SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-24960
Covenant Transport, Inc.
(Exact name of registrant as specified in its charter)
Nevada 88-0320154
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
400 Birmingham Hwy.
Chattanooga, TN 37419
(423) 821-1212
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive office)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days.
YES X NO __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date (September 30, 1998)
Class A Common Stock, $.01 par value: 12,558,800 shares
Class B Common Stock, $.01 par value: 2,350,000 shares
Exhibit Index is on Page 13
Page 1 of 14
PART I
FINANCIAL INFORMATION
PAGE
NUMBER
Item 1. Financial statements
Condensed consolidated balance sheets as of December 31, 1997
and September 30, 1998 (unaudited) 3
Condensed consolidated statements of operations for the three
and nine months ended September 30, 1997 and 1998 (unaudited) 4
Condensed consolidated statements of cash flows for the nine
months ended September 30, 1997 and 1998 (unaudited) 5
Notes to condensed consolidated financial statements (unaudited) 6
Item 2. Management's discussion and analysis of financial condition
and results of operations 8
PART II
OTHER INFORMATION
PAGE
NUMBER
Item 1. Legal proceedings 13
Items 2, 3, 4, and 5. Not applicable 13
Item 6. Exhibits and reports on Form 8-K 13
Page 2 of 14
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except per share data and unaudited)
December 31, September 30,
1997 1998
------------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 2,610 $ 450
Accounts receivable, net of allowance of $810
in 1997 and $1,065 in 1998 37,792 47,129
Drivers advances and other receivables 965 1,088
Tire and parts inventory 1,121 1,597
Prepaid expenses 3,773 7,691
Deferred income taxes 1,111 1,112
------------ ----------
Total current assets 47,372 59,067
Property and equipment, at cost 228,932 257,144
Less accumulated depreciation and amortization 67,311 72,219
------------ ----------
Net property and equipment 161,621 184,925
Other 6,263 5,067
------------ ----------
Total assets $ 215,256 249,059
============= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 1,566 1,461
Accounts payable 5,328 7,003
Accrued expenses 9,074 12,831
Accrued income taxes 724 2,060
------------ ----------
Total current liabilities 16,692 23,355
Long-term debt, less current maturities 80,812 65,686
Deferred income taxes 22,155 24,121
------------ ----------
Total liabilities 119,659 113,162
Stockholders' equity:
Class A common stock, $.01 par value; 11,010,250
and 12,558,800 shares issued and outstanding as of
December 31, 1997 and September 30, 1998 respectively 110 126
Class B common stock, $.01 par value; 2,350,000
shares issued and outstanding 24 24
Additional paid-in-capital 50,634 78,238
Retained earnings 44,829 57,509
------------ ----------
Total stockholders' equity 95,597 135,897
------------ ----------
Total liabilities and stockholders' equity $ 215,256 $ 249,059
============ ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3 of 14
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(in thousands except per share data and unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1998 1997 1998
---- ---- ---- ----
Revenue $ 75,308 $ 95,566 $ 207,956 $ 264,400
Operating expenses:
Salaries, wages, and related expenses 33,836 42,534 93,228 117,683
Fuel, oil and road expenses 15,405 16,869 45,877 49,125
Revenue equipment rentals and purchased
transportation 1,802 6,250 3,335 16,682
Repairs 1,615 2,222 4,186 5,866
Operating taxes and licenses 1,854 2,427 5,202 6,805
Insurance 2,109 2,530 5,800 7,348
General supplies and expenses 3,992 4,540 11,545 13,980
Depreciation and amortization, including
gain on disposition of equipment 6,807 7,901 19,496 21,937
----- ----- ------ ------
Total operating expenses 67,420 85,273 188,669 239,426
------ ------ ------- -------
Operating income 7,888 10,293 19,287 24,974
Interest expense 1,384 1,383 4,228 4,387
----- ----- ----- -----
Income before income taxes 6,504 8,910 15,059 20,587
Income tax expense 2,406 3,463 5,570 7,907
----- ----- ----- -----
Net income $ 4,098 $ 5,447 $ 9,489 $ 12,680
======= ======= ======== ========
Earnings per share:
Basic and diluted earnings per share $ 0.31 $ 0.37 $ 0.71 $ 0.89
Weighted average common shares 13,359 14,909 13,359 14,220
Outstanding
Adjusted weighted average common shares
and assumed conversions outstanding 13,359 14,909 13,359 14,231
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 4 of 14
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(in thousands and unaudited)
1997 1998
-------- --------
Cash flows from operating activities:
Net income $ 9,489 $ 12,680
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on Receivables 293 298
Depreciation and amortization 19,654 23,646
Deferred income taxes 4,506 1,966
Gain on disposition of property and equipment (158) (1,709)
Changes in operating assets and liabilities:
Receivables and advances (2,980) (8,869)
Prepaid expenses (1,172) (3,918)
Tire and parts inventory 28 (476)
Accounts payable and accrued expenses 4,825 6,769
