SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the Fiscal Year Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED).
For the transition period from to
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 No.)
Incorporation or Organization)
400 Birmingham Highway
Chattanooga, Tennessee 37419
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 423/821-1212
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: $0.01 Par Value
Class A Common Stock
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
such filing requirements for the past 90 days. YES NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $95.0 million as of March 16, 1998 (based upon the
$21.75 per share closing price on that date as reported by Nasdaq). In making
this calculation the registrant has assumed, without admitting for any purpose,
that all executive officers, directors, and their family members, and no other
persons, are affiliates.
As of March 16, 1998, the registrant had 11,011,250 shares of Class A Common
Stock and 2,350,000 shares of Class B Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: The information set forth under Part III,
Items 10, 11, 12, and 13 of this Report is incorporated by reference from the
registrant's definitive proxy statement for the 1998 annual meeting of
stockholders that will be filed no later than April 30, 1998.
Cross Reference Index
The following cross reference index indicates the document and location of the
information contained herein and incorporated by reference into the Form 10-K.
Document and
Location
Part I
Item 1 Business Page 3 herein
Item 2 Properties Page 5 herein
Item 3 Legal Proceedings Page 6 herein
Item 4 Submission of Matters to a Vote of
Security Holders Page 6 herein
Part II
Item 5 Market for the Registrant's Common Equity
and Related Stockholder Matters Page 6 herein
Item 6 Selected Financial Data Page 7 herein
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations Page 8 herein
Item 8 Financial Statements and Supplementary Data Page 15 herein
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure Page 15 herein
Part III
Item 10 Directors and Executive Officers of the Page 2 of Proxy
Registrant Statement
Item 11 Executive Compensation Pages 5-7 of Proxy
Statement
Item 12 Security Ownership of Certain Beneficial Page 8 of Proxy
Owners and Management Statement
Item 13 Certain Relationships and Related Page 10 of Proxy
Transactions Statement
Part IV
Item 14 Exhibits, Financial Statement Schedules,
and Reports on Form 8-K Page 16 herein
This report contains "forward-looking statements" in paragraphs that are
marked with an asterisk. These statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
anticipated. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Cautionary Statement Regarding Forward-Looking
Statements" for additional information and factors to be considered concerning
forward-looking statements.
PART I
ITEM 1. BUSINESS
General
Covenant Transport, Inc. ("Covenant," or the "Company") is a truckload carrier
that offers just-in-time and other premium transportation service for customers
throughout the United States. Covenant was founded by David and Jacqueline
Parker in 1985 with 25 tractors and 50 trailers. In twelve years of operating,
the Company's fleet has grown to 2,136 tractors and 3,948 trailers, and in 1997
revenue grew to $297.9 million. In recent years, the Company has grown both
internally and through acquisitions, although prior to 1997 most growth was
internal. In 1995, Covenant acquired the assets of two small Dalton,
Georgia-based truckload carriers that specialized in transporting carpet to the
Pacific Northwest. In August 1997, the Company accelerated its acquisition
strategy. Covenant first acquired the customer relationships of $13 million
annual revenue Trans-Roads, Inc., a dry van team-driver operation based near
Atlanta, Georgia. In October 1997, Covenant acquired the stock of Bud Meyer
Truck Lines, Inc., a $45 million annual revenue truckload carrier that focuses
on providing temperature-controlled transportation service for shippers
primarily in the frozen food and consumer products industries.
The Company's corporate structure includes Covenant Transport, Inc., a Nevada
holding company organized in May 1994 and its wholly owned subsidiaries:
Covenant Transport, Inc., a Tennessee corporation organized in November 1985;
Covenant Leasing, Inc., a Nevada corporation; Intellectual Property Co., a
Nevada corporation, Covenant Acquisition Co., a Nevada shell corporation; and
Bud Meyer Truck Lines, Inc., a Minnesota corporation. Covenant Leasing, Inc. was
formed in March 1997 with the purpose of leasing equipment to the operating
subsidiary. Intellectual Property Co. was formed in March 1997 with the purpose
of holding of the intellectual property of the Company.
Operations
Covenant approaches its operations as an integrated effort of marketing,
customer service, and fleet management. The Company's customer service and
marketing personnel emphasize both new account development and expanded service
for current customers. Customer service representatives provide day-to-day
contact with customers, while the sales force targets driver-friendly freight
that will increase lane density.
The Company's primary customers include retailers and manufacturers of goods
such as garments, consumer electronics, appliances, carpet, textiles, tires, and
frozen food. Covenant also transports freight of all kinds after it has been
consolidated into truckload quantities by consolidators, such as
less-than-truckload and air freight carriers, third-party freight consolidators,
and freight forwarders. No single customer accounted for 4% or more of the
Company's revenue during any of the last three fiscal years.
Covenant conducts its dry van dispatch from its headquarters in Chattanooga,
Tennessee, and its temperature-controlled dispatch from the Bud Meyer Truck
Lines headquarters in Lake City, Minnesota. Fleet managers plan load coverage
according to customer information requirements and relay pick-up, delivery,
routing, and fueling instructions to the Company's drivers. The fleet managers
attempt to route most of the Company's trucks over selected operating lanes. The
resulting lane density assists the Company in balancing traffic between
eastbound and westbound movements, reducing empty miles, and improving the
reliability of delivery schedules.
Covenant utilizes proven technology, including the Qualcomm OmnitracsTM and
SensortracsTM systems, to increase operating efficiency and improve customer
service and fleet management. The Omnitracs system is a satellite based tracking
and communications system that permits direct communication between drivers and
fleet managers. The Omnitracs system also updates the tractor's position every
30 minutes to permit shippers and the Company to locate freight and accurately
estimate pick-up and delivery times. The Company uses the Sensortracs system to
monitor engine idling time, speed, and performance, and other factors that
affect operating efficiency. All of the Company's tractors have been equipped
with the Qualcomm systems since 1995, and the Company has added Qualcomm systems
to the Bud Meyer tractors.
As an additional service to customers, the Company offers electronic data
interchange ("EDI"), which allows customers and the Company to communicate
electronically, permitting real-time information flow, reductions or
eliminations in paperwork, and fewer clerical personnel. With EDI customers can
receive updates as to cargo position, delivery times, and other information. It
also allows customers to communicate electronically delivery, local
distribution, and account payment instructions.
In 1997, the Company installed a document imaging system to reduce paperwork and
enhance employee access to important information. Management believes the
imaging system has streamlined workflow and reduced the number of employees
required to perform certain record-intensive functions.
Drivers and Other Personnel
Driver recruitment, retention, and satisfaction are essential to Covenant's
success, and the Company has made each of these factors a primary element of its
strategy. Driver-friendly operations are emphasized throughout the Company. The
Company has implemented automatic programs to signal when a driver is scheduled
to be routed toward home, and fleet managers are assigned specific tractor
units, regardless of geographic region, to foster positive relationships between
the drivers and their principal contact with the Company. In addition, Covenant
has offered per-mile wage increases to drivers in 1996 and 1997 and continues to
aggressively seek rate increases from customers in part to fund higher driver
pay.
Covenant differentiates its primary dry van business from many shorter-haul
truckload carriers by its use of driver teams. Driver teams permit the Company
to provide expedited service over its long average length of haul, because
driver teams are able to handle longer routes and drive more miles while
remaining within Department of Transportation safety rules. Management believes
that these teams contribute to greater equipment utilization than most carriers
with predominately single drivers. The use of teams, however, increases
personnel costs as a percentage of revenue and the number of drivers the Company
must recruit. In 1997, teams operated over 61% of the Company's tractors.
Covenant is not a party to a collective bargaining agreement and its employees
are not represented by a union. In August 1996, the Company ceased leasing its
personnel from a third party leasing company and employed them directly. At
December 31, 1997, the Company employed 3,426 drivers and 539 nondriver
personnel. Management believes that the Company has a good relationship with its
personnel.
Revenue Equipment
Management believes that operating high-quality, efficient equipment is an
important part of providing excellent service to customers. The Company's policy
is to operate its tractors while under warranty to minimize repair and
maintenance cost and reduce service interruptions caused by breakdowns. The
Company also orders most of its equipment with uniform specifications to reduce
its parts inventory and facilitate maintenance.
The Company's fleet of 2,136 tractors had an average age of 21 months at
December 31, 1997, and all tractors remained covered by manufacturer's
warranties. Management believes that a late model tractor fleet is important to
driver recruitment and retention and contributes to operating efficiency. The
Company utilizes conventional tractors equipped with large sleeper compartments.
At December 31, 1997, the Company owned 3,948 trailers. Most of the Company's
trailers were 53-feet long by 102-inch wide, dry vans. The Company also operated
326 53-foot and 183 48-foot temperature-controlled trailers. At year end the
trailers had a fleetwide average age of 32.5 months.
Competition
The United States trucking industry is highly competitive and includes thousands
of for-hire motor carriers, none of which dominates the market. Service and
price are the principal means of competition in the trucking industry. The
Company targets primarily the market segment that demands just-in-time and other
premium services. Management
believes that this segment generally offers higher freight rates than the
segment that is less dependent upon timely service and that the Company's size
and use of driver teams are important in competing in this segment. The Company
competes to some extent with railroads and rail-truck intermodal service but
differentiates itself from rail and rail-truck intermodal carriers on the basis
of service because rail and rail-truck intermodal movements are subject to
delays and disruptions arising from rail yard congestion, which reduces the
effectiveness of such service on traffic with time-definite pick-up and delivery
schedules.
