SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
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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 March 31, 1997
( ) 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) 821-0121
(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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date (April 15, 1997)
Class A Common Stock, $.01 par value: 11,000,000 shares
Class B Common Stock, $.01 par value: 2,350,000 shares
Exhibit Index is on Page 11
Page 1 of 12
PART I
FINANCIAL INFORMATION
PAGE
NUMBER
Item 1. Financial statements
Condensed consolidated balance sheets as of December 31, 1996
and March 31, 1997 (unaudited) 3
Condensed consolidated statements of operations for the three
months ended March 31, 1996 and 1997 (unaudited) 4
Condensed consolidated statements of cash flows for the three
months ended March 31, 1996 and 1997 (unaudited) 5
Notes to condensed consolidated financial statements (unaudited) 6
Item 2. Management's discussion and analysis of financial condition
and results of operations 7
PART II
OTHER INFORMATION
PAGE
NUMBER
Item 1. Legal proceedings 11
Items 2.,
3., 4.,
and 5. Not applicable
Item 6. Exhibits and reports on Form 8-K 11
Page 2 of 12
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS December 31, March 31,
1996 1997
-------------------------------------
(unaudited)
Current assets:
Cash and cash equivalents $ 3,491,543 $ 4,264,789
Accounts receivable, net of allowance
of $500,000 in 1996 and $550,000
in 1997 29,955,577 34,869,339
Drivers advances and other receivables 3,230,857 1,747,811
Tire and parts inventory 880,086 988,247
Prepaid expenses 3,781,003 6,098,856
Deferred income taxes 248,000 203,000
---------------------------------------
Total current assets 41,587,066 48,172,042
Property and equipment, at cost 183,136,067 197,344,869
Less accumulated depreciation and
amortization 38,752,116 44,281,078
---------------------------------------
Net property and equipment 144,383,951 153,063,791
Other 1,177,158 1,169,800
---------------------------------------
Total assets $ 187,148,175 $ 202,405,633
=======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 50,000 $ 50,000
Accounts payable 3,892,208 3,330,590
Accrued expenses 4,480,151 6,249,969
---------------------------------------
Total current liabilities 8,422,359 9,630,559
Long-term debt, less current maturities 83,110,000 94,110,000
Deferred income taxes 13,886,000 15,097,000
---------------------------------------
Total liabilities 105,418,359 118,837,559
Stockholders' equity:
Class A common stock, $.01 par value;
11,000,000 shares issued and
outstanding 110,000 110,000
Class B common stock, $.01 par value;
2,350,000 shares issued and
outstanding 23,500 23,500
Additional paid-in-capital 50,469,596 50,469,596
Retained earnings 31,126,720 32,964,978
---------------------------------------
Total stockholders' equity 81,729,816 83,568,074
---------------------------------------
Total liabilities and stockholders'
equity $ 187,148,175 $ 202,405,633
=======================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3 of 12
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(unaudited)
1996 1997
----------------------------
Revenue $ 49,457,827 $ 62,587,858
Operating expenses:
Salaries, wages, and related expenses 23,525,604 27,685,230
Fuel, oil, and road expenses 11,468,037 15,559,625
Revenue equipment rentals and purchased
transportation 231,020 427,388
Repairs 1,054,115 1,267,433
Operating taxes and licenses 1,522,104 1,533,512
Insurance 1,355,062 1,785,908
General supplies and expenses 3,039,812 3,690,990
Depreciation and amortization, including gain
on disposition of equipment 5,139,593 6,356,027
----------------------------
Total operating expenses 47,335,347 58,306,113
----------------------------
Operating income 2,122,480 4,281,745
Interest expense 1,368,160 1,367,487
----------------------------
Income before income taxes 754,320 2,914,258
Income tax expense 272,000 1,076,000
----------------------------
Net income $ 482,320 $ 1,838,258
============================
Earnings per share:
Net income $ 0.04 $ 0.14
============================
Weighted average shares outstanding 13,350,000 13,350,000
============================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 4 of 12
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(unaudited)
1996 1997
----------------------------
Cash flows from operating activities:
Net income $ 482,320 $ 1,838,258
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on receivables 101,511 50,000
Depreciation and amortization 5,118,965 6,360,277
Deferred income taxes (878,000) 1,256,000
Loss (gain) on disposition of property and
equipment 20,629 (4,250)
Changes in operating assets and liabilities:
