN 37419
(423) 821-1212
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive office)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days.
YES X NO __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date (November 12, 2001).
Class A Common Stock, $.01 par value: 11,669,653 shares
Class B Common Stock, $.01 par value: 2,350,000 shares
Exhibit Index is on Page 16
PART I
FINANCIAL INFORMATION
Page Number
Item 1. Financial statements
Condensed Consolidated Balance Sheets as of December 31, 2000 and September 30, 3
2001 (Unaudited)
Condensed Consolidated Statements of Income for the three and nine months ended
September 30, 2000 and 2001 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000 and 2001 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II
OTHER INFORMATION
Page Number
Item 1. Legal Proceedings 16
Items 2, 3, 4, and 5. Not applicable 16
Item 6. Exhibits and reports on Form 8-K 16
2
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, 2000 September 30, 2001
(unaudited)
--------------------- ----------------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,287 $ 1,054
Accounts receivable, net of allowance of $1,263 in 2000 and
$1,295 in 2001 72,482 70,438
Drivers' advances and other receivables 11,393 6,227
Tire and parts inventory 2,949 3,514
Prepaid expenses 13,914 11,170
Deferred income taxes 2,590 1,461
Income taxes receivable 3,651 4,727
--------------------- ----------------------
Total current assets 109,266 98,591
Property and equipment, at cost 356,630 382,825
Less accumulated depreciation and amortization 100,581 119,519
--------------------- ----------------------
Net property and equipment 256,049 263,306
Other 25,198 24,895
--------------------- ----------------------
Total assets $ 390,513 $ 386,792
===================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks written in excess of bank balance $ - $ 1,325
Current maturities of long-term debt 6,505 5,251
Securitization facility 62,000 53,130
Accounts payable 6,988 8,929
Accrued expenses 16,130 17,589
Insurance and claims accrual 1,046 8,427
--------------------- ----------------------
Total current liabilities 92,669 94,651
Long-term debt, less current maturities 74,295 67,000
Deferred income taxes 55,727 54,907
--------------------- ----------------------
Total liabilities 222,691 216,558
Stockholders' equity:
Class A common stock, $.01 par value; 20,000,000 shares authorized;
12,566,850 and 12,641,253 shares issued and 11,595,350 and 11,669,653 126 126
shares outstanding as of 2000 and 2001, respectively
Class B common stock, $.01 par value; 5,000,000 shares authorized;
2,350,000 shares issued and outstanding as of 2000 and 2001 24 24
Additional paid-in-capital 78,343 79,226
Treasury stock, at cost; 971,500 shares as of 2000 and 2001 (7,935) (7,935)
Other comprehensive income - (99)
Retained earnings 97,264 98,892
--------------------- ----------------------
Total stockholders' equity 167,822 170,234
--------------------- ----------------------
Total liabilities and stockholders' equity $ 390,513 $ 386,792
===================== ======================
The accompanying notes are an integral part of these consolidated financial statements.
3
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
(unaudited) (unaudited)
---------------------------------- --------------------------------
2000 2001 2000 2001
---- ---- ---- ----
Revenue $ 141,667 $ 138,057 $ 407,546 $ 411,069
Operating expenses:
Salaries, wages, and related expenses 61,176 58,291 176,065 181,520
Fuel, oil, and road expenses 25,036 25,262 69,370 75,870
Revenue equipment rentals and
purchased transportation 18,548 16,684 56,627 50,922
Repairs 3,374 5,294 9,430 13,699
Operating taxes and licenses 3,560 3,496 10,359 10,519
Insurance and claims 4,271 6,208 11,291 15,165
Communications and utilities 1,818 1,995 5,359 5,645
General supplies and expenses 6,424 5,415 18,521 16,653
Depreciation and amortization,
including gain on disposal of equipment 10,025 10,465 30,136 30,410
---------------- -------------- -------------- -------------
Total operating expenses 134,232 133,110 387,158 400,403
---------------- -------------- -------------- -------------
Operating income 7,435 4,947 20,388 10,666
Other (income) expenses:
Interest expense 2,454 1,756 7,438 6,441
Interest income (150) (44) (394) (252)
Other - 1,010 - 990
---------------- -------------- -------------- -------------
Other (income) expenses, net 2,304 2,722 7,044 7,179
---------------- -------------- -------------- -------------
Income before income taxes 5,131 2,225 13,344 3,487
Income tax expense 2,053 1,380 5,334 1,859
---------------- -------------- -------------- -------------
Net income $ 3,078 $ 845 $ 8,010 $ 1,628
================ ============== ============== =============
Basic earnings per share $ 0.22 $ 0.06 $ 0.55 $ 0.12
Diluted earnings per share $ 0.22 $ 0.06 $ 0.54 $ 0.11
Weighted average shares outstanding 13,960 14,009 14,557 13,975
Adjusted weighted average shares and assumed
conversions outstanding 14,025 14,233 14,708 14,230
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001
(In thousands)
Nine months ended September 30,
(unaudited)
--------------------------------------------
2000 2001
---- ----
Cash flows from operating activities:
Net income $ 8,010 $ 1,628
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on receivables 361 185
Depreciation and amortization 30,778 29,517
Deferred income tax expense 2,136 310
Equity in earnings of affiliate - 1,016
Gain/(loss) on disposition of property and equipment (642) 15
Changes in operating assets and liabilities:
Receivables and advances (5,664) 7,049
Prepaid expenses (3,045) 2,745
Tire and parts inventory (92) (565)
Accounts payable and accrued expenses 5,641 9,604
------------------ -----------------
Net cash flows provided by operating activities 37,482 51,504
Cash flows from investing activities:
Acquisition of property and equipment (46,624) (53,955)
Acquisition of business (7,288) (564)
Investment in Transplace, Inc. (5,294) -
Proceeds from disposition of property and equipment 34,234 17,086
Acquisition of company stock (7,935) -
------------------ -----------------
Net cash flows used in investing activities (32,907) (37,433)
Cash flows from financing activities:
Changes in checks outstanding in excess of bank
balances (3,391) 1,325
Deferred costs (167) (94)
Proceeds from exercise of stock option 30 883
Proceeds from issuance of long-term debt 46,000 49,000
Repayments of long-term debt (47,711) (66,418)
------------------ -----------------
Net cash flows used in financing activities (5,239) (15,304)
------------------ -----------------
Net change in cash and cash equivalents (663) (1,233)
Cash and cash equivalents at beginning of period 1,046 2,287
------------------ -----------------
Cash and cash equivalents at end of period $ 383 $ 1,054
================== =================
The accompanying notes are an integral part of these consolidated financial statements.