Regulation
The Company is a common and contract motor carrier of general commodities.
Historically, the Interstate Commerce Commission (the "ICC") and various state
agencies regulated motor carriers' operating rights, accounting systems, mergers
and acquisitions, periodic financial reporting, and other matters. In 1995,
federal legislation preempted state regulation of prices, routes, and services
of motor carriers and eliminated the ICC. Several ICC functions were transferred
to the Department of Transportation (the "DOT"). Management does not believe
that regulation by the DOT or by the states in their remaining areas of
authority has had a material effect on the Company's operations. The Company's
employee and independent contractor drivers also must comply with the safety and
fitness regulations promulgated by the DOT, including those relating to drug and
alcohol testing and hours of service. The DOT has rated the Company
"satisfactory," which is the highest safety and fitness rating.
The Company's operations are subject to various federal, state, and local
environmental laws and regulations, implemented principally by the EPA and
similar state regulatory agencies, governing the management of hazardous wastes,
other discharge of pollutants into the air and surface and underground waters,
and the disposal of certain substances. If the Company should be involved in a
spill or other accident involving hazardous substances, if any such substances
were found on the Company's property, or if the Company were found to be in
violation of applicable laws and regulations, the Company could be responsible
for clean-up costs, property damage, and fines or other penalties, any one of
which could have a materially adverse effect on the Company. The Company does
not have on-site underground fuel storage tanks at any of its locations.
Management believes that its operations are in material compliance with current
laws and regulations.
Fuel Availability and Cost
The Company actively manages its fuel costs by routing the Company's drivers
through fuel centers with which the Company has negotiated volume discounts.
Average fuel prices were lower in 1997 than 1996, and by the end of the year the
cost of fuel was below the level at which the Company received fuel surcharges.
The Company historically has been able to pass through most increases in fuel
prices and taxes to customers in the form of higher rates and surcharges,
although short-term fluctuations are not fully recovered. At December 31, 1997,
approximately 20% of the total annual purchases of fuel by the Company was
subject to hedging contracts.
ITEM 2. PROPERTIES
Covenant maintains ten terminals located on its major traffic lanes in
Chattanooga, Tennessee; Lake City, Minnesota; Oklahoma City, Oklahoma; Fremont,
California; Dalton, Georgia; Pomona, California; Dallas, Texas; El Paso, Texas;
Delanco, New Jersey; and Indianapolis, Indiana. The terminals provide driver
recruiting centers, a base for drivers in proximity to their homes, transfer
locations for trailer relays on transcontinental routes, and parking space for
equipment dispatch and maintenance. In addition the Chattanooga, Oklahoma City,
Dalton, and Lake City locations offer maintenance service as an alternative to
commercial shops.
In 1996, the Company's headquarters and main terminal was relocated to
approximately 75 acres of property near Chattanooga, Tennessee. The facilities
include an office building of approximately 82,000 square feet, which houses all
of the Company's administrative and operations personnel, the Company's 45,000
square-foot principal maintenance facility, and a truck wash. The Company's
other maintenance facility is at Oklahoma City. The Company leased property in
Chattanooga, Tennessee and in Greer, South Carolina from related parties during
1997.
ITEM 3. LEGAL PROCEEDINGS
The Company from time to time is a party to litigation arising in the ordinary
course of its business, substantially all of which involves claims for personal
injury and property damage incurred in the transportation of freight. The
Company maintains insurance covering losses in excess of a $2,500 deductible
from cargo loss and physical damage claims, and losses in excess of a $5,000
deductible from personal injury and property damage. The Company maintains a
fully insured workers' compensation plan for its employees. Each of the primary
insurance policies has a limit of $1.0 million per occurrence, and the Company
carries excess liability coverage, which management believes is adequate to
cover exposure to claims at any level reasonably anticipated. The Company is not
aware of any claims or threatened claims that might materially adversely affect
its operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ended December 31, 1997, no matters were
submitted to a vote of security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Price Range of Common Stock
The Company's Class A Common Stock has been traded on the National Market under
the symbol "CVTI." The following table sets forth for the calendar periods
indicated the range of high and low bid quotations for the Company's Class A
Common Stock as reported by Nasdaq from January 1, 1996 to December 31, 1997.
Period High Low
Calendar Year 1996
1st Quarter $17.75 $11.25
2nd Quarter 18.00 15.00
3rd Quarter 21.00 15.00
4th Quarter 19.25 13.00
Calendar Year 1997
1st Quarter 16.25 11.25
2nd Quarter 19.125 13.75
3rd Quarter 20.25 18.00
4th Quarter 20.125 15.25
The prices reported reflect interdealer quotations without retail mark-ups,
mark-downs or commissions, and may not represent actual transactions. As of
March 16, 1998, the Company had approximately 150 stockholders of record of its
Class A Common Stock. However, the Company estimates that it has approximately
2,000 stockholders because a substantial number of the Company's shares are held
of record by brokers or dealers for their customers in street names.
Dividend Policy
The Company has never declared and paid a cash dividend on its common stock. It
is the current intention of the Company's Board of Directors to continue to
retain earnings to finance the growth of the Company's business rather than to
pay dividends. The payment of cash dividends is currently limited by agreements
relating to the Company's $100 million line of credit, $25 million in senior
notes due October 2005, and the operating lease covering the Company's
headquarters and terminal facility. Future payments of cash dividends will
depend upon the financial condition, results of operations, and capital
commitments of the Company, restrictions under then-existing agreements, and
other factors deemed relevant by the Board of Directors.
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
Selected Financial Data
Year Ended December 31, 1993 1994 1995 1996 1997
(In thousands except per share
and operating data amounts)
Statement of Operations Data:
Revenue $81,911 $131,926 $180,346 $236,267 $297,861
Operating expenses:
Salaries, wages, and
related expenses 34,629 57,675 83,747 108,818 131,522
Fuel, oil and road
expenses 17,573 27,282 37,802 55,340 64,910
Revenue equipment rentals
and purchased
transportation 1,703 2,785 1,230 605 8,492
Repairs 1,363 2,285 3,569 4,293 5,885
Operating taxes and
licenses 2,125 3,479 4,679 6,065 7,514
Insurance(1) 3,374 4,510 4,907 6,115 8,655
General supplies and
expenses 5,921 8,650 9,648 12,825 16,277
Depreciation and
amortization 5,850 9,310 16,045 22,139 26,482
-----------------------------------------------------
Total operating
expenses 72,538 115,976 161,627 216,200 269,737
-----------------------------------------------------
Operating income 9,373 15,950 18,719 20,067 28,124
Interest expense 3,765 4,736 4,162 5,987 6,274
-----------------------------------------------------
Income before income taxes 5,608 11,214 14,557 14,080 21,850
Income tax expense 1,722 3,951 5,274 5,102 8,148
-----------------------------------------------------
Net income(2) $ 3,886 $ 7,263 $ 9,283 $ 8,978 $ 13,702
=====================================================
Basic and diluted earnings
per share $ 0.39 $ 0.69 $ 0.70 $ 0.67 $ 1.03
Weighted average common
shares outstanding 10,000 10,496 13,350 13,350 13,360
Balance Sheet Data:
Net property and equipment $46,975 $ 87,882 $127,408 $144,384 $161,621
Total assets 61,628 112,552 169,381 187,148 215,256
Long-term debt, less
current maturities 37,225 27,734 80,150 83,110 80,812
Stockholders' equity $ 5,703 $ 63,469 $ 72,752 $ 81,730 $ 95,597
Selected Operating Data:
Operating ratio(3) 88.6% 87.9% 89.6% 91.5% 90.6%
Pretax Margin(3) 6.8% 8.5% 8.1% 6.0% 7.3%
Average revenue per loaded
mile(4) $ 1.05 $ 1.09 $ 1.09 $ 1.10 $ 1.13
Deadhead miles percentage 6.0% 5.4% 5.6% 5.2% 5.5%
Average length of haul in
miles 1,821 1,840 1,811 1,780 1,653
Average miles per tractor
per year 157,756 159,921 148,669 150,778 149,117
Average revenue per tractor
per week $ 3,008 $ 3,165 $ 2,942 $ 2,994 $ 3,059
Weighted average tractors
for year(5) 518 796 1,179 1,509 1,866
Total tractors at end of
period(5) 621 1,001 1,343 1,629 2,136
Total trailers at end of
period(5) 966 1,651 2,554 3,048 3,948
(1) Includes uninsured losses for 1993 of $300,000.