Receivables and advances 8,438,642 (3,521,503)
Prepaid expenses (2,312,821) (2,317,853)
Tire and parts inventory 35,395 (108,161)
Accounts payable and accrued expenses 4,075,812 1,208,200
----------------------------
Net cash flows from operating activities 15,082,453 4,760,968
Cash flows from investing activities:
Acquisition of property and equipment (14,066,503) (16,288,112)
Proceeds from disposition of property and
equipment 446,070 1,300,390
----------------------------
Net cash flows from investing activities (13,620,433) (14,987,722)
Cash flows from financing activities:
Proceeds from issuance of long-term debt -- 11,000,000
Repayments of long-term debt (1,000,000) --
Deferred debt issuance cost (25,271) --
----------------------------
Net cash flows from financing activities (1,025,271) 11,000,000
----------------------------
Net change in cash and cash equivalents 436,749 773,246
Cash and cash equivalents at beginning of period 461,288 3,491,543
----------------------------
Cash and cash equivalents at end of period $ 898,037 $ 4,264,789
============================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 5 of 12
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 (the Company). All significant intercompany
balances and transactions have been eliminated in consolidation.
The financial statements have been prepared, without audit, in
accordance with generally accepted accounting principles, 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, 1996 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, 1996. Results of
operations in interim periods are not necessarily indicative of results
to be expected for a full year.
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FORWARD LOOKING STATEMENTS
This document contains forward-looking statements in paragraphs that
are marked with an asterisk. Statements by the Company in press
releases, public filings, and stockholder reports, as well as oral
public statements by Company representatives, also may contain certain
forward looking information. Forward-looking information is subject to
certain risks and uncertainties that could cause actual results to
differ materially from those projected. Without limitation, these risks
and uncertainties include economic factors such as recessions,
downturns in customers' business cycles, surplus inventories,
inflation, fuel price increases, and higher interest rates; the resale
value of the Company's used revenue equipment; the availability and
compensation of qualified drivers; and competition from trucking, rail,
and intermodal competitors. 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.
Page 6 of 12
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain items to
revenue for the three months ended March 31, 1996 and 1997:
1996 1997
----------------
Revenue 100.0% 100.0%
Operating expenses:
Salaries, wages, and related expenses 47.6 44.2
Fuel, oil, and road expenses 23.2 24.9
Revenue equipment rentals and purchased
transportation 0.5 0.7
Repairs 2.1 2.0
Operating taxes and licenses 3.1 2.5
Insurance 2.7 2.8
General supplies and expenses 6.1 5.9
Depreciation and amortization, including
gain on disposition of equiment 10.4 10.2
----------------
Total operating expenses 95.7 93.2
----------------
Operating income 4.3 6.8
Interest expense 2.8 2.2
----------------
Income before income taxes 1.5 4.6
Income tax expense 0.5 1.7
----------------
Net income 1.0% 2.9%
================
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1997 TO THREE MONTHS ENDED MARCH 31,
1996
Revenue increased $13.1 million (26.5%) to $62.6 million in the 1997 period from
$49.5 million in the 1996 period. The revenue increase was primarily generated
by a 24.6% increase in weighted average tractors, to 1,732 during the 1997
period from 1,390 during the 1996 period, as the Company expanded to meet demand
from new customers and higher volume from existing customers. The Company's
average revenue per loaded mile also increased to approximately $1.11 during the
1997 period from $1.08 during the 1996 period. The increase was attributable to
per-mile rate increases negotiated by the Company and approximately $700,000 in
fuel surcharge revenue during the 1997 period. In addition, several storms
during the 1996 period forced the Company to use secondary customers paying
lower rates. The Company's revenue per loaded mile in the 1997 period net of the
fuel surcharges was $1.10. Average miles per tractor decreased to 34,389 in the
1997 period from 35,067 in the 1996 period as the 1997 period had one less day
and the Company had tractors
Page 7 of 12
without drivers during January and late March 1997. Deadhead improved to 5.2%
of total miles in the 1997 period from 5.6% in the 1996 period.