5
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The condensed consolidated financial statements include the accounts of
Covenant Transport, Inc., a Nevada holding company, and its wholly-owned
subsidiaries ("Covenant" or the "Company"). All significant intercompany
balances and transactions have been eliminated in consolidation.
The financial statements have been prepared, without audit, in accordance
with accounting principles generally accepted in the United States of
America, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, the accompanying
financial statements include all adjustments which are necessary for a fair
presentation of the results for the interim periods presented, such
adjustments being of a normal recurring nature. Certain information and
footnote disclosures have been condensed or omitted pursuant to such rules
and regulations. The December 31, 2000 Condensed Consolidated Balance Sheet
was derived from the audited balance sheet of the Company for the year then
ended. It is suggested that these condensed consolidated financial
statements and notes thereto be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Form 10-K
for the year ended December 31, 2000. Results of operations in interim
periods are not necessarily indicative of results to be expected for a full
year.
Note 2. Basic and Diluted Earnings Per Share
The following table sets forth for the periods indicated the
calculation of net earnings per share included in the Company's Condensed
Consolidated Statements of Income:
(in thousands except per share data) Three months ended Nine months ended
September 30, September 30,
2000 2001 2000 2001
---- ---- ---- ----
Numerator:
Net Income $ 3,078 $ 845 $8,010 $1,628
Denominator:
Denominator for basic earnings
per share - weighted-average shares 13,960 14,009 14,557 13,975
Effect of dilutive securities:
Employee stock options 65 224 151 255
----------- ----------- ----------- -----------
Denominator for diluted earnings per share -
adjusted weighted-average shares and assumed 14,025 14,233 14,708 14,230
conversions
=========== =========== =========== ===========
Basic earnings per share $ .22 $ .06 $ .55 $ .12
=========== =========== =========== ===========
Diluted earnings per share $ .22 $ .06 $ .54 $ .11
=========== =========== =========== ===========
Note 3. Income Taxes
Income tax expense varies from the amount computed by applying the federal
corporate income tax rate of 35% to income before income taxes primarily
due to state income taxes, net of federal income tax effect, plus the
effect of nondeductible amortization of goodwill and per diem pay structure
for drivers.
Note 4. Investment in Transplace
Effective July 1, 2000, the Company merged its logistics business with five
other transportation companies into a company called Transplace, Inc.
("TPC"). TPC operates an Internet-based global transportation logistics
service and is developing programs for the cooperative purchasing of
products, supplies, and services. In the transaction, Covenant contributed
its logistics customer list, logistics business software and software
licenses, certain intellectual property, intangible assets totaling
6
approximately $5.1 million, and $5.0 million in cash for the initial
funding of the venture. In exchange, Covenant received 13% ownership in
TPC. Upon completion of the transaction, Covenant ceased operating its own
transportation logistics and brokerage business, which consisted primarily
of the Terminal Truck Broker, Inc. business acquired in November 1999.
Initially, the Company accounted for its 13% investment in TPC using the
equity method of accounting. During the third quarter of 2001, TPC changed
its filing status to a C corporation and as a result management determined
it appropriate to account for its investment using the cost method of
accounting.
Note 5. Con-Way Truckload Services, Inc. acquisition
In August 2000, the Company purchased certain trucking assets of Con-Way
Truckload Services, Inc. ("CTS"), an $80 million annual revenue truckload
carrier headquartered in Fort Worth, Texas. For approximately $7.7 million,
the Company acquired CTS's customer list and driver files as well as 90
tractors and 90 trailers. In August 2001, the Company paid an additional
$564,000 related to the percentage of annual revenues from certain acquired
customers. The acquisition has been accounted for under the purchase method
of accounting with the excess of the purchase price over the estimated fair
value of the net assets acquired of approximately $3.2 million allocated to
goodwill. CTS was owned by Con-Way Transportation Services of Ann Arbor,
Michigan, a subsidiary of CNF Inc., a $5.6 billion global supply chain
management services company.
Note 6. Derivative Instruments and Other Comprehensive Income
In 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for
Derivative Instruments and Hedging Activities, as amended by Statement of
Financial Accounting Standards No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of SFAS
Statement No. 133, an amendment of SFAS Statement No. 133, and Statement of
Financial Accounting Standards No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of SFAS Statement
No. 133. SFAS 133 requires that all derivative instruments be recorded on
the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or in other
comprehensive income, depending on whether a derivative is designated as
part of a hedging relationship and, if it is, depending on the type of
hedging relationship.
The Company adopted SFAS 133 effective January 1, 2001 but had no
instruments in place on that date. During the first quarter the Company
entered into two $10 million notional amount interest rate swap agreements
to manage the risk of variability in cash flows associated with
floating-rate debt. These derivatives are not designated as hedging
instruments under SFAS 133 and consequently are marked to fair value
through earnings. At September 30, 2001, the fair value of these interest
rate swap agreements was ($0.9) million.
The Company uses purchase commitments through suppliers to reduce a portion
of its exposure to fuel price fluctuations. At September 30, 2001, the
notional amount for normal purchase commitments during the remainder of
2001 is 1.5 million gallons. In addition, during the third quarter the
Company entered into two heating oil commodity swap contracts to hedge its
exposure to diesel fuel price fluctuations. These contracts are considered
highly effective and each call for 6 million gallons of fuel purchases at a
fixed price of $0.695 and $0.629 per gallon, respectively, through December
31, 2002. At September 30, 2001 the cumulative fair value of these heating
oil contracts was a liability of $99,000, which was recorded in accrued
expenses with the offset to other comprehensive loss.