(2) Since its inception in 1991, Tenn-Ga Leasing, Inc. (Tenn-Ga), a
revenue equipment leasing company formed by a related party to serve as a
financing alternative for a portion of the Company's revenue equipment, has
operated as an S corporation and was not subject to federal and state corporate
income taxes. If Tenn-Ga had been subject to corporate income taxes for the
periods presented, the Company's consolidated pro forma net income would have
been $3,637,000 in 1993 and $7,038,000 in 1994. As a result of the Company's
acquisition of substantially all of Tenn-Ga's assets effective May 31, 1994, the
results of the Company and Tenn-Ga are not combined in future periods. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(3) Operating expenses expressed as a percentage of revenue. Because obtaining
equipment from owner-operators and under operating leases effectively shifts
financing expenses from interest to "above the line" operating expenses, the
Company intends to evaluate its efficiency using pretax margin and net margin
rather than operating ratio. (4) Includes fuel surcharge in 1997. Excluding the
fuel surcharge, the Company estimates that average revenue per loaded mile was
$1.12. (5) Includes monthly rental tractors and excludes monthly rental
trailers.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
During the three year period ended December 31, 1997, the Company increased its
revenue at a compounded annual growth rate of 31.2%, as revenue increased to
$297.9 million in 1997 from $131.9 million in 1994. A significant increase in
fleet size to meet customer demand as well as an increase in the freight rates
contributed to revenue growth over this period.
In addition to internal growth, the Company completed four acquisitions during
the three years ended in 1997. In 1995, the Company purchased certain assets of
two small truckload carriers based in Dalton, Georgia. The two carriers together
generated less than $8 million in revenue, but each provided the Company with
significant customer relationships. In August 1997, the Company acquired the
customer relationships of Trans-Roads, Inc., a $13 million annual revenue dry
van carrier based near Atlanta, Georgia. In October 1997, the Company purchased
all the outstanding capital stock of Bud Meyer Truck Lines, Inc., a $45 million
annual revenue temperature-controlled carrier based in Lake City, Minnesota. The
Company intends to continue to grow both internally and through acquisitions,
with the main constraint on internal growth being the ability to recruit and
retain sufficient numbers of qualified drivers.
The Company's improved net income approximately 53%, to $13.7 million in 1997
from $9.0 million in 1996. Several factors contributed to the improvement,
including declining fuel prices and negotiating higher freight rates from
substantially all customers. Although higher driver compensation partially
offset the increased freight rates, management believes the Company benefitted
from attracting and retaining more drivers.
Changes in several operating statistics and expense categories are expected to
result from actions taken in 1997. Bud Meyer Truck Lines operates predominantly
single-driver tractors, as opposed to the primarily team-driver tractor fleet
operated by Covenant's long-haul, dry van operation. The single driver fleet
operates fewer miles per tractor and experiences more empty miles. In addition,
Bud Meyer's operations must bear additional expenses of fuel for refrigeration
units, pallets, and depreciation and interest expense of more expensive trailers
associated with temperature-controlled service. The additional expenses and
lower productive miles are offset by generally higher revenue per loaded mile
and the reduced employee expense of compensating only one driver. The Company's
operating statistics and expenses are expected to shift in future periods with
the mix of single, team, and temperature-controlled operations.(*)
The Company also initiated the use of owner-operators of tractors in 1997 and
contracted with approximately 100 owner-operators at December 31, 1997. Owner
operators provide a tractor and driver and bear all operating expenses in
exchange for a fixed lease payment per mile. The Company does not have the
capital outlay of purchasing the tractor. In 1997, the Company also financed
approximately 240 tractors under operating leases. The lease payments to
owner-operators and the financing of tractors under operating leases appear as
operating expenses under 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,
communications, 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
intends to evaluate its efficiency using pretax margin and net margin rather
than operating ratio.(*)
(*) May contain "forward-looking" statements.
The following table sets forth the percentage relationship of certain items to
revenue for the years ended December 31, 1995, 1996, and 1997:
1995 1996 1997
-----------------------------------
Revenue 100.0% 100.0% 100.0%
Operating expenses:
Salaries, wages, and related expenses 46.4 46.1 44.2
Fuel, oil, and road expenses 21.0 23.4 21.8
Revenue equipment rentals and
purchased transportation 0.7 0.2 2.9
Repairs 2.0 1.8 2.0
Operating taxes and licenses 2.6 2.6 2.5
Insurance 2.7 2.6 2.9
General supplies and expenses 5.3 5.4 5.5
Depreciation and amortization 8.9 9.4 8.9
-------------------------------------------
Total operating expenses 89.6 91.5 90.6
-------------------------------------------
Operating income 10.4 8.5 9.4
Interest expense 2.3 2.5 2.1
-------------------------------------------
Income before income taxes 8.1 6.0 7.3
Income tax expense 2.9 2.2 2.7
-------------------------------------------
Net income 5.2% 3.8% 4.6%
===========================================
Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996
Revenue increased $61.6 million (26.1%) to $297.9 million in 1997 from $236.3
million in 1996. The revenue increase was attributable to three primary factors.
First, the Company added tractors to meet demand from new and existing
customers. Second, the Company negotiated rate increases with customers of
approximately $.04 per loaded mile, net of fuel surcharges. Third, the Company
acquired the customer relationships of Trans-Roads, Inc., a $13 million annual
revenue dry van carrier in August 1997 and all the capital stock of Bud Meyer
Truck Lines, Inc., a $45 million annual revenue temperature-controlled carrier
in October 1997. Covenant operated 1,866 weighted average tractors during 1997
as compared with 1,509 during 1996, a 23.7% increase.
Salaries, wages and related expenses increased $22.7 million (20.9%), to $131.5
in 1997 from $108.8 million in 1996. As a percentage of revenue, salaries,
wages, and related expenses decreased to 44.2% in 1997 from 46.1% in 1996.
Driver wages as a percentage of revenue increased to 35.0% in 1997 from 33.5% in
1996 primarily as a result of the pay increase that went into effect in May
1997. Non-driving employee payroll expense decreased to 5.3% of revenue in 1997
from 5.4% in 1996. Health insurance, employer paid taxes, and workers'
compensation decreased to 6.1% of revenue in 1997 from 6.8% in 1996. This was
primarily attributed to reduced worker's compensation premiums negotiated in
August 1997 with a fixed rate for a three-year period.
Fuel, oil, and road expenses increased $9.5 million (17.3%), to $64.9 million in
1997 from $55.3 million in 1996. As a percentage of revenue, fuel, oil, and road
expenses decreased to 21.8% of revenue in 1997 from 23.4% in 1996. The increase
reflects the greater number of tractors in service during 1997. The decrease as
a percentage of revenue was primarily a result of improving fuel prices during
1997. In addition to decreased fuel prices, the fuel expense was further offset
by fuel surcharges charged to customers totaling $2.4 million.
Revenue equipment rentals and purchased transportation increased $7.9 million
(1336.8%), to $8.5 million in 1997 from $0.6 million in 1996. As a percentage of
revenue, revenue equipment rentals and purchased transportation increased to
2.9% of revenue in 1997 from 0.2% in 1996. Revenue equipment rentals and
purchased transportation historically had represented payments under operating
leases or short-term rentals of tractors and trailers. During 1997, the Company
began using owner-operators of revenue equipment, who 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 had contracted with
approximately 100 owner-operators at December 31, 1997. In the fourth quarter of
1997, the Company also entered into a sale and leaseback of 227 tractors, which
will increase this expense in the future, while reducing depreciation and
interest.(*)
Repairs increased $1.6 million (37.1%), to $5.9 million in 1997 from $4.3
million in 1996. As a percentage of revenue, repairs increased to 2.0% of
revenue in 1997 from 1.8% in 1996. The increase was attributable to an increase
in fleet size, a slight increase in fleet age, and to repairs made to improve
the condition of equipment prior to sales and trades of older equipment acquired
in the Bud Meyer Truck Lines transaction.
Insurance, consisting primarily of premiums for liability, physical damage, and
cargo damage insurance, and claims, increased $2.5 million (41.5%), to $8.7
million in 1997 from $6.1 million in 1996. As a percentage of revenue, insurance
increased to 2.9% of revenue in 1997 from 2.6% in 1996. An increase in accident
claims more than offset a reduction in insurance premiums per million
dollars of revenue.
General supplies and expenses, consisting primarily of headquarters and other
terminal lease expense, driver recruiting expenses, communications, and agent
commissions, increased $3.5 million (26.9%), to $16.3 million in 1997 from $12.8
million in 1996. As a percentage of revenue, general supplies and expenses
remained essentially constant at 5.5% of revenue in 1997 compared with 5.4% in
1996.
Depreciation and amortization, consisting primarily of depreciation of revenue
equipment, increased $4.3 million (19.6%), to $26.5 million in 1997 from $22.1
million in 1996. As a percentage of revenue, depreciation and amortization
decreased to 8.9% in 1997 from 9.4% in 1996 as the Company utilized more owner
operators, leased more revenue equipment, and realized an increase in revenue
per tractor per week, which more efficiently spread this fixed cost over a
larger revenue base. Amortization expense relates to deferred debt costs
incurred and covenants not to compete from two 1995 asset acquisitions, as well
as goodwill from two 1997 acquisitions.
Interest expense increased $0.3 million (0.5%), to $6.3 million in 1997 from
$6.0 million in 1996. As a percentage of revenue, interest expense decreased to
2.1% of revenue in 1997 from 2.5% in 1996. Lower average debt balances more than
offset slightly higher average interest rates (7.2 % in 1997 compared with 7.0%
in 1996) contributed to improving this expense item.
As a result of the foregoing, the Company's pretax margin improved to 7.3% in
1997 from 6.0% in 1996.
The Company's effective tax rate was 37.2% in 1997 and 36.2% in 1996.