Salaries, wages, and related expenses increased $4.2 million (17.7%) to $27.7
million in the 1997 period from $23.5 million in the 1996 period. As a
percentage of revenue, salaries, wages and related expenses decreased to 44.2%
of revenue in the 1997 period from 47.6% in the 1996 period. Driver wages as a
percentage of revenue decreased to 32.5% in the 1997 period from 34.0% in the
1996 period as the 1997 period had very little adverse weather and therefore,
lower layover expenses. The Company has announced a pay increase for drivers of
approximately $0.02 per mile that is effective May 15, 1997. The pay increase is
anticipated to increase overall costs for driver wages and benefits by
approximately 1.5% of revenue. Non-driving employee payroll expense decreased
to 5.2% in the 1997 period from 5.5% in the 1996 period as the Company reduced
the number of non-driving employees per tractor. Employee benefits, consisting
primarily of health insurance, workers' compensation costs, and employer paid
taxes, decreased to 6.6% of revenue in the 1997 period from 8.1% in the 1996
period as the Company did not contract with the leasing company utilized during
the 1996 period and obtained more favorable rates for health insurance during
the 1997 period. (*)
Fuel, oil, and road expenses increased $4.1 million (35.7%) to $15.6 million in
the 1997 period from $11.5 million in the 1996 period. As a percentage of
revenue, fuel, oil and road expenses increased to 24.9% of revenue in the 1997
period from 23.2% in the 1996 period primarily as a result of higher per gallon
fuel costs during the 1997 period. Fuel surcharges totaled $700,000 during the
1997 period and were implemented with a majority of the Company's customers.
Revenue equipment rentals and purchased transportation increased $196,000
(85.0%) to $427,000 in the 1997 period from $231,000 in the 1996 period. As a
percentage of revenue, revenue equipment rentals and purchased transportation
increased to 0.7% in the 1997 period from 0.5% in the 1996 period as operating
leases for revenue equipment and the Company initiated the use of independent
contractor suppliers of tractors during the 1997 period.
Repairs increased $213,000 (20.2%) to $1.3 million in the 1997 period from $1.1
million in the 1996 period. As a percentage of revenue, repairs remained
essentially constant at 2.0% in the 1997 period and 2.1% in the 1996 period.
Operating taxes and licenses remained virtually unchanged between the periods.
As a percent of revenue, operating taxes and licenses decreased to 2.5% in the
1997 period from 3.1% in the 1996 period. The expense as a percent of revenue
returned to normalized levels after unusually high expenses in the first quarter
of 1996. For the past three years, operating taxes and licenses have averaged
2.6%.
Insurance increased $431,000 (31.8%) to $1.8 million in the 1997 period from
$1.4 million in the 1996 period. As a percentage of revenue, insurance increased
to 2.9% of revenue in the 1997 period from 2.7% in the 1996 period as a larger
number of accidents resulted in additional deductibles being paid.
- -------------------
(*) May contain "forward-looking" statements.
Page 8 of 12
General supplies and expenses, consisting primarily of driver recruiting,
communications expenses, and facilities expenses, increased $651,000 (21.4%) to
$3.7 million in the 1997 period from $3.0 million in the 1996 period. As a
percentage of revenue, general supplies and expenses decreased to 5.9% of
revenue in the 1997 period from 6.1% in the 1996 period. The 1997 decrease is
primarily related to the fixed nature of a portion of these costs as well as the
increased revenue per tractor more than offsetting higher facilities expenses
related to the Company's new headquarters and terminal in Chattanooga,
Tennessee.
Depreciation and amortization, consisting primarily of depreciation of revenue
equipment, increased $1.2 million (23.7%) to $6.4 million in the 1997 period
from $5.1 million in the 1996 period. As a percentage of revenue, depreciation
and amortization decreased to 10.2% of revenue in the 1997 period from 10.4% in
the 1996 period as a result of a greater percentage of the Company's fleet being
obtained under operating leases and independent contractor agreements, as well
as an increase in revenue per tractor.