At September 30, 2001 and 2000 the Company's comprehensive income is as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2000 2001 2000 2001
-------------- ------------- ------------- ------------
Net income $ 3,078 845 8,010 1,628
Other comprehensive (loss):
Unrealized (loss) on
derivative instruments - (99) - (99)
----------- ------------- ------------- ------------
Comprehensive income $ 3,078 746 8,010 1,529
=========== ============= ============= ============
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The condensed consolidated financial statements include the accounts of Covenant
Transport, Inc., a Nevada holding company, and its wholly-owned subsidiaries
("Covenant" or the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
Except for the historical information contained herein, the discussion in this
quarterly report contains forward-looking statements that involve risk,
assumptions, and uncertainties that are difficult to predict. Statements that
constitute forward-looking statements are usually identified by words such as
"anticipates," "believes," "estimates," "projects," "expects," or similar
expressions. These statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Such statements are based
upon the current beliefs and expectations of the Company's management and are
subject to significant risks and uncertainties. Actual results may differ from
those set forth in the forward-looking statements. The following factors, among
others, could cause actual results to differ materially from those in
forward-looking statements: excess capacity in the trucking industry; surplus
inventories; recessionary economic cycles and downturns in customers' business
cycles; increases or rapid fluctuations in fuel prices, interest rates, fuel
taxes, tolls, and license and registration fees; the resale value of the
Company's used equipment; increases in compensation for and difficulty in
attracting and retaining qualified drivers and owner-operators; increases in
insurance premiums and deductible amounts relating to accident, cargo, workers'
compensation, health, and other claims; seasonal factors such as harsh weather
conditions that increase operating costs; competition from trucking, rail, and
intermodal competitors; and the ability to identify acceptable acquisition
candidates, consummate acquisitions, and integrate acquired operations. Readers
should review and consider the various disclosures made by the Company in its
press releases, stockholder reports, and public filings, as well as the factors
explained in greater detail in the Company's annual report on Form 10-K.
The Company grew its revenue 0.9%, to $411.1 million in the nine months ended
September 30, 2001, from $407.5 million during the same period of 2000. A slight
increase in fleet size and the acquisition of certain assets of Con-Way
Truckload Services, Inc. ("CTS") in late August 2000 contributed to revenue
growth over this period. Due to a weak freight environment, the Company has
elected to constrain the size of the Company fleet until profitability improves.
The Company's pretax margin decreased to 0.8% of revenue from 3.3% of revenue,
and the Company's net income decreased approximately 79.7%, to $1.6 million for
the nine months ended September 30, 2001, from $8.0 million during the same
period of 2000. A soft freight environment that has impacted freight rates and
equipment utilization was the major factor contributing to the decrease. Other
factors included increased fuel costs and higher insurance, claims and repair
costs as compared with the previous year. Also in the third quarter of 2001, net
income and the pretax margin were negatively impacted by a $0.9 million pretax
non-cash adjustment related to the accounting for interest rate derivatives
under SFAS 133.
The Company continues to obtain revenue equipment through its owner-operator
fleet and finance equipment under operating leases. The Company's owner-operator
fleet decreased to an average of 371 in the nine month period ended September
30, 2001 compared to 539 in the nine month period ended September 30, 2000. Over
the past year, it has become more difficult to retain owner-operators due to the
challenging operating conditions. Owner-operators provide a tractor and a driver
and are responsible for all operating expenses in exchange for a fixed payment
per mile. The Company does not have the capital outlay of purchasing the
tractor. The Company's use of operating leases has continued to grow. As of
September 30, 2001, the Company has financed approximately 995 tractors and
1,932 trailers under operating leases as compared to 840 tractors and 1,359
trailers under operating leases as of September 30, 2000. During 2001, the
Company extended its trade cycle for tractors from approximately 36 months to
approximately 48 months. As the operating leases expire, tractors are being
financed under the Credit Agreement (as defined below). The payments to
owner-operators and the financing of equipment under operating leases are
recorded in revenue equipment rentals and purchased transportation. Expenses
associated with owned equipment, such as interest and depreciation, are not
incurred, and for owner-operator tractors, driver compensation, fuel, and other
expenses are not incurred. Because obtaining equipment from owner-operators and
under operating leases effectively shifts financing expenses from interest to
"above the line" operating expenses, the Company evaluates its efficiency using
pretax margin and net margin rather than operating ratio.
8
The following table sets forth the percentage relationship of certain items to
revenue:
Three Months Ended Nine Months Ended
September 30, September 30,
2000 2001 2000 2001
------------- ----------- ------------ ------------
Revenue 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Salaries, wages, and related expenses 43.2 42.2 43.2 44.2
Fuel, oil, and road expenses 17.7 18.3 17.0 18.5
Revenue equipment rentals and purchased
transportation 13.1 12.1 13.9 12.4
Repairs 2.4 3.8 2.3 3.3
Operating taxes and licenses 2.5 2.5 2.5 2.6
Insurance and claims 3.0 4.5 2.8 3.7
Communications and utilities 1.3 1.4 1.4 1.4
General supplies and expenses 4.5 3.9 4.5 4.1
Depreciation and amortization 7.1 7.6 7.4 7.4
------------- ----------- ------------ -----------
Total operating expenses 94.8 96.4 95.0 97.4
------------- ----------- ------------ -----------
Operating income 5.2 3.6 5.0 2.6
Other expenses, net 1.6 2.0 1.7 1.7
------------- ----------- ------------ -----------
Income before income taxes 3.6 1.6 3.3 0.9
Income tax expense 1.4 1.0 1.3 0.5
------------- ----------- ------------ -----------
Net income 2.2% 0.6% 2.0% 0.4%
============= =========== ============ ===========
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2001 TO THREE MONTHS ENDED
SEPTEMBER 30, 2000
Revenue decreased $3.6 million (2.5%), to $138.1 million in the 2001 period from
$141.7 million in the 2000 period. The revenue decrease was primarily generated
by a 1.3% decrease in weighted average tractors, to 3,738 during the 2001 period
from 3,787 during the 2000 period. Revenue per tractor per week decreased to
$2,774 during the 2001 quarter from $2,839 during the 2000 quarter due to 1.4%
lower utilization of equipment and a 0.9% lower rate per total mile. Due to a
weak freight environment, the Company has elected to constrain the size of its
tractor fleet until profitability improves.
Salaries, wages, and related expenses decreased $2.9 million (4.7%), to $58.3
million in the 2001 period from $61.2 million in the 2000 period. As a
percentage of revenue, salaries, wages, and related expenses decreased to 42.2%
in the 2001 period from 43.2% in the 2000 period. Driver wages as a percentage
of revenue decreased to 29.0% in the 2001 period from 31.1% in the 2000 period,
partially due to the Company implementing a per diem pay program for its drivers
during August 2001. The Company's non-driving employee payroll expense increased
to 6.9% of revenue in the 2001 period from 5.9% of revenue in 2000 period due to
growth in headcount and local drivers in the dedicated fleet.