As a result of the factors described above, net income increased $4.7 million
(52.6%), to $13.7 million in 1997 (4.6% of revenue) from $9.0 million in 1996
(3.8% of revenue).
Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995
Revenue increased $56.0 million (31.0%), to $236.3 million in 1996 from $180.3
million in 1995. The revenue increase was primarily generated by business from
new customers and higher volume from existing customers. Average revenue per
loaded mile was $1.10 in 1996 ($1.09 net of fuel surcharge of $1.6 million) and
$1.09 in 1995. Average miles per tractor increased to 150,778 in 1996 from
148,669 in 1995, as the trucking economy improved. Deadhead decreased to 5.2% of
total miles from 5.6%. Covenant operated 1,509 weighted average tractors during
1996 as compared with 1,179 during 1995, a 28.0% increase.
Salaries, wages and related expenses increased $25.1 million (29.9%), to $108.8
million in 1996 from $83.7 million in 1995. As a percentage of revenue,
salaries, wages, and related expenses decreased to 46.1% of revenue in 1996 from
46.4% in 1995. Driver wages as a percentage of revenue increased to 33.5% in
1996 from 32.8% in 1995 primarily as a result of the tenure of our driving
employees and a small pay increase in August 1996. Non-driving employee payroll
expense increased to 5.4% of revenue in 1996 from 5.1% in 1995. Health
insurance, employer paid taxes, and workers' compensation decreased to 6.8% of
revenue in 1996 from 8.2% in 1995.
(*) May contain "forward-looking statements.
Fuel, oil, and road expenses increased $17.5 million (46.4%), to $55.3 million
in 1996 from $37.8 in 1995. As a percentage of revenue, fuel, oil, and road
expenses increased to 23.4% of revenue in 1996 from 21.0% in 1995. The increase
was primarily a result of increased fuel prices during all of 1996. The fuel
expense was partially offset by fuel surcharges charged to customers totaling
$1.6 million. Additionally, motel cost increased in 1996 as compared to 1995 as
the result of an increase in per motel allowance given to the drivers.
Revenue equipment rentals and purchased transportation decreased $625,000
(50.8%), to $605,000 in 1996 from $1.2 million in 1995. As a percentage of
revenue, revenue equipment rentals and purchased transportation decreased to
0.2% of revenue in 1996 from 0.7% in 1995. The Company had more revenue
equipment under operating leases during 1995.
Repairs increased $724,000 (20.3%), to $4.3 million in 1996 from $3.6 million in
1995. As a percentage of revenue, repairs decreased to 1.8% of revenue in 1996
from 2.0% in 1995. The decreases were primarily due to a change in oil change
intervals in 1996.
Insurance, consisting primarily of premiums for liability, physical damage and
cargo damage insurance, increased $1.2 million (24.6%), to $6.1 million in 1996
from $4.9 million in 1995. As a percentage of revenue, insurance decreased to
2.6% of revenue in 1996 from 2.7% in 1995, as the Company continued to reduce
premiums.
General supplies and expenses, consisting primarily of driver recruiting
expenses, communications and agent commissions, increased $3.2 million (32.9%),
to $12.8 million in 1996 from $9.6 million in 1995. As a percentage of revenue,
general supplies and expenses increased to 5.4% of revenue in 1996 from 5.3% in
1995.
Depreciation and amortization, consisting primarily of depreciation of revenue
equipment, increased $6.1 million (38.0%), to $22.1 million in 1996 from $16.0
million in 1995. As a percentage of revenue, depreciation and amortization
increased to 9.4% in 1996 from 8.9% in 1995, as the Company's average cost of
revenue equipment increased in 1996, all tractors were equipped with satellite
communication units for all of 1996, and the Company reduced its reliance of
revenue equipment rentals. Amortization expense relates to deferred debt costs
incurred and covenants not to compete from two 1995 asset acquisitions .
Interest expense increased $1.8 million (43.9%), to $6.0 million in 1996 from
$4.2 million in 1995. As a percentage of revenue, interest expense increased to
2.5% of revenue in 1996 from 2.3% in 1995, as higher average debt balances
($85.6 million in 1996 compared with $58.4 million in 1995) were not fully
offset by lower average interest rates (7.0% in 1996 compared with 7.3% in 1995)
and a larger revenue base.
As a result of the foregoing, the Company's pretax margin decreased to 6.0% in
1996 from 8.1% in 1995.
The Company's effective tax rate was 36.2% in 1996 and 1995.
Primarily as a result of the factors described above, net income decreased to
$9.0 million in 1996 (3.8% of revenue) from $9.3 million in 1995 (5.2% 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 installment notes payable to commercial
lending institutions and equipment manufacturers, borrowings under a line of
credit, cash flows from operations, and long-term operating leases. The
Company's primary sources of liquidity at December 31, 1997 were funds provided
by operations and borrowings under its primary credit agreement, which had
maximum available borrowing of $100 million at December 31, 1997 (the "Credit
Agreement"). The Company believes its sources of liquidity are adequate to meet
its current and projected needs. (*)
The Company's primary source of cash flow from operations is net income
increased by depreciation and deferred income taxes. The Company's principal use
of cash in operations is to finance receivables and advances associated with
growth in the business. The Company's number of days sales in accounts
receivable decreased from 46 days in 1996 to 43 days in 1997.
(*) May contain "forward-looking" statements.
Net cash provided by operating activities was $45.2 million in 1997, $39.1
million in 1996, and $9.1 million in 1995.
The primary source of funds in 1997 was net income of $13.7 million increased by
non-cash adjustments including depreciation of $27.4 million, deferred income
taxes of $5.1 million, and accounts payable of $2.1 million. The primary use of
funds was an increase in accounts receivable of $1.7 million.
Net cash used in investing activities was $27.6 million in 1997, $38.9 million
in 1996, and $55.7 million in 1995. Such amounts were used primarily to acquire
additional revenue equipment as the Company expanded its operations. In
addition, in 1997, the Company used $5.6 million of such amount to consummate
the acquisition of Trans-Road, Inc. and Bud Meyer Truck Lines, Inc. The Company
expects capital expenditures (primarily for revenue equipment), net of
trade-ins, to be approximately $55.0 million in 1998.(*)
Net cash used in financing activities was $18.5 million in 1997. Net cash
provided by financing activities were $2.8 million in 1996 and $42.1 million in
1995. The cash provided by financing activities in 1997, 1996, and 1995 related
primarily to borrowings under the Credit Agreement. At December 31, 1997, the
Company had outstanding debt of $82.4 million, primarily consisting of $52
million drawn under the Credit Agreement and the $25 million in 10-year senior
notes. Interest rates on this debt range from 6.25% to 12.5%.
The Credit Agreement is with a group of banks and has a maximum borrowing limit
of $100 million. Borrowings related to revenue equipment are limited to the
lesser of 90% of the net book value of revenue equipment or $55 million. Working
capital borrowings are limited to 85% of eligible accounts receivable. Letters
of credit are limited to an aggregate commitment of $10 million. The Credit
Agreement includes a "security agreement" such that the Credit Agreement may be
collateralized by virtually all assets of the Company if a covenant violation
occurs. A commitment fee of 0.225% per annum is due on the daily unused portion
of the Credit Agreement. The Credit Agreement is guaranteed by Covenant
Transport, Inc. a Nevada corporation, Intellectual Property Co., a Nevada
corporation, Bud Meyer Truck Lines, Inc., a Minnesota corporation, and Covenant
Acquisition Co., a Nevada corporation.
The Credit Agreement revolves for two years and then has a four-year term out if
not renewed. Payments for interest are due quarterly in arrears with principal
payments due in 12 equal quarterly installments beginning on the second
anniversary of the date of the Credit Agreement (or any renewal). The Company
renewed the loan in December 1997 and anticipates renewing the Credit Agreement
on an annual basis. Borrowings under the Credit Agreement may be 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 0.375%
and 1% based on cash flow coverage and a defined debt to capitalization ratio.
At December 31, 1997, the margin was 0.5%.
In October 1995, the Company placed $25 million in 10-year senior notes with an
insurance company. The notes bear interest at 7.39%, payable semi-annually, and
mature on October 1, 2005. Principal payments are due in equal annual
installments beginning in the seventh year of the notes. Proceeds of the notes
were used to reduce borrowings under the Credit Agreement.
In December 1997, the Company engaged in a sale-and-leaseback transaction
involving 199 of the Company's tractors that had been newly acquired or were
awaiting delivery. The proceeds of the sale were used to reduce debt under the
Credit Agreement. The Company entered into a three-year lease of the equipment,
with a 5.15% implied interest rate and a residual value guaranteed by the
Company at a level equal to the Company's salvage value on owned tractors.
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.
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 instruments are cross-defaulted. The
Company was in compliance with the agreements at December 31, 1997.
Inflation and Fuel Costs
Most of the Company's operating expenses are inflation-sensitive, with inflation
generally producing increased costs of operation. During the past three years,
the most significant effects of inflation have been on revenue equipment prices
and the compensation paid to 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. The failure to obtain rate
increases in the future could have an adverse effect on profitability. 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, shorter-term increases are not fully recovered. At December 31, 1997,
approximately 20% of the total annual purchases of fuel by the Company was
subject to hedging contracts.(*)
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. First quarter net income historically has been lower than net
income in each of the other three quarters of the year because of the weather.