--------- ---------
Net cash provided by operating activities 34,485 30,387
Cash flows from investing activities:
Acquisition of property and equipment (41,282) (64,422)
Acquisition of intangible assets (2,250) (200)
Proceeds from disposition of property and equipment 10,125 19,686
--------- ---------
Net cash (used in)/provided by investing activities (33,407) (44,936)
Cash flows from financing activities:
Proceeds from issuance of long-term debt 18,000 54,000
Repayments of long-term debt (20,050) (69,230)
Issuance of common stock 27,485
Exercise of stock options 146 134
--------- ---------
Net cash (used in)/provided by financing activities (1,904) 12,389
--------- ---------
Net decrease in cash and cash equivalents (826) (2,160)
Cash and cash equivalents at beginning of period 3,492 2,610
--------- ---------
Cash and cash equivalents at end of period $ 2,666 $ 450
========== =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 5 of 14
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share data and unaudited)
Note 1. Basis of Presentation
The condensed consolidated financial statements include the accounts of
Covenant Transport, Inc., a Nevada holding company, and its wholly-owned
subsidiaries (the Company). All significant intercompany balances and
transactions have been eliminated in consolidation.
The unaudited financial statements have been prepared, in accordance with
generally accepted accounting principles, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, the accompanying financial statements include all adjustments
which are necessary for a fair presentation of the results for the interim
periods presented, such adjustments being of a normal recurring nature.
Certain information and footnote disclosures have been condensed or omitted
pursuant to such rules and regulations. The December 31, 1997 Condensed
Consolidated Balance Sheet was derived from the audited balance sheet of the
Company for the year then ended. It is suggested that these condensed
consolidated financial statements and notes thereto be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's Form 10-K for the year ended December 31, 1997. Results of
operations in interim periods are not necessarily indicative of results to
be expected for a full year.
Note 2. Basic and Diluted Earnings Per Share
The following table sets forth for the periods indicated the calculation of
net earnings per share included in the Company's Condensed Consolidated
Statement of Operations:
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1998 1997 1998
---- ---- ---- ----
Numerator:
Net income $ 4,098 $ 5,445 $ 9,489 $ 12,680
Denominator:
Denominator for basic earnings per
share - weighted-average shares 13,359 14,909 13,359 14,220
Effect of dilutive securities:
Employee stock options - - - 11
--------- --------- --------- ---------
Denominator for diluted earnings
per share -- adjusted weighted -- average
shares and assumed conversions 13,359 14,909 13,359 14,231
========= ========= ========= =========
Basic earnings per share: $ 0.31 $ 0.37 $ 0.71 $ 0.89
Diluted earnings per share: $ 0.31 $ 0.37 $ 0.71 $ 0.89
Page 6 of 14
Note 3. Audit
The Internal Revenue Service is currently auditing the Company's tax return
for 1995. No assessment of additional amounts owed by the Company has been
made by the Internal Revenue Service to date. Based upon discussions with
the Company's tax advisors, management does not anticipate any material
liability resulting from the audit.
Note 4. Income Taxes
Income tax expense varies from the amount computed by applying the federal
corporate income tax rate of 37% to income before income taxes primarily due
to state income taxes, net of federal income tax effect, which were
approximately 1.9% higher in the quarter ended September 30, 1998 as
compared with the quarter ended September 30, 1997.
FORWARD LOOKING STATEMENTS
This document contains forward-looking statements in paragraphs that are
marked with an asterisk. Statements by the Company in press releases, public
filings, and stockholder reports, as well as oral public statements by
Company representatives, also may contain certain forward-looking
information. Forward-looking information is subject to certain risks and
uncertainties that could cause actual results to differ materially from
those projected. Without limitation, these risks and uncertainties include
economic factors such as recessions, downturns in customers' business
cycles, surplus inventories, inflation, fuel price increases, and higher
interest rates; the resale value of the Company's used revenue equipment;
the availability and compensation of qualified drivers; competition from
trucking, rail, and intermodal competitors; and the ability to identify
acceptable acquisition targets and negotiate, finance, and consummate
acquisitions and integrate acquired companies. Readers should review and
consider the various disclosures made by the Company in its press releases,
stockholder reports, and public filings, as well as the factors explained in
greater detail in the Company's annual report on Form 10-K.