Fuel, oil, and road expenses increased $0.2 million (0.9%), to $25.3 million in
the 2001 period from $25.0 million in the 2000 period. As a percentage of
revenue, fuel, oil, and road expenses increased to 18.3% of revenue in the 2001
period from 17.7% in the 2000 period. This increase was due to the increased
usage of company trucks (due to the decrease in the Company's utilization of
owner-operators, who pay for their own fuel purchases), lower quantities of fuel
contracted using purchase commitments and slightly lower fuel economy. These
increases were partially offset by fuel surcharges, which amounted to $.048 per
loaded mile or approximately $5.4 million during the 2001 period compared to
$.058 per loaded mile or approximately $6.7 million during the 2000 period.
Revenue equipment rentals and purchased transportation decreased $1.9 million
(10.0%), to $16.7 million in the 2001 period from $18.5 million in the 2000
period. As a percentage of revenue, revenue equipment rentals and purchased
transportation decreased to 12.1% in the 2001 period from 13.1% in the 2000
period. The decrease was due to the Company utilizing fewer owner-operators,
which was offset partially by the Company entering into additional operating
leases. The Company's owner-operator fleet decreased to an average of 331 in the
2001 period compared to 487 in the 2000 period. Over the past year, it has
become more difficult to retain owner-operator drivers due to the challenging
operating conditions. Owner-operators provide a tractor and driver and cover all
of their operating expenses in exchange for a fixed payment per mile.
Accordingly, expenses such as driver salaries, fuel, repairs, depreciation, and
interest normally associated with Company-owned equipment are consolidated in
revenue equipment rentals and purchased transportation when owner-operators are
utilized. The Company also entered into additional operating leases. As of
September 30, 2001, the Company had financed approximately 995 tractors and
1,932 trailers under operating leases as compared to 840 tractors and 1,359
trailers under operating leases as of September 30, 2000.
9
Repairs increased approximately $1.9 million (56.9%), to $5.3 million in the
2001 period from $3.4 million in the 2000 period. As a percentage of revenue,
repairs increased to 3.8% in the 2001 period from 2.4% in the 2000 period. The
increase was primarily the result of the Company adopting an insurance program
with significantly higher physical damage deductible exposure. Repair expense
will vary based on the frequency and severity of physical damage claims. The
Company accrues the estimated cost of the uninsured portion of pending claims.
These accruals are based on management's evaluation of the nature and severity
of the claim and estimates of future claims development based on historical
trends.
Operating taxes and licenses decreased approximately $0.1 million (1.8%), to
$3.5 million in the 2001 period from $3.6 million in the 2000 period. As a
percent of revenue, operating taxes and licenses remained essentially constant
at 2.5% in 2000 and 2001 periods.
Insurance and claims, consisting primarily of premiums and deductible amounts
for liability, physical damage, and cargo damage insurance and claims, increased
$1.9 million (45.4%), to $6.2 million in the 2001 period from $4.3 million in
the 2000 period. As a percentage of revenue, insurance increased to 4.5% in the
2001 period from 3.0% in the 2000 period because of an industry-wide increase in
insurance rates, which the Company addressed by adopting an insurance program
with significantly higher deductible exposure that is partially offset by lower
premium rates. The Company's insurance program for liability, physical damage,
and cargo damage involves self-insurance with varying risk retention levels.
Claims in excess of these risk retention levels are covered by insurance in
amounts which management considers adequate. The Company accrues the estimated
cost of the uninsured portion of pending claims. These accruals are based on
management's evaluation of the nature and severity of the claim and estimates of
future claims development based on historical trends. Insurance and claims
expense will vary based on the frequency and severity of claims.
Communications and utilities expense increased approximately $0.2 million
(9.7%), to $2.0 million in the 2001 period from $1.8 million in the 2000 period.
As a percentage of revenue, communications and utilities remained essentially
constant at 1.4% in the 2001 period and 1.3% in the 2000 period.
General supplies and expenses, consisting primarily of driver recruiting
expenses and terminal related expenses, decreased $1.0 million (15.7%), to $5.4
million in the 2001 period from $6.4 million in the 2000 period. As a percentage
of revenue, general supplies and expenses decreased to 3.9% in the 2001 period
from 4.5% in the 2000 period. The 2001 decrease is partially the result of the
capitalization of the Company's headquarters facility. In March 2001, the
Company's headquarters facility operating lease expired. The building was
financed through the Credit Agreement (as defined below), and the related
expenses are being reflected in the depreciation and amortization category as
well as interest expense.
Depreciation and amortization, consisting primarily of depreciation of revenue
equipment, increased $0.4 million (4.4%), to $10.5 million in the 2001 period
from $10.0 million in the 2000 period. As a percentage of revenue, depreciation
and amortization increased to 7.6% in the 2001 period from 7.1% in the 2000
period. The increase is primarily due to the acquisition of the Company's
headquarters facility which was previously financed through an operating lease
that expired in March 2001. The headquarters lease expense was previously
recorded in general supplies and expenses. Depreciation and amortization expense
is net of any gain or loss on the sale of tractors and trailers. The
predictability of any gain/(loss) on the sale of equipment is difficult due to
the variation in market value of used equipment from year to year. The
unpredictability of gains/(losses) could impact depreciation and amortization as
a percentage of revenue. Amortization expense primarily relates to covenants not
to compete and goodwill from acquisitions. Goodwill amortization will cease
beginning January 1, 2002, in accordance with SFAS 142 and the Company will
evaluate goodwill and certain intangibles for impairment.
Other expenses, net increased $0.4 million (18.1%), to $2.7 million in the 2001
period from $2.3 million in the 2000 period. As a percentage of revenue, other
expenses increased to 2.0% in the 2001 period from 1.6% in the 2000 period.
Included in the other expenses category is interest expense, interest income,
earnings from TPC and a $0.9 million pretax non-cash adjustment related to the
accounting for interest rate derivatives under SFAS 133. Excluding the non-cash
adjustment, other expense decreased $0.4 million (18.9%), to $1.9 million in the
2001 period from $2.3 million in the 2000 period. The decrease was the result of
lower debt balances and interest rates.
As a result of the foregoing, the Company's pretax margin decreased to 1.6% in
the 2001 period from 3.6% in the 2000 period.
The Company's effective tax rate prior to permanent differences was 38.0% in the
2001 period and 40.0% in the 2000 period. The Company implemented a per diem pay
structure during the third quarter of 2001. Due to the nondeductible effect of
per diem, the Company's tax rate will fluctuate in future periods as earnings
fluctuate. Including these permanent differences raises the tax rate to 62.0%
for the third quarter of 2001.