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.(*)
The table below sets forth quarterly information reflecting the Company's
equipment utilization (miles per tractor per period) during 1995, 1996, and
1997. The Company believes that equipment utilization more accurately
demonstrates the seasonality of its business than changes in revenue, which are
affected by the timing of deliveries of new revenue equipment. Results of any
one or more quarters are not necessarily indicative of annual results or
continuing trends.
First Quarter Second Quarter Third Quarter Fourth Quarter
1995 35,467 38,029 38,186 36,941
1996 35,067 38,462 38,989 38,036
1997 34,389 37,325 38,850 38,314
Year 2000
The Company is aware of the current concerns throughout the business community
of reliance upon computer systems that do not properly recognize the year 2000
in date formats, often referred to as the "Year 2000 Problem." Computer
operations are a significant function within the Company and daily operations of
the Company depend on the successful operation of its computer systems. As a
result the Company is currently assessing Year 2000 preparedness and developing
a plan to help ensure continuity of operations.
The Company relies upon software purchased from third party vendors rather than
internally generated software. In its analysis of the software, and based upon
its ongoing discussions with vendors, the Company has determined that most of
its software already reflects changes necessary to avoid the Year 2000 Problem.
The Company intends to continue to work and complete testing to ensure existing
systems are Year 2000 compliant and does not expect a materially adverse impact
on its financial condition or operations.(*)
(*) May contain "forward-looking" statements.
Earnings Per Share. Effective December 31, 1997, the Company adopted Statement
of Financial Accounting Standards No. 128, Earnings Per Share. The standard
replaces the presentation of primary EPS with a presentation of basic EPS and
replaces the presentation of fully diluted EPS with diluted EPS. Basic income
per share is computed by dividing net income available for common shareholders
by the weighted average number of shares of common stock outstanding. Diluted
income per share is computed by dividing adjusted net income by the weighted
average number of shares of common stock and assumed conversions of dilutive
securities outstanding during the respective periods. Dilutive securities
represented by options have been included in the computation. The Company uses
the treasury stock method for calculating the dilutive effect of options.
Recent Accounting Pronouncements - Effective December 31, 1997, the Company
implemented Statement of Financial Accounting Standards No. 129, Disclosure of
Information about Capital Structure. The Statement consolidates disclosures
required by several existing pronouncements regarding an entity's capital
structure. The Company's disclosures are already in compliance with such
pronouncements and, accordingly, SFAS No. 129 does not require any change to
existing disclosures.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income. The
Statement establishes standards for reporting comprehensive income and its
components in a full set of financial statements. The Statement is effective for
fiscal years beginning after December 15, 1997.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures About Segments of an
Enterprise and Related Information. This Statement establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Statement is
effective for fiscal years beginning after December 31, 1997. In the initial
year of application, comparative information for earlier years is to be
restated. The Company is evaluating SFAS No. 131 to determine the impact, if
any, on its reporting and disclosure requirements.
Cautionary Statement Regulating Forward-Looking Statements
The Company may from time-to-time make written or oral forward-looking
statements. Written forward-looking statements may appear in documents filed
with the Securities and Exchange Commission, in press releases, and in reports
to stockholders. The Private Securities Litigation Reform Act of 1995 contains a
safe harbor for forward-looking statements. The Company relies on this safe
harbor in making such disclosures. In connection with this "safe harbor"
provision, the Company is hereby identifying important factors that could cause
actual results to differ materially from those contained in any forward-looking
statement made by or on behalf of the Company. Factors that might cause such a
difference include, but are not limited to, the following:
Economic Factors; Fuel Prices. Negative economic factors such as recessions,
downturns in customers' business cycles, surplus inventories, inflation, and
higher interest rates could impair the Company's operating results by decreasing
equipment utilization or increasing costs of operations. High fuel prices can
have a negative impact on the Company's profitability.
Resale of Used Revenue Equipment. The Company historically has recognized a gain
on the sale of its revenue equipment, however if the resale value of the
Company's revenue equipment were to decline, the Company could find it necessary
to dispose of its equipment at lower prices or retain some of its equipment
longer, with a resulting increase in operating expenses.
Recruitment, Retention, and Compensation of Qualified Drivers. Competition for
drivers is intense in the trucking industry. There was in 1997, and historically
has been, an industry-wide shortage of qualified drivers. This shortage could
force the Company to significantly increase the compensation it pays to driver
employees or curtail the Company's growth.
Competition. The trucking industry is highly competitive and fragmented. The
Company competes with other truckload carriers, private fleets operated by
existing and potential customers, railroads, rail-intermodal service, and to
some extent with air-freight service. Competition is based primarily on service,
efficiency, and freight rates. Many competitors
offer transportation service at lower rates than the Company. The Company's
results could suffer if it cannot obtain higher rates than competitors that
offer a lower level of service.
Acquisitions. A significant portion of the Company's growth since June 1995 has
occurred through acquisitions, and acquisitions are an important component of
the Company's growth strategy. Management must continue to identify desirable
target companies and negotiate, finance, and close acceptable transactions or
the Company's growth could suffer.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's audited consolidated balance sheets, statements of income, cash
flows, and stockholders' equity, and notes related thereto, are contained at
Pages 19 to 31 of this report. The supplementary quarterly financial data
follows:
Quarterly Financial Data:
Fourth Third Second First
Quarter Quarter Quarter Quarter
1997 1997 1997 1997
----------- ----------- ------------ -----------
Revenue $ 89,905 $ 75,308 $ 70,060 $ 62,588
Operating income 8,837 7,888 7,118 4,282
Income before taxes 6,791 6,504 5,641 2,914
Income taxes 2,578 2,406 2,088 1,076
Net income 4,213 4,098 3,553 1,838
Basic and diluted earnings
per share $ 0.32 $ 0.31 $ 0.27 $ 0.14
Fourth Third Second First
Quarter Quarter Quarter Quarter
1996 1996 1996 1996
----------- ----------- ------------ -----------
Revenue $ 64,161 $ 63,022 $ 59,626 $ 49,458
Operating income 5,084 6,768 6,092 2,122
Income before taxes 3,540 5,186 4,600 754
Income taxes 1,286 1,868 1,676 272
Net income 2,254 3,318 2,924 482
Basic and diluted earnings
per share $ 0.17 $ 0.25 $ 0.22 $ 0.04
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No reports on Form 8-K have been filed within the twenty-four months prior to
December 31, 1997, involving a change of accountants or disagreements on
accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information respecting executive officers and directors set forth under the
captions "Election of Directors Information Concerning Directors and Executive
Officers" and "Compliance with Section 16(a) of the Securities Exchange Act of
1934" on Page 2 and Page 10 of the Registrant's Proxy Statement for the 1998
annual meeting of stockholders, which will be filed with the Securities and
Exchange Commission in accordance with Rule 14a-b promulgated under the
Securities Exchange Act of 1934, as amended (the "Proxy Statement") is
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information respecting executive compensation set forth under the caption
"Executive Compensation" on Pages 5 to 7 of the Proxy Statement is incorporated
herein by reference; provided, that the "Compensation Committee Report on
Executive Compensation" contained in the Proxy Statement is not incorporated by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information respecting security ownership of certain beneficial owners and
management set forth under the caption "Security Ownership of Principal
Stockholders and Management" on Page 8 of the Proxy Statement is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information respecting certain relationships and transactions of management
set forth under the captions "Compensation Committee Interlocks and Insider
Participation" on Page 4 and "Certain and Relationships and Related
Transactions" on Page 10 of the Proxy Statement is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) 1. Financial Statements.
The Company's audited financial statements are set forth at the following pages
of this report:
Page
Report of Independent Accountants..........................................19
Consolidated Balance Sheets................................................20
Consolidated Statements of Operations......................................21
Consolidated Statements of Stockholders' Equity............................22
Consolidated Statements of Cash Flows......................................23
Notes to Consolidated Financial Statements.................................24
2. Financial Statement Schedules.
Financial statement schedules are not required because all required information
is included in the financial statements.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the fourth quarter ended December
31, 1997.
(c) Exhibits
Exhibit
Number Description
3.1 <F1> Restated Articles of Incorporation.
3.2 <F1> Amended By-Laws dated September 27, 1994.
4.1 <F1> Restated Articles of Incorporation.
4.2 <F1> Amended By-Laws dated September 27, 1994.
10.3 <F2> 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.
10.4 <F1> 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.
10.5 <F1> 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.
10.8 <F1> Incentive Stock Plan filed as Exhibit 10.9.
10.9 <F1> 401(k) Plan filed as Exhibit 10.10.
10.12 <F3> Note Purchase Agreement dated October 15, 1995, among Covenant
Transport, Inc., a Tennessee corporation and CIG & Co.
10.13 <F3> First Amendment to Credit Agreement and Waiver dated October 15,
1995.
10.14 <F4> Participation Agreement dated March 29, 1996, among Covenant
Transport, Inc., a Tennessee corporation, Lease Plan USA, Inc.,
and ABN-AMBO Bank, N.V., Atlanta Agency.
10.15 <F4> Second Amendment to Credit Agreement and Waiver dated April 12,
1996.
10.16 <F4> First Amendment to Note Purchase Agreement and Waiver dated April
1, 1996.