Page 7 of 14
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's revenue grew 27.1%, to $264.4 million in the nine months ended
September 30, 1998, compared with $208.0 million during the same period of 1997.
The Company's pretax margin expanded to 7.8% of revenue from 7.3% of revenue,
reflecting improved revenue per tractor and lower costs of operation
(particularly fuel) as a percentage of revenue. Although the Company's pretax
margin expanded, there were significant fluctuations among expense categories,
primarily as a result of two factors: (i) the growing percentage of the
Company's tractor fleet being obtained through owner-operators, and (ii) the use
of operating leases to finance a substantial portion of the revenue equipment
added during the second half of 1997 and in 1998. Costs associated with revenue
equipment acquired under operating leases or through agreements with
owner-operators are expensed as "revenue equipment rentals and purchased
transportation." For these categories of equipment the Company does not incur
costs such as interest and depreciation which it does with owned equipment. In
addition, owner-operator tractors, driver compensation, fuel, communications,
and certain other expenses are borne by the owner-operator and are not incurred
by the Company. Obtaining equipment from owner-operators and under operating
leases effectively shifts expenses from interest to "above the line" operating
expenses. Because of fluctuations that may occur from time-to-time in the
percentage of the Company's fleet that is owned versus obtained from
owner-operators and under operating leases, management intends to evaluate the
Company's efficiency using pretax margin and net margin rather than operating
ratio.(*)
The following table sets forth the percentage relationship of certain items to
revenue for the three months and nine months ended September 30, 1997 and 1998:
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1998 1997 1998
---- ---- ---- ----
Revenue 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Salaries, wages, and related expenses 44.9 44.5 44.8 44.5
Fuel, oil, and road expenses 20.5 17.7 22.1 18.6
Revenue equipment rentals and purchased 2.4 6.5 1.6 6.3
transportation
Repairs 2.1 2.3 2.0 2.2
Operating taxes and licenses 2.5 2.5 2.5 2.6
Insurance 2.8 2.6 2.8 2.8
General supplies and expenses 5.3 4.8 5.5 5.3
Depreciation and amortization, including gain
on disposition of equipment 9.0 8.3 9.4 8.3
---------- --------- -------- --------
Total operating expenses 89.5 89.2 90.7 90.6
---------- --------- -------- --------
Operating income 10.5 10.8 9.3 9.4
Interest expense 1.9 1.5 2.0 1.7
---------- -------- -------- --------
Income before income taxes 8.6 9.3 7.3 7.8
Income tax expense 3.2 3.6 2.7 3.0
---------- -------- -------- --------
Net income 5.4% 5.7% 4.6% 4.8%
========== ========= ========= =========
Page 8 of 14
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998
TO THREE MONTHS ENDED SEPTEMBER 30, 1997
Revenue increased $20.3 million (26.9%), to $95.6 million in the 1998 period
from $75.3 million in the 1997 period. The revenue increase was primarily
generated by a 30.4% increase in weighted average tractors, to 2,358 during the
1998 period from 1,808 during the 1997 period, as the Company expanded
internally to serve new customers and higher volume from existing customers, as
well as externally through the acquisitions of Bud Meyer Truck Lines during
October of 1997 and Gouge Trucking, Inc. during August of 1998. The Company's
average revenue per loaded mile increased to approximately $1.19 during the 1998
period from $1.13 during the 1997 period. The increase was attributable to
per-mile rate increases negotiated by the Company as well as higher revenue per
loaded mile at Bud Meyer Truck Lines. The increase in average revenue per loaded
mile more than offset an increase in the empty miles percentage. Revenue per
total mile increased to $1.11 in the 1998 period from $1.07 in the 1997 period.