As a result of the foregoing, the Company's operating ratio was 93.2% in the
1997 period versus 95.7% in the 1996 period.
Interest expense remained virtually unchanged for the 1997 period as compared to
the 1996 period. Interest expense decreased to 2.2% of revenue in the 1997
period from 2.8% in the 1996 period, as higher average debt balances ($85.4
million in the 1997 period compared with $79.2 million in the 1996 period) were
offset by lower average interest rates (6.4% in the 1997 period compared with
6.9% in the 1996 period) and higher revenue in 1997.
The Company's effective tax rate was 36.9% in the 1997 period compared with
36.1% in the 1996 period reflecting increased state income taxes in the 1997
period. The effective tax rate is expected to average approximately 37.0% for
the remainder of 1997. (*)
Primarily as a result of the factors described above, net income increased to
$1.8 million in the 1997 period (2.9% of revenue) from $482,000 in the 1996
period (1.0% of revenue).
LIQUIDITY AND CAPITAL RESOURCES
The growth of the Company's business has required significant investments in new
revenue equipment. The Company historically has financed its revenue equipment
requirements with borrowings under a line of credit, senior notes, cash flows
from operations, and operating leases. The Company's primary sources of
liquidity at March 31, 1997 were funds provided by operations, borrowings under
its credit agreement (which was increased from $70 million to $85 million during
the quarter), funds provided from its $25 million in senior notes, and an
operating lease covering its new headquarters and terminal facility.
The Company's primary source of cash flow from operations is net income
increased by depreciation and deferred income taxes. Historically, financing
increases in receivables and advances associated with the Company's revenue
growth has been a significant use of cash provided by operations. In
- -------------------
(*) May contain "forward-looking" statements.
Page 9 of 12
the 1996 period, however, receivables and advances decreased due to collection
of an other receivable and rectifying an accounts receivable imbalance that had
occurred at the end of 1995 resulting in $10.5 million in operating cash flows.
Management believes that cash flows in the 1997 period are more representative
of a normalized first quarter. Net cash provided by operating activities was
$4.8 million in the 1997 period and $15.1 million in the 1996 period. (*)
Net cash used in investing activities was $15.0 million in the 1997 period and
$13.6 million in the 1996 period. These investments were primarily to acquire
additional revenue equipment as the Company expanded its operations. The Company
expects capital expenditures (primarily for revenue equipment), net of
trade-ins, to be approximately $50.0 million in 1997. (*)
Net cash provided by financing activities of $11 million in 1997 was related to
borrowings under a credit agreement. This compared with net cash used by
financing activities of $1.0 million in 1996 as the Company made repayments
under the credit agreement.
At March 31, 1997, the Company had outstanding debt of $94.2 million,
substantially all of which related to draws under a its credit agreement and $25
million in senior notes. Interest rates on this debt ranged from 6.1% to 7.4% at
March 31, 1997. Effective March 31, 1997, the Company renewed its credit
agreement and increased its limit to $85 million in order to provide for future
needs.
At March 31, 1997, $69 million was drawn under the Company's credit agreement.
The credit agreement is with a syndicate of banks and provides for outstanding
borrowings to bear interest at the London Interbank Offered Rate (LIBOR) plus an
applicable margin between 0.375% and 1.0%. For the quarter ended March 31, 1997,
the applicable margin was 0.5%. During February and May 1995, the Company
entered into interest rate swap agreements that fixed interest rates for two
years on $28 million and $10 million of the borrowings under the credit
agreement at 6.9% and 5.8%, respectively, plus the applicable margin. An
additional $25 million swap agreement was completed in 1996 to fix interest
rates from February 1997 until February 1999 at 5.9% plus the applicable margin.
All remaining borrowings under the credit agreement are at one, two, or three
month LIBOR plus the applicable margin.
The Company also has outstanding $25 million in senior notes due October 2005
that were placed with an insurance company. The notes bear interest at 7.39%,
payable semi-annually. Principal payments are due in equal annual installments
beginning in October 2001.