10.17 <F5> Third Amendment to Credit Agreement and Waiver dated March 31,
1997, filed as Exhibit 10.11.
10.18 <F5> Waiver to Note Purchase Agreement dated March 31, 1997, filed as
Exhibit 10.12.
10.19 Second Amendment to Note Purchase Agreement dated December 30,
1997.
10.20 Fourth Amendment to Credit Agreement dated December 31, 1997.
10.21 Stock Purchase Agreement made and entered into as of October 10,
1997, by and among Covenant Transport, Inc., a Nevada
corporation; Russell Meyer; and Bud Meyer Truck Lines, Inc., a
Minnesota corporation.
21 List of subsidiaries.
23.1 Consent of Coopers & Lybrand L.L.P., independent accountants.
27 Financial Data Schedule.
- --------------
<FN>
<F1> Filed as an exhibit to the registrant's Registration Statement on Form
S-1, Registration No. 33-82978, effective October 28, 1994, and
incorporated herein by reference.
<F2> Filed as an exhibit to the registrant's Form 10-Q for the quarter ended
March 31, 1995, and incorporated herein by reference.
<F3> Filed as an exhibit to the registrant's Form 10-K for the year ended
December 31, 1995, and incorporated herein by reference.
<F4> Filed as an exhibit to the registrant's Form 10-Q for the quarter ended
March 31, 1996, and incorporated herein by reference.
<F5> Filed as an exhibit to the registrant's Form 10-Q for the quarter ended
March 31, 1997, and incorporated herein by reference.
</FN>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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: March 26, 1998 By: /s/ Joey B. Hogan
------------------------------ ----------------------
Joey B. Hogan
Treasurer and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Position Date
/s/ David R. Parker Chairman of the Board,
David R. Parker President, and Chief Executive
Officer (principal executive officer) March 26, 1998
/s/ Joey B. Hogan Treasurer and Chief Financial Officer
Joey B. Hogan (principal financial and accounting
officer) March 26, 1998
/s/ R. H. Lovin, Jr.
R. H. Lovin, Jr. Director March 26, 1998
/s/ Michael W. Miller
Michael W. Miller Director March 26, 1998
/s/ William T. Alt
William T. Alt Director March 26, 1998
/s/ Hugh O. Maclellan, Jr.
Hugh O. Maclellan, Jr. Director March 26, 1998
/s/ Mark A. Scudder
Mark A. Scudder Director March 26, 1998
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Covenant Transport, Inc.
We have audited the accompanying consolidated balance sheets of Covenant
Transport, Inc. and its subsidiaries (the Company) as of December 31, 1996 and
1997 and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Covenant
Transport, Inc. and subsidiaries as of December 31, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Knoxville, Tennessee
January 31, 1998
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
1996 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,491,543 $ 2,609,520
Accounts receivable, net of allowance of
$500,000 in 1996 and $810,000 in 1997 29,955,577 37,792,308
Drivers advances and other receivables 3,230,857 964,575
Tire and parts inventory 880,086 1,120,684
Prepaid expenses 3,781,003 3,773,556
Deferred income taxes 248,000 1,111,000
------------ ------------
Total current assets 41,587,066 47,371,643
Property and equipment, at cost 183,136,067 228,931,936
Less accumulated depreciation and amortization 38,752,116 67,310,934
------------ ------------
Net property and equipment 144,383,951 161,621,002
Other 1,177,158 6,263,491
------------ ------------
Total assets $187,148,175 $215,256,136
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt 50,000 1,565,639
Accounts payable 3,892,208 5,328,346
Accrued expenses 4,480,151 9,073,554
Accrued income tax -- 724,815
------------ ------------
Total current liabilities 8,422,359 16,692,354
Long-term debt, less current maturities 83,110,000 80,811,783
Deferred income taxes 13,886,000 22,155,000
------------ ------------
Total liabilities 105,418,359 119,659,137
Stockholders' equity:
Class A Common Stock, $.01 par value;
20,000,000 shares authorized; 11,000,000
and 11,010,250 shares issued and outstanding
as of 1996 and 1997, respectively 110,000 110,103
Class B common stock, $.01 par value;
5,000,000 shares authorized; 2,350,000 shares
issued and outstanding as of 1996 and 1997,
respectively 23,500 23,500
Additional paid-in-capital 50,469,596 50,634,369
Retained earnings 31,126,720 44,829,027
------------ ------------
Total stockholders' equity 81,729,816 95,596,999
============ ============
Total liabilities and stockholders' equity $187,148,175 $215,256,136
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
1995 1996 1997
---------- ---------- ----------
Revenue $180,345,922 $236,266,945 $297,861,080
Operating expenses:
Salaries, wages, and related expenses 83,746,833 108,817,623 131,521,804
Fuel, oil, and road expenses 37,801,823 55,340,234 64,910,201
Revenue equipment rentals and purchased
transportation 1,230,163 604,924 8,492,445
Repairs 3,568,778 4,293,141 5,884,881
Operating taxes and licenses 4,679,137 6,064,652 7,514,241
Insurance 4,907,330 6,114,526 8,655,465
General supplies and expenses 9,647,976 12,825,287 16,276,834
Depreciation and amortization, including
gain on disposition equipment 16,045,415 22,139,456 26,481,578
---------- ---------- ----------
Total operating expenses 161,627,455 216,199,843 269,737,449
---------- ---------- ----------
Operating income 18,718,467 20,067,102 28,123,631
Interest expense 4,161,668 5,987,148 6,273,324
---------- ---------- ----------
Income before income taxes 14,556,799 14,079,954 21,850,307
Income tax expense 5,274,000 5,102,000 8,148,000
========== ========== ==========
Net income $ 9,282,799 $ 8,977,954 $ 13,702,307
========== ========== ==========
Basic and diluted earnings per share:
Net income $ 0.70 $ 0.67 $ 1.03
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, and 1997
Class A Class B Additional Total
Common Common Paid-In Retained Stockholders'
Stock Stock Capital Earnings Equity
----------------------------------------------------
Balances at
January 1, 1995 $110,000 $23,500 $ 50,469,596 $12,865,967 $63,469,063
Net income -- -- -- 9,282,799 9,282,799
--------------------------------------------------------
Balances at
December 31, 1995 110,000 23,500 50,469,596 22,148,766 72,751,862
Net income -- -- -- 8,977,954 8,977,954
--------------------------------------------------------
Balances at
December 31, 1996 110,000 23,500 50,469,596 31,126,720 81,729,816
Exercise of employee
stock options 103 -- 164,773 -- 164,876
Net income -- -- -- 13,702,307 13,702,307
--------------------------------------------------------
Balances at
December 31, 1997 $110,103 $23,500 $ 50,634,369 $44,829,027 $95,596,999
========================================================
The accompanying notes are an integral part of these consolidated financial
statements.
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
1995 1996 1997
-------------------------------------
Cash flows from operating activities:
Net income $ 9,282,799 $ 8,977,954 $ 13,702,307
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for losses on receivables 150,000 407,655 457,665
Depreciation and amortization 16,787,219 22,781,481 27,363,501
Deferred income tax expense 4,673,000 4,050,000 4,354,000
Gain on disposition of
property and equipment (741,804) (642,025) (881,922)
Changes in operating assets and
liabilities:
Receivables and advances (19,610,235) 3,010,662 (2,580,948)
Prepaid expenses (1,298,535) (1,088,845) 200,113
Tire and parts inventory (301,696) (78,626) (155,794)
Accounts payable, accrued
expenses, and accrued income
taxes 185,885 1,707,242 2,785,653
-------------------------------------
Net cash flows provided by operating
activities 9,126,633 39,125,498 45,245,575
Cash flows from investing activities:
Acquisition of property and equipment (72,431,927) (49,142,303) (54,027,486)
Proceeds from disposition of property
and equipment 16,942,319 10,219,276 32,023,244
Acquisition of intangibles -- -- (1,250,000)
Acquisition of business- Bud Meyer<F1> -- -- (4,350,442)
Covenant not to compete (200,000) -- --
-------------------------------------
Net cash flows from investing activities (55,689,608) (38,923,027) (27,604,684)
Cash flows from financing activities:
Exercise of stock options -- -- 164,876
Proceeds from issuance of long-term
debt 84,000,000 3,000,000 --
Repayments of long-term debt (41,494,926) (40,000) (18,563,513)
Deferred debt issuance cost (358,172) (132,216) (124,277)
-------------------------------------
Net cash flows provided/(used) by
financing activities 42,146,902 2,827,784 (18,522,914)
-------------------------------------
Net change in cash and cash equivalents (4,416,073) 3,030,255 (882,023)
Cash and cash equivalents at beginning
of period 4,877,361 461,288 3,491,543
-------------------------------------
Cash and cash equivalents at end of
period $ 461,288 $ 3,491,543 $ 2,609,520
=====================================
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest $ 3,607,927 $ 5,905,000 $ 6,147,050
=====================================
Income taxes $ 601,000 $ 795,000 $ 2,927,376
=====================================
<FN>
<F1> Acquisition of business presented net of acquired cash of $347,688 and
receivable from officer of acquired company of $501,870.
</FN>
The accompanying notes are an integral part of these consolidated financial
statements.