Primarily as a result of the factors described above, net income decreased $2.2
million (72.5%), to $0.8 million in the 2001 period (0.6% of revenue) from $3.1
million in the 2000 period (2.2% of revenue).
10
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2001 TO NINE MONTHS ENDED
SEPTEMBER 30, 2000
Revenue increased $3.5 million (0.9%), to $411.1 million in the 2001 period from
$407.5 million in the 2000 period. The revenue increase was primarily generated
by a 2.9% increase in weighted average tractors, to 3,823 during the 2001 period
from 3,716 during the 2000 period and from the asset acquisition of CTS. Revenue
per tractor per week decreased to $2,685 during the 2001 period from $2,780
during the 2000 period due to 0.5% lower utilization of equipment and a 1.9%
lower rate per total mile. Due to a weak freight environment, the Company has
elected to constrain the size of its tractor fleet until profitability improves.
Salaries, wages, and related expenses increased $5.5 million (3.1%), to $181.5
million in the 2001 period from $176.1 million in the 2000 period. As a
percentage of revenue, salaries, wages, and related expenses increased to 44.2%
in the 2001 period from 43.2% in the 2000 period. Driver wages as a percentage
of revenue remained constant at 30.5% in the 2000 and 2001 periods. During 2001,
the Company's utilization of owner-operators declined causing an increase in
driver wages due to the higher percentage of company drivers being compensated.
This increase was offset by the Company implementing cost savings strategies,
including a per diem pay program for its drivers during August 2001. The
Company's non-driving employee payroll expense increased to 6.7% of revenue in
the 2001 period from 6.2% of revenue in 2000 period due to growth in headcount
and salaried drivers in the dedicated fleet. Workers' compensation and group
health insurance expense also increased due to rising medical and prescription
drug costs.
Fuel, oil, and road expenses increased $6.5 million (9.4%), to $75.9 million in
the 2001 period from $69.4 million in the 2000 period. As a percentage of
revenue, fuel, oil, and road expenses increased to 18.5% of revenue in the 2001
period from 17.0% in the 2000 period. This increase was due to increased usage
of company trucks (due to the decrease in the Company's utilization of
owner-operators, who pay for their own fuel purchases), lower quantities of fuel
being hedged using price purchase commitments and slightly lower fuel economy.
These increases were partially offset by fuel surcharges which amounted to $.050
per loaded mile or approximately $16.8 million during the 2001 period compared
to $.049 per loaded mile or approximately $16.2 million during the 2000 period.
Revenue equipment rentals and purchased transportation decreased $5.7 million
(10.1%), to $50.9 million in the 2001 period from $56.6 million in the 2000
period. As a percentage of revenue, revenue equipment rentals and purchased
transportation decreased to 12.4% in the 2001 period from 13.9% in the 2000
period. The decrease was due to the Company utilizing fewer owner-operators,
which was offset partially by the Company entering into additional operating
leases. The Company's owner-operator fleet decreased to an average of 371 in the
2001 period compared to 539 in the 2000 period. Owner-operators provide a
tractor and driver and cover all of their operating expenses in exchange for a
fixed payment per mile. Accordingly, expenses such as driver salaries, fuel,
repairs, depreciation, and interest normally associated with Company-owned
equipment are consolidated in revenue equipment rentals and purchased
transportation when owner-operators are utilized. The Company also entered into
additional operating leases. As of September 30, 2001, the Company had financed
approximately 995 tractors and 1,932 trailers under operating leases as compared
to 840 tractors and 1,359 trailers under operating leases as of September 30,
2000.
Repairs increased approximately $4.3 million (45.3%), to $13.7 million in the
2001 period from $9.4 million in the 2000 period. As a percentage of revenue,
repairs increased to 3.3% in the 2001 period from 2.3% in the 2000 period. The
increase was primarily the result of the Company adopting an insurance program
with significantly higher physical damage deductible exposure. Repair expense
will vary based on the frequency and severity of physical damage claims. The
Company accrues the estimated cost of the uninsured portion of pending claims.
These accruals are based on management's evaluation of the nature and severity
of the claim and estimates of future claims development based on historical
trends.
Operating taxes and licenses increased approximately $0.2 million (1.5%), to
$10.5 million in the 2001 period from $10.4 million in the 2000 period. As a
percent of revenue, operating taxes and licenses remained essentially constant
at 2.6% in the 2001 period and 2.5% in the 2000 period.
Insurance and claims, consisting primarily of premiums and deductible amounts
for liability, physical damage, and cargo damage insurance and claims, increased
$3.9 million (34.3%), to $15.2 million in the 2001 period from $11.3 million in
the 2000 period. As a percentage of revenue, insurance increased to 3.7% in the
2001 period from 2.8% in the 2000 period because of an industry-wide increase in
insurance rates, which the Company addressed by adopting an insurance program
with significantly higher deductible exposure that is partially offset by lower
premium rates. The Company's insurance program for liability, physical damage,
and cargo damage involves self-insurance with varying risk retention levels.
Claims in excess of these risk retention levels are covered by insurance in
amounts which management considers adequate. The Company accrues the estimated
cost of the uninsured portion of pending claims. These accruals are based on
management's evaluation of the nature and severity of the claim and estimates of
future claims development based on historical trends. Insurance and claims
expense will vary based on the frequency and severity of claims.
Communications and utilities expense increased approximately $0.3 million
(5.3%), to $5.6 million in the 2001 period from $5.4 million in the 2000 period.
As a percentage of revenue, communications and utilities remained essentially
constant at 1.4% in the 2000 and 2001 periods.
11
General supplies and expenses, consisting primarily of driver recruiting
expenses and terminal related expenses, decreased $1.9 million (10.1%), to $16.7
million in the 2001 period from $18.5 million in the 2000 period. As a
percentage of revenue, general supplies and expenses decreased to 4.1% in the
2001 period from 4.5% in the 2000 period. The 2001 decrease is primarily the
result of the capitalization of the Company's headquarters facility and a
reclassification of certain accessorial charges to shippers against the related
expense. In March 2001, the Company's headquarters facility operating lease
expired. The building was financed through the Credit Agreement (as defined
below), and the related expenses are being reflected in the depreciation and
amortization category as well as interest expense. The Company implemented
accessorial reclassification in the third quarter of 2000.