In December 1996, the Company took possession of its new headquarters and
terminal facility. The facility was constructed under a "build-to-suit"
operating lease and is expected to increase the Company's annual facilities
costs by approximately $750,000.
The credit agreement, senior notes, and headquarters and terminal lease
agreement contain certain restrictions and covenants relating to, among other
things, dividends, tangible net worth, cash flow, acquisitions and dispositions,
and total indebtedness. All of these agreements are cross-defaulted. The Company
was in compliance with the agreements at March 31, 1997.
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(*) May contain "forward-looking" statements.
Page 10 of 12
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
Item 1. Legal Proceedings
No reportable events or material changes occurred during the
quarter for which this report is filed.
Items 2, 3,
4 and 5. Not applicable
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
10.1 Credit Agreement dated January 17, 1995, among Covenant
Transport, Inc., a Tennessee corporation, ABN-AMRO Bank N.V.,
as agent, and certain other banks, filed as Exhibit 10 to the
Company's Form 10-Q for the quarter ended March 31, 1995, and
incorporated herein by reference.
10.2 Lease dated January 1, 1990, between David R. and Jacqueline
F. Parker and Covenant Transport, Inc, a Tennessee
corporation, with respect to the Chattanooga, Tennessee
headquarters, filed as Exhibit 10.5 to the Company's Registra-
tion Statement on Form S-1, Registration No. 33-82978,
effective October 28, 1994, and incorporated herein by
reference.
10.3 Lease dated June 1, 1994, between David R. and Jacqueline F.
Parker and Covenant Transport, Inc, a Tennessee corporation,
with respect to terminal facility in Greer, South Carolina,
filed as Exhibit 10.6 to the Company's Registration Statement
on Form S-1, Registration No. 33-82978, effective October 28,
1994, and incorporated herein by reference.
10.4 Incentive Stock Plan, filed as Exhibit 10.9 to the Company's
Registration Statement on Form S-1, Registration No. 33-82978,
effective October 28, 1994, and incorporated herein by
reference.
10.5 401(k) Plan, filed as Exhibit 10.10 to the Company's Registra-
tion Statement on Form S-1, Registration No. 33-82978,
effective October 28, 1994, and incorporated herein by
reference.
10.6 Note Purchase Agreement dated October 15, 1995, among Covenant
Transport, Inc, a Tennessee corporation and CIG & Co., filed
as Exhibit 10.12 to the Company's Form 10-K for the year ended
December 31, 1995, and incorporated herein by reference.
10.7 First Amendment to Credit Agreement and Waiver dated October
15, 1995, filed as Exhibit 10.13 to the Company's Form 10-K
for the year ended December 31, 1995, and incorporated herein
by reference.
10.8 Participation Agreement dated March 29, 1996, among Covenant
Transport, Inc, a Tennessee corporation, Lease Plan USA, Inc.,
and ABN-AMRO Bank, N.V., Atlanta Agency, filed as Exhibit
10.14 to the Company's Form 10-Q for the period ended March
31, 1996, and incorporated herein by reference.
10.9 Second Amendment to Credit Agreement and Waiver dated April
12, 1996, filed as Exhibit 10.15 to the Company's Form 10-Q
for the period ended March 31, 1996, and incorporated herein
by reference.
10.10 First Amendment to Note Purchase Agreement and Waiver dated
April 1, 1996, filed as Exhibit 10.16 to the Company's Form
10-Q for the period ended March 31, 1996, and incorporated
herein by reference.
10.11* Third Amendment to Credit Agreement and Waiver dated March 31,
1997.
10.12* Waiver to Note Purchase Agreement dated March 31, 1997.
11* Statement re: Computation of Per Share Earnings.
21* Subsidiaries of the Registrant.
27* Financial data schedule.
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* Filed herewith.
(b) No reports on Form 8 - K have been filed during the
quarter for which this report is filed.
Page 11 of 12
SIGNATURE
Pursuant to the requirements of the Securities and 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: April 18, 1997 /s/ Bradley A. Moline
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Bradley A. Moline
Treasurer and Chief Financial Officer
Page 12 of 12