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Covenant Transport, Inc. (the Company) is a long-haul
truckload carrier that transports time-sensitive freight on express delivery
schedules.
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company, a holding company incorporated in the state of Nevada
in 1994, and its wholly-owned subsidiaries, Covenant Transport, Inc., a
Tennessee corporation, Bud Meyer Truck Lines, Inc., a Minnesota corporation,
Covenant Leasing, Inc., a Nevada corporation, Covenant Acquisition Co., a Nevada
corporation, and Intellectual Property Co., a Nevada corporation. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Revenue Recognition - Revenue, drivers' wages and other direct operating
expenses are recognized on the date shipments are completed to the customer.
Cash and Cash Equivalents - The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
Tires and Parts Inventory - Tires on new revenue equipment are capitalized as a
component of the related equipment cost when the vehicle is placed in service
and recovered through depreciation over the life of the vehicle. Replacement
tires and parts on hand at year end are recorded at the lower of cost or market
with cost determined using the first-in, first-out method.
Property and Equipment - Depreciation and amortization of property and equipment
is calculated on the straight-line method over the estimated useful lives of the
assets. Salvage values of 25% to 33 1/3% and lives of five to seven years are
used in the calculation of depreciation for revenue equipment.
In accordance with industry practices, the gains or losses on disposal of
revenue equipment are included in depreciation and amortization in the
statements of operations.
Capital Structure - The shares of Class A and B Common Stock are substantially
identical except that the Class B shares are entitled to two votes per share.
The terms of future issuances of preferred shares will be set by the Board of
Directors.
Insurance and Other Claims - Losses resulting from claims for personal injury,
property damage, cargo loss and damage, and other sources are covered by
insurance, subject to deductibles. Losses resulting from uninsured claims are
recognized when such losses are known and estimable.
Concentrations of Credit Risk - The Company performs ongoing credit evaluations
of its customers and does not require collateral for its accounts receivable.
The Company maintains reserves which management believes are adequate to provide
for potential credit losses. The Company's customer base spans the continental
United States.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Earnings Per Share. Effective December 31, 1997, the Company adopted Statement
of Financial Accounting Standards No. 128, Earnings Per Share. The standard
replaces the presentation of primary EPS with a presentation of basic EPS and
replaces the presentation of fully diluted EPS with diluted EPS. Basic income
per share is computed by dividing net income available for common shareholders
by the weighted average number of shares of common stock outstanding. Diluted
income per share is computed by dividing adjusted net income by the weighted
average number of shares of common stock and assumed conversions of dilutive
securities outstanding during the respective periods. Dilutive
securities represented by options have been included in the computation. The
Company uses the treasury stock method for calculating the dilutive effect of
options.
Recent Accounting Pronouncements - Effective December 31, 1997, the Company
implemented Statement of Financial Accounting Standards No. 129, Disclosure of
Information about Capital Structure. The Statement consolidates disclosures
required by several existing pronouncements regarding an entity's capital
structure. The Company's disclosures are already in compliance with such
pronouncements and, accordingly, SFAS No. 129 does not require any change to
existing disclosures.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income. The
Statement establishes standards for reporting comprehensive income and its
components in a full set of financial statements. The Statement is effective for
fiscal years beginning after December 15, 1997.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures About Segments of an
Enterprise and Related Information. This Statement establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Statement is
effective for fiscal years beginning after December 31, 1997. In the initial
year of application, comparative information for earlier years is to be
restated. The Company is evaluating SFAS No. 131 to determine the impact, if
any, on its reporting and disclosure requirements.
2. OTHER ASSETS
A summary of other assets as of December 31, 1996 and 1997 is as follows:
1996 1997
------------- --------------
Covenants not to compete, net $ 252,500 $ 1,232,083
Deferred debt costs, net 262,486 398,961
Goodwill, net -- 2,459,058
Split dollar life insurance 425,279 556,877
Cash surrender value of life insurance 106,078 106,078
Insurance deposit -- 873,477
Other 130,815 636,957
============= ==============
$ 1,177,158 $ 6,263,491
============= ==============
3. PROPERTY AND EQUIPMENT
A summary of property and equipment, at cost, as of December 31, 1996 and 1997
is as follows:
1996 1997
------------- --------------
Revenue equipment $168,059,349 $ 207,990,788
Land and improvements 3,687,215 4,425,629
Buildings and leasehold improvements 1,706,048 3,135,866
Communications equipment 6,428,634 8,466,052
Other 3,123,425 4,911,801
Construction in process 131,396 1,800
------------- --------------
$183,136,067 $ 228,931,936
============= ==============
4. LONG-TERM DEBT
Long term debt consists of the following at December 31, 1996 and 1997:
1996 1997
--------------------------------
Borrowings under $100 million credit agreement $ 58,000,000 $ 52,000,000
10-year senior notes 25,000,000 25,000,000
Notes to unrelated individuals non-compete
agreements 160,000 1,060,000
Equipment and vehicle obligations with
commercial lending institutions, with fixed
interest rates ranging from 5.875% to
12.50% at 1997 -- 4,317,422
--------------------------------
$ 83,160,000 $ 82,377,422
Less current maturities 50,000 1,565,639
--------------------------------
$ 83,110,000 80,811,783
================================
The Company is party to a credit agreement with a group of banks with maximum
borrowings of $100 million. Borrowings related to revenue equipment are limited
to the lesser of 90% of the net book value of revenue equipment or $55 million.
Working capital borrowings are limited to 85% of eligible accounts receivable.
Letters of credit are limited to an aggregate commitment of $10 million. The
credit agreement includes a "security agreement" such that the credit agreement
may be collateralized by virtually all assets of the Company if a covenant
violation occurs. A commitment fee of 0.225% per annum is due on the daily
unused portion of the credit agreement. The credit agreement is guaranteed by
Covenant Transport, Inc. a Nevada corporation, Intellectual Property Co., a
Nevada corporation, Bud Meyer Truck Lines, Inc., a Minnesota corporation, and
Covenant Acquisition Co., a Nevada corporation.
The credit agreement revolves for 1998 and 1999 and then has a term out in 2000.
Payments for interest are due quarterly in arrears with principal payments due
in 12 equal quarterly installments beginning on the second anniversary of the
date of the credit agreement. The Company renewed the loan in December 1997 and
anticipates renewing the line of credit on an annual basis. Borrowings under the
credit agreement may be 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 0.375% and 1% based on cash flow coverage and
a defined debt to capitalization ratio. At December 31, 1997, the margin was
0.5%.
During February and May 1995, the Company entered into interest rate swap
agreements that fixed interest rates on $28 million and $10 million of the
borrowings under the credit agreement at 6.9% and 5.8%, respectively, plus the
applicable margin under the credit agreement for two years. A $25 million
interest rate swap agreement was completed in 1996 that expires in February 1999
at 5.9% plus the applicable margin. During October 1997 the Company entered into
an interest rate swap agreement with a fixed interest rate on $10 million of the
borrowing under the credit agreement at 5.95% plus the applicable margin for two
years. All remaining borrowings under the credit agreement are at one, two, or
three month LIBOR.
During August 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 four equal
annual installments beginning October 1, 2002. Interest accrues at 7.39% per
annum.
The credit agreement and senior note agreement subject the Company to certain
restrictions and covenants related to, among others, dividends, tangible net
worth, cash flow, acquisitions and dispositions, and total indebtedness.
The notes for non-compete agreements resulted from purchases of certain assets
of two companies completed in 1995 and the purchase of certain assets of a
company completed in 1997. Revenue equipment, customer lists, and covenants not
to compete were purchased for amounts totaling $1,919,532 for the 1995
purchases. Customer list and covenants not to compete were purchased for
$2,033,000 for the 1997 purchase.
The maturities of long term debt at December 31, 1997 are as follows:
1998 $ 1,565,639
1999 $ 1,521,875
2000 $ 53,207,847
2001 $ 904,354
2002 $ 177,707
5. RELATED PARTY TRANSACTIONS
Transactions involving related parties not otherwise disclosed herein are as
follows:
During 1996 and 1997, the Company sold certain of its used tractors and trailers
to corporations owned by related parties for an aggregate of approximately
$103,000 in 1996 and $1,161,000 in 1997. In all cases, the Company received
amounts equal to, or in excess of, the trade-in amounts guaranteed by the
tractor manufacturer or fair values listed in industry trailer publications.
In June 1997 the Company obtained a promissory note in the amount of $480,000
from a related party. Principal and related interest at the rate of 7% shall be
due on or before June 2001.
6. LEASES
The Company has operating lease commitments for office and terminal properties
and revenue equipment, exclusive of owner/operator rentals, trip lease
agreements, and month-to-month equipment rentals, in the following amounts at
December 31, 1997:
Year ending December 31:
1998 $ 6,643,899
1999 $ 6,375,157
2000 $ 5,173,901
2001 $ 1,626,579
2002 $ 1,141,460
Total rental expense is summarized as follows for the years ended December 31,
1995, 1996, and 1997:
1995 1996 1997
------------------------------------------
Revenue equipment rentals $ 914,034 $ 338,283 $ 1,618,973
Owner/operator rentals 70,926 -- 6,860,853
Terminal rentals 531,948 606,424 1,503,523
Other equipment rentals 451,092 505,062 1,181,589
==========================================
$ 1,968,000 $ 1,449,769 $ 11,164,938
==========================================
During April 1996, the Company entered into an agreement to lease its
headquarters and terminal in Chattanooga under an operating lease. The lease
provides for rental payments to be variable based upon LIBOR interest rates for
five years. The Company entered into an agreement with the lessee to fix the
rental payments from January 1997 until July 2000 at approximately $87,000 per
month.