Depreciation and amortization, consisting primarily of depreciation of revenue
equipment, increased $0.3 million (0.9%), to $30.4 million in the 2001 period
from $30.1 million in the 2000 period. As a percentage of revenue, depreciation
and amortization remained essentially constant at 7.4% in the 2000 and 2001
periods. The increase is primarily the result of the acquisition of the
Company's headquarters facility and lower gains on sale of equipment.
Depreciation and amortization expense is net of any gain or loss on the sale of
tractors and trailers. Loss on the sale of tractors and trailers was
approximately $16,000 in the 2001 period compared to a gain of $642,000 in the
2000 period. The increase in depreciation and amortization expense was partially
offset by the Company leasing more revenue equipment through operating leases
and extending the depreciable life of the Company's trailers from seven years to
eight years to conform to the Company's actual experience of equipment life,
which the Company implemented in the second quarter of 2000.
Other expense, net, increased $0.1 million (1.9%), to $7.2 million in the 2001
period from $7.0 million in the 2000 period. As a percentage of revenue, other
expense remained essentially constant at 1.7% in the 2001 period from 1.7% in
the 2000 period. Included in the other expense category is interest expense,
interest income, earnings from TPC and a $0.9 million pretax non-cash adjustment
related to the accounting for interest rate derivatives under SFAS 133.
Excluding the non-cash adjustment, other expense decreased $0.7 million (10.5%),
to $6.3 million in the 2001 period from $7.0 million in the 2000 period. The
decrease was the result of lower debt balances and interest rates.
As a result of the foregoing, the Company's pretax margin decreased to 0.9% in
the 2001 period from 3.3% in the 2000 period.
The Company's effective tax rate prior to permanent differences was 38.0% in the
2001 period and 40.0% in the 2000 period. The Company implemented a per diem pay
structure during the third quarter of 2001. Due to the nondeductible effect of
per diem, the Company's tax rate will fluctuate in future periods as earnings
fluctuate. Including these permanent differences raises the tax rate to 53.3%
for the nine months ended September 30, 2001.
Primarily as a result of the factors described above, net income decreased $6.4
million (79.7%), to $1.6 million in the 2001 period (0.4% of revenue) from $8.0
million in the 2000 period (2.0% of revenue).
LIQUIDITY AND CAPITAL RESOURCES
The growth of the Company's business has required significant investments in new
revenue equipment. The Company has financed its revenue equipment requirements
with borrowings under a line of credit, cash flows from operations, long-term
operating leases, and borrowings under installment notes payable to commercial
lending institutions and equipment manufacturers. The Company's primary sources
of liquidity at September 30, 2001 were funds provided by operations, proceeds
under the Securitization Facility (as defined below), and borrowings under its
primary credit agreement, which had maximum borrowing of $120.0 million at
September 30, 2001 (the "Credit Agreement"). At September 30, 2001, the
Company's availability was $76 million. The Company believes its sources of
liquidity are adequate to meet its current and projected needs.
Net cash provided by operating activities was $37.5 million in the 2000 period
and $51.5 million in the 2001 period. The 37.3% increase in operating cash flows
from the 2000 period to the 2001 period was primarily due to improved billing
and collection of accounts receivable, and increases in accounts payable,
accrued expenses and prepaid expenses.
Net cash used in investing activities was $32.9 million in the 2000 period and
$37.4 million in the 2001 period. In 2001, approximately $15 million was related
to the financing of the Company's headquarters facility, which was previously
financed through an operating lease that expired in March 2001. The Company
financed the facility using proceeds from the Credit Agreement. The Company
expects to spend no more than $5.0 million on net capital expenditures during
the remainder of 2001. Total projected net capital expenditures for 2001 are
expected to be approximately $42 million (excluding operating leases of
equipment and the effect of any potential acquisitions).
Net cash used in financing activities was $5.2 million in the 2000 period and
$15.3 million in the 2001 period. At September 30, 2001, the Company had
outstanding debt of $125.4 million, primarily consisting of approximately $44.0
million drawn under the Company's Credit Agreement, $53.1 million in the
Securitization Facility, $25.0 million in 10-year senior notes, $3.0 million in
an
12
interest bearing note to the former primary stockholder of Southern Refrigerated
Transportation, Inc. ("SRT") related to the acquisition of SRT in October 1998,
and $0.3 million in term equipment financing and notes related to non-compete
agreements. Interest rates on this debt range from 2.6% to 9.0%.
In December 2000, the Company entered into the Credit Agreement with a group of
banks. The Credit Agreement allows maximum borrowings of $120 million and
matures December 2003. The Credit Agreement provides a revolving credit facility
with borrowings limited to the lesser of 90% of the net book value of eligible
revenue equipment or $120 million. Letters of credit are limited to an aggregate
commitment of $20 million. The Credit Agreement is collateralized by an
agreement, which includes pledged stock of the Company's subsidiaries,
inter-company notes, and licensing agreements. A commitment fee is charged on
the average daily unused portion of the facility and is adjusted quarterly
between 0.15% and 0.25% per annum based on the consolidated leverage ratio. At
September 30, 2001, the fee was 0.25% per annum. The Credit Agreement is
guaranteed by the Company and all of the Company's subsidiaries except CVTI
Receivables Corp. ("CRC").
Borrowings under the Credit Agreement are based on the banks' base rate or LIBOR
and accrue interest based on one, two, or three month LIBOR rates plus an
applicable margin that is adjusted quarterly between 0.75% and 1.25% based on a
ratio of total debt to trailing cash flow coverage. At September 30, 2001, the
margin was 1.25%.
During October 1995, the Company placed $25 million in senior notes due October
2005 with an insurance company. The term agreement requires payments for
interest semi-annually in arrears with principal payments due in five equal
annual installments the first of which was paid on October 1, 2001. Interest
accrues at 7.39% per annum. This agreement was amended and restated in December
2000.
In December 2000, the Company entered into a $62 million revolving accounts
receivable securitization facility (the "Securitization Facility"). On a
revolving basis, the Company sells its interests in its accounts receivable to
CRC, a wholly owned bankruptcy-remote special purpose subsidiary. The
Securitization Facility is collateralized by the receivables of CRC. The
transaction does not meet the criteria for sale treatment under SFAS No. 125 and
subsequently under SFAS 140 and is reflected as a secured borrowing in the
financial statements.