Covenant leases property in Chattanooga, Tennessee from the principal
stockholder of the Company. Effective July 1, 1997, the monthly rental was
approximately $15,000 per month. The Company also leases a property at Greer,
South Carolina for annual rent of $12,000 from the principal stockholder.
Included in terminal rentals are payments of $239,344, $237,664, and $224,172
for the years ended December 31, 1995, 1996, and 1997, respectively, to the
principal stockholder of the Company for the rental of terminal facilities.
7. INCOME TAX EXPENSE
Income tax expense for the years ended December 31, 1995, 1996, and 1997 is
comprised of:
1995 1996 1997
------------------------------------
Federal, current $ 601,000 $ 795,000 $3,530,000
Federal, deferred 4,380,000 3,984,000 3,941,000
State, current -- 257,000 263,000
State, deferred 293,000 66,000 414,000
====================================
$5,274,000 $5,102,000 $8,148,000
====================================
Income tax expense varies from the amount computed by applying the federal
corporate income tax rate of 35% to income before income taxes for the years
ended December 31, 1995, 1996 and 1997 as follows:
1995 1996 1997
-------------------------------------
Computed "expected" income tax expense $ 5,095,000 4,928,000 7,648,000
Adjustments in income taxes resulting
from:
State income taxes, net of federal
income tax effect 189,000 183,000 440,000
Permanent differences and other, net (10,000) (9,000) 60,000
=====================================
Actual income tax expense $ 5,274,000 5,102,000 8,148,000
=====================================
The temporary differences and the approximate tax effects that give rise to the
Company's net deferred tax liability at December 31, 1996 and 1997 are as
follows:
1996 1997
----------------- ----------------
Deferred tax assets:
Allowance for doubtful accounts $ 180,000 $ 292,000
Accrued expenses 68,000 1,111,000
Loss carryforwards 9,186,000 3,595,000
Alternative minimum tax credits 2,969,000 5,473,000
Contributions 309,000 --
Investment tax credits carryforward 82,000 82,000
Intangible Assets 29,000 126,000
----------------- ----------------
12,823,000 10,679,000
Deferred tax liability:
Depreciation 26,461,000 31,723,000
----------------- ----------------
Net deferred tax liability 13,638,000 21,044,000
Portion reflected as current asset 248,000 1,111,000
================= ================
Net deferred tax liability $ 13,886,000 $ 22,155,000
================= ================
The Company has available for federal income tax purposes net operating loss and
investment tax credit carryforwards, respectively, which expire as follows:
Net Investment
Operating Loss Tax Credit
----------------- ----------------
2001 $ -- $ 82,000
2003 -- --
2005 -- --
2007 -- --
2009 -- --
2010 1,922,000 --
2011 8,065,000 --
================= ================
$ 9,987,000 $ 82,000
================= ================
8. CONTINGENCIES
The Company, in the normal course of business, is involved in certain legal
matters for which it carries liability insurance. It is management's belief that
the losses, if any, from these lawsuits will not have a materially adverse
impact on the financial condition, operations, or cash flows of the Company.
Financial risks which potentially subject the Company to concentrations of
credit risk consist of deposits in banks in excess of the Federal Deposit
Insurance Corporation limits. The Company's sales are generally made on account
without collateral. Repayment terms vary based on certain conditions. The
Company maintains reserves which management believes are adequate to provide for
potential credit losses. The majority of the Company's customer base spans the
United States. The Company monitors this risk and historically has not
experienced any losses on these financial instruments.
9. EARNINGS PER SHARE
The following table sets forth for the periods indicated the calculation of net
earnings per share included in the Company's Consolidated Statement of
Operations:
1995 1996 1997
---------- ------------ ------------
Numerator:
Net Income $ 9,282,799 $ 8,977,954 $ 13,702,307
Denominator:
Denominator for basic
earnings per share --
weighted-average shares 13,350,000 13,350,000 13,360,000
Effect of dilutive
securities:
Employee stock options -- 2,528 --
---------- ------------ ------------
Denominator for diluted
earnings per share --
adjusted weighted-average
shares and assumed
conversions 13,350,000 13,352,528 13,360,000
========== ============ ============
Basic earnings per share: $ 0.70 $ 0.67 $ 1.03
====================================
Diluted earnings per share:$ 0.70 $ 0.67 $ 1.03
====================================
10. DEFERRED PROFIT SHARING EMPLOYEE BENEFIT PLAN
The Company has a deferred profit sharing and savings plan that covers
substantially all employees of the Company with at least six months of service.
Employees may contribute up to 17% of their annual compensation subject to
Internal Revenue Code maximum limitations. The Company may make discretionary
contributions as determined by a committee of the Board of Directors. The
Company contributed approximately $326,000, $464,000, and $538,000 in 1995,
1996, and 1997, respectively, to the profit sharing and savings plan.
11. INCENTIVE STOCK PLAN
The Company has adopted an incentive stock plan. Awards may be in the form of
incentive stock awards or other forms. The Company has reserved 659,750 shares
of Class A Common Stock for distribution at the discretion of the Board of
Directors. During October 1994, the Company granted options to purchase 122,500
shares which are exercisable at the fair market value on the date of grant
($16.50) and vest at varying dates through October 1999. During June 1996, the
Company granted options to purchase 267,500 shares which are exercisable at the
fair market value on the date of grant ($15.50) and vest at varying dates
through June 2001. During 1997 the Company granted options to purchase 149,000
shares which are exercisable at the fair market value on the date of the grant
(weighted
average of $16.43) and vest at varying dates through December 2002. The options
expire 10 years from the date of grant. The following table details the activity
of the incentive stock option plan:
1995 1996 1997
---- ---- ----
Balance January 1 119,000 117,000 383,250
Granted -- 267,500 149,000
Exercised -- -- (10,250)
Canceled (2,000) (1,250) (20,500)
------------ ------------- -------------
Balance December 31 117,000 383,250 501,500
============ ============= =============
Exercisable
December 31 48,000 82,500 151,000
For the year ended December 31, 1997, 10,250 options were exercised at an
average price of $16.09. As of December 31, 1997, the Company has 501,500
options outstanding with exercise prices which range from $15.25 to $18.81 with
an average price of $15.99 and average remaining life of 8 years.
The Company accounts for its stock-based compensation plans under APB No. 25,
under which no compensation expense has been recognized because all employee
stock options have been granted with the exercise price equal to the fair value
of the Company's Class A Common Stock on the date of grant. The Company adopted
SFAS 123 for disclosure purposes only in 1996. Under SFAS No. 123, fair value of
options granted are estimated as of the date of grant using the Black-Scholes
option pricing model and the following weighted average assumptions for 1997:
risk-free interest rate of 5.50%, expected life of 5 years, dividend rate of
zero percent, and expected volatility of 18.53%. Using these assumptions, the
fair value of the employee stock options granted in 1996 and 1997 is $700,000
and $600,000 respectively, which would be amortized as compensation expense over
the vesting period of the options. Had compensation cost been determined in
accordance with SFAS No. 123, utilizing the assumptions detailed above, the
Company's net income and net income per share would have been reduced to the
following pro forma amounts for the years ended December 31, 1996, and 1997:
1996 1997
Net income:
As reported $ 8,977,954 $ 13,702,307
Pro forma 8,837,954 13,402,696
Net income per share:
As reported $ 0.67 $ 1.03
Pro forma 0.66 1.00
12. BUSINESS COMBINATIONS
In October 1997 the Company purchased all of the outstanding stock of Bud Meyer
Truck Lines, Inc. The acquisition of Bud Meyer Truck Lines has been accounted
for under the purchase method of accounting. Accordingly, the operating results
of Bud Meyer have been included in the consolidated operating results since the
date of acquisition. The purchase price of $5,200,000, net of cash received of
$347,688 and a receivable from an officer of Bud Meyer to the acquired company
of $501,870 has been allocated to the net assets acquired based on appraised
fair values at the date of acquisition as follows:
Property and equipment $ 21,300,395
Current assets 4,430,017
Goodwill 1,513,832
Other assets 906,836
Accounts payable and accrued expenses (3,968,703)
Deferred taxes (3,051,000)
Notes payable (16,780,935)
----------------
$ 4,350,422
================
The unaudited consolidated pro forma operating data for the Company, assuming
the acquisition of Bud Meyer occurred January 1, 1996.
1996 1997
--------------- ---------------
(unaudited) (unaudited)
Revenues $ 281,269,621 $ 332,007,120
Net income 9,531,607 13,166,040
Net earnings per share
Basic and diluted $ 0.71 $ 0.99
The unaudited pro forma information is presented for informational purposes only
and is not necessarily indicative of the operating results that would have
occurred had the acquisitions been consummated as of the above date, nor are
they indicative of future operating results.
In August 1997, the Company purchased certain intangible assets of Trans-Road,
Inc. for $2,250,000, of which $1,000,000 will be paid out over the next five
years.