The Company can receive up to $62 million of proceeds, subject to eligible
receivables and will pay a service fee recorded as interest expense, based on
commercial paper interest rates plus an applicable margin of 0.41% per annum and
a commitment fee of 0.10% per annum on the daily unused portion of the facility.
The Securitization Facility is subject to annual renewal. The Securitization
Facility includes certain significant events that could cause amounts to be
immediately due and payable in the event of certain ratios. The proceeds
received are reflected as a current liability on the consolidated financial
statements because the committed term, subject to annual renewals, is 364 days.
As of September 30, 2001, there were $53.1 million in proceeds received, with a
weighted average interest rate of 2.9%.
The Company's headquarters facility was completed in December 1996. The cost of
the approximately 75 acres and construction of the headquarters and shop
buildings was approximately $15 million. The Company financed the land and
improvements under a "build to suit" operating lease. This operating lease
expired March 2001, and the Company has purchased the facility using proceeds
from the Credit Agreement. In December 2000, the Company completed the
construction of an approximately 100,000 square foot addition to the office
building and has completed improvements on an additional 58 acres of land. The
cost of these additional activities was approximately $15 million, which was
also financed under the Credit Agreement.
The Credit Agreement, Securitization Facility, and senior notes contain certain
restrictions and covenants relating to, among other things, dividends, tangible
net worth, cash flow, acquisitions, dispositions, and total indebtedness. All of
these instruments are cross-defaulted. The Company was in compliance with the
agreements at September 30, 2001.
INFLATION AND FUEL COSTS
Most of the Company's operating expenses are inflation-sensitive, with inflation
generally producing increased costs of operations. During the past three years,
the most significant effects of inflation have been on revenue equipment prices
and the compensation paid to the drivers. Innovations in equipment technology
and comfort have resulted in higher tractor prices, and there has been an
industry-wide increase in wages paid to attract and retain qualified drivers.
The Company historically has limited the effects of inflation through increases
in freight rates and certain cost control efforts.
In addition to inflation, fluctuations in fuel prices can affect profitability.
Fuel expense comprises a larger percentage of revenue for Covenant than many
other carriers because of Covenant's long average length of haul. Most of the
Company's contracts with customers contain fuel surcharge provisions. Although
the Company historically has been able to pass through most long-term increases
in fuel prices and taxes to customers in the form of surcharges and higher
rates, increases in fuel expense usually are not fully recovered. In
13
the fourth quarter of 1999, fuel prices escalated rapidly and have remained high
throughout 2000 and most of 2001. This has increased the Company's cost of
operating.
SEASONALITY
In the trucking industry, revenue generally decreases as customers reduce
shipments during the winter holiday season and as inclement weather impedes
operations. At the same time, operating expenses generally increase, with fuel
efficiency declining because of engine idling and weather creating more
equipment repairs. For the reasons stated, first quarter net income historically
has been lower than net income in each of the other three quarters of the year.
The Company's equipment utilization typically improves substantially between May
and October of each year because of the trucking industry's seasonal shortage of
equipment on traffic originating in California and the Company's ability to
satisfy some of that requirement. The seasonal shortage typically occurs between
May and August because California produce carriers' equipment is fully utilized
for produce during those months and does not compete for shipments hauled by the
Company's dry van operation. During September and October, business increases as
a result of increased retail merchandise shipped in anticipation of the
holidays.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001 the FASB issued SFAS No. 141 Business Combinations and SFAS No. 142
Goodwill and Other Intangible Assets. SFAS No. 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting, and broadens the criteria for recording
intangible assets separate from goodwill. Recorded goodwill and intangibles will
be evaluated against this new criteria and may result in certain intangibles
being subsumed into goodwill, or alternatively, amounts initially recorded as
goodwill may be separately identified and recognized apart from goodwill. SFAS
No. 142 requires the use of a nonamortization approach to account for purchased
goodwill and certain intangibles. Under a nonamortization approach, goodwill and
certain intangibles will not be amortized into results of operations, but
instead would be reviewed for impairment and written down and charged to results
of operations only in the periods in which the recorded value of goodwill and
certain intangibles is more than its fair value. The provisions of each
statement which apply to goodwill and intangible assets acquired prior to June
30, 2001 will be adopted by the Company on January 1, 2002. The impact of the
application of the provisions of this statement on the Company's financial
position or results of operations upon adoption are not known at this time
however the Company anticipates the standard will result in reducing the
amortization of goodwill. As of September 30, 2001, the Company has
approximately $11.1 million of unamortized goodwill and other intangible assets
resulting in approximately $324,000 of annualized amortization expense.
In July the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. That standard requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The standard is
effective for fiscal years beginning after June 15, 2002, with earlier
application encouraged.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (Statement 144), which supersedes both SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of (SFAS No. 121) and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations--Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions (Opinion 30), for the
disposal of a segment of a business (as previously defined in that Opinion).
SFAS No. 144 retains the fundamental provisions in SFAS No. 121 for recognizing
and measuring impairment losses on long-lived assets held for use and long-lived
assets to be disposed of by sale, while also resolving significant
implementation issues associated with SFAS No. 121. For example, SFAS No. 144
provides guidance on how a long-lived asset that is used as part of a group
should be evaluated for impairment, establishes criteria for when a long-lived
asset is held for sale, and prescribes the accounting for a long-lived asset
that will be disposed of other than by sale. Statement 144 retains the basic
provisions of Opinion 30 on how to present discontinued operations in the income
statement but broadens that presentation to include a component of an entity
(rather than a segment of a business). Unlike SFAS No. 121, an impairment
assessment under Statement 144 will never result in a write-down of goodwill.
Rather, goodwill is evaluated for impairment under SFAS No. 142, Goodwill and
Other Intangible Assets.
The Company is required to adopt SFAS No. 144 no later than the year beginning
after December 15, 2001, and plans to adopt its provisions for the quarter
ending March 31, 2002. Management does not expect the adoption of SFAS No. 144
for long-lived assets held for use to have a material impact on the Company's
financial statements because the impairment assessment under SFAS No. 144 is
largely unchanged from SFAS No. 121. The provisions of the Statement for assets
held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities.
Therefore, management cannot determine the potential effects that adoption of
SFAS No. 144 will have on the Company's financial statements.
14
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to market risks from changes in (i) certain commodity
prices and (ii) certain interest rates on its debt.
COMMODITY PRICE RISK
Prices and availability of all petroleum products are subject to political,
economic, and market factors that are generally outside the Company's control.
Because the Company's operations are dependent upon diesel fuel, significant
increases in diesel fuel costs could materially and adversely affect the
Company's results of operations and financial condition. Historically, the
Company has been able to recover a portion of short-term fuel price increases
from customers in the form of fuel surcharges. The price and availability of
diesel fuel can be unpredictable as well as the extent to which fuel surcharges
could be collected to offset such increases. For the third quarter of 2001,
diesel fuel expenses represented 15.6% of the Company's total operating expenses
and 15.0% of total revenue. The Company uses purchase commitments through
suppliers to reduce a portion of its exposure to fuel price fluctuations. At
September 30, 2001, the national average price of diesel fuel as provided by the
U.S. Department of Energy was $1.39 per gallon. At September 30, 2001, the
notional amount for purchase commitments during the remainder of 2001 was 1.5
million gallons. At September 30, 2001, the price of the notional 1.5 million
gallons would have produced approximately $22,500 of additional fuel expense if
the price of fuel remained the same as of September 30, 2001. At September 30,
2001, a ten percent increase in the price of fuel would produce approximately
$177,000 of income to offset increased fuel prices. At September 30, 2001, a ten
percent decrease in the price of fuel would produce approximately $200,000 of
additional fuel expense. In addition, during the third quarter the Company
entered into two heating oil commodity swap contracts to hedge its exposure to
diesel fuel price fluctuations. These contracts are considered highly effective
and each call for 6 million gallons of fuel purchases at a fixed price of $0.695
and $0.629 per gallon, respectively, through December 31, 2002. At September 30,
2001 the cumulative fair value of these heating oil contracts was a liability of
$99,000, which was recorded in accrued expenses with the offset to other
comprehensive loss. The Company does not enter into contracts with the objective
of earning financial gains on price fluctuations, nor does it trade in these
instruments when there are no underlying related exposures.
INTEREST RATE RISK
The Credit Agreement, provided there has been no default, carries a maximum
variable interest rate of LIBOR for the corresponding period plus 1.25%. During
the first quarter of 2001, the Company entered into two $10 million notional
amount interest rate swap agreements to manage the risk of variability in cash
flows associated with floating-rate debt. At September 30, 2001, the Company had
drawn $44 million under the Credit Agreement. Approximately $24 million was
subject to variable rates and the remaining $20 million was subject to interest
rate swaps that fixed the interest rates at 5.16% and 4.75% plus the applicable
margin per annum. The swaps expire January 2006 and March 2006. These
derivatives are not designated as hedging instruments under SFAS 133 and
consequently are marked to fair value through earnings. At September 30, 2001,
the fair value of these interest rate swap agreements was ($0.9) million.
Assuming the September 30, 2001 variable rate borrowings, each one-percentage
point increase or decrease in LIBOR would affect the Company's pretax interest
expense by $240,000 on an annualized basis.
The Company does not trade in derivatives with the objective of earning
financial gains on price fluctuations, nor does it trade in these instruments
when there are no underlying related exposures.
15
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
None
Items 2, 3, 4, and 5. Not applicable
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits
Exhibit
Number Reference Description
3.1 (1) Restated Articles of Incorporation.
3.2 (1) Amended By-Laws dated September 27, 1994.
4.1 (1) Restated Articles of Incorporation.
4.2 (1) Amended By-Laws dated September 27, 1994.
10.1 (1) Incentive Stock Plan filed as Exhibit 10.9.
10.2 (1) 401(k) Plan filed as Exhibit 10.10.
10.3 (2) Amendment No. 2 to the Incentive Stock Plan, filed as
Exhibit 10.10.
10.4 (3) Stock Purchase Agreement made and entered into as of
November 15, 1999, by and among Covenant Transport, Inc.,
a Tennessee corporation; Harold Ives; Marilu Ives, Tommy
Ives, Garry Ives, Larry Ives, Sharon Ann Dickson, and the
Tommy Denver Ives Irrevocable Trust; Harold Ives Trucking
Co.; and Terminal Truck Broker, Inc.
10.5 (4) Outside Director Stock Option Plan, filed as Exhibit A.
10.6 (5) Amendment No. 3 to the Incentive Stock Plan, filed as
Exhibit 10.10.
10.7 (5) Amendment No. 1 to the Outside Director Stock Option Plan,
filed as Exhibit 10.11.
10.8 (6) Amended and Restated Note Purchase Agreement dated
December 13, 2000, among Covenant Asset Management, Inc.,
Covenant Transport, Inc., and CIG & Co., filed as Exhibit
10.8.
10.9 (6) Credit Agreement by and among Covenant Asset Management,
Inc., Covenant Transport, Inc., Bank of America, N.A., and
Lenders, dated December 13, 2000, filed as Exhibit 10.9.
10.10 (6) Loan Agreement dated December 12, 2000, among CVTI
Receivables Corp., and Covenant Transport, Inc., Three
Pillars Funding Corporation, and Suntrust Equitable
Securities Corporation, filed as Exhibit 10.10.
10.11 (6) Receivables Purchase Agreement dated as of December 12,
2000, among CVTI Receivables Corp., Covenant Transport,
Inc., and Southern Refrigerated Transport, Inc., filed as
Exhibit 10.11.
10.12 (7) Clarification of Intent and Amendment No. 1 to Loan
Agreement dated March 7, 2001, filed as Exhibit 10.12.
10.13 (8) Incentive Stock Plan, Amended and Restated as of May 17,
2001, filed as Appendix B.
- -------------------------------------------------------------------------------
References:
Previously filed as an exhibit to and incorporated by reference from:
(1) Form S-1, Registration No. 33-82978, effective October 28, 1994.
(2) Form 10-Q for the quarter ended June 30, 1999.
(3) Form 8-K for the event dated November 16, 1999.
(4) Schedule 14A, filed April 13, 2000.
(5) Form 10-Q for the quarter ended September 30, 2000.
(6) Form 10-K for the year ended December 31, 2000.
(7) Form 10-Q for the quarter ended March 31, 2001.
(8) Schedule 14A, filed April 5, 2001.
(b) A Form 8-K was filed on September 19, 2001, and a Form 8-K/A was filed
on September 26, 2001, with respect to the change in the Company's certifying
accountant.
16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COVENANT TRANSPORT, INC.
Date: November 13, 2001 /s/ Joey B. Hogan
-----------------
Joey B. Hogan
Treasurer and Chief Financial Officer
17