Salaries, wages, and related expenses increased $8.7 million (25.7%), to $42.5
million in the 1998 period from $33.8 million in the 1997 period. As a
percentage of revenue, salaries, wages, and related expenses decreased to 44.5%
of revenue in the 1998 period from 44.9% in the 1997 period. Driver wages as a
percentage of revenue decreased to 32.7% in the 1998 period from 33.7% in the
1997 period as the use of owner-operators more than offset a pay increase that
went into effect in April 1998. The Company also experienced an increase in
non-driving employee payroll expense to 5.5% in the 1998 period from 5.0% in the
1997 period. Although the Company is continuing to reduce the number of
non-driving employees per tractor, a larger number of participants in the
Company's bonus program as well as a larger accrual amount contributed to the
increase. In 1997 and prior years bonus amounts had not been accrued until year
end.
Fuel, oil, and road expenses increased $1.5 million (9.5%), to $16.9 million in
the 1998 period from $15.4 million in the 1997 period. As a percentage of
revenue, fuel, oil, and road expenses decreased to 17.7% of revenue in the 1998
period from 20.5% in the 1997 period primarily as a result of improved fuel
prices during the 1998 period, as well as the increased use of owner-operators
who pay for their fuel purchases. The expense for owner-operators is reflected
in the revenue equipment rentals and purchased transportation expense category.
Fuel surcharges were not in effect during the 1998 period and amounted to nearly
$.005 per mile during the 1997 period.
Revenue equipment rentals and purchased transportation increased $4.4 million
(246.8%), to $6.3 million in the 1998 period from $1.8 million in the 1997
period. As a percentage of revenue, revenue equipment rentals and purchased
transportation increased to 6.5% of revenue in the 1998 period from 2.4% in the
1997 period. During 1997, the Company began using owner-operators 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 also
entered into operating leases of 241 tractors during the fourth quarter of 1997
and 74 tractors during the third quarter of 1998 for a total of 390 tractor
leases.
Repairs increased $607,000 (37.6%), to $2.2 million in the 1998 period from $1.6
million in the 1997 period. As a percentage of revenue, repairs increased to
2.3% of revenue in the 1998 period from 2.1% in the 1997 period, primarily as a
result of an increase in the number of tractors and trailers damaged in
accidents experienced by the Company and an increase in deductible limits under
the Company's physical damage insurance to $5,000 compared with $2,500.
Operating taxes and licenses increased approximately $573,000 (30.9%), to $2.4
million in the 1998 period from $1.9 million in the 1997 period. As a percentage
of revenue, operating taxes and licenses remained essentially constant at 2.5%
in the 1998 period and in the 1997 period.
Insurance increased $421,000 (20.0%), to $2.5 million in the 1998 period from
$2.1 million in the 1997 period. As a percentage of revenue, insurance decreased
to 2.6% of revenue in the 1998 period from 2.8% in the 1997 period as the
Company continued to reduce premiums per million dollars of revenue.
General supplies and expenses, consisting primarily of driver recruiting,
communications, and facilities expenses, increased $548,000 (13.7%), to $4.5
million in the 1998 period from $4.0 million in the 1997 period. As a percentage
of revenue, general supplies and expenses decreased to 4.8% of revenue in the
1998 period from 5.3% in the 1997 period. The 1998 decrease as a percentage of
revenue is related to the termination of the lease of the former headquarters, a
telephone credit related to surcharges for 800 line access charges, as well as
the fixed nature of a portion of these costs which was more effectively spread
over higher revenue.
Depreciation and amortization, consisting primarily of depreciation of revenue
equipment, increased $1.1 million (16.1%), to $7.9 million in the 1998 period
from $6.8 million in the 1997 period. As a percentage of revenue, depreciation
and amortization decreased to 8.3% of revenue in the 1998 period from 9.0% in
the 1997 period as the Company utilized more owner operators and leased more
revenue equipment. In addition, greater revenue per tractor more efficiently
spread this fixed expense.
Interest expense remained constant at $1.4 million in the 1998 and 1997 periods.
Interest expense decreased to 1.5% of revenue in the 1998 period from 1.9% in
the 1997 period, as the Company financed more equipment under operating leases
and contracted with more owner-operators during the 1998 period. Additionally,
the Company reduced interest expense due to the repayment of $27.5 million of
indebtedness with the proceeds from the sale of stock during the second quarter.
Page 9 of 14
As a result of the foregoing, the Company's pretax margin improved to 9.3% in
the 1998 period versus 8.6% in the 1997 period.
The Company's effective tax rate was 38.9% in the 1998 period compared with
37.0% in the 1997 period reflecting increased state income taxes in the 1998
period.
Primarily as a result of the factors described above, net income increased $1.3
million (32.9%), to $5.4 million in the 1998 period (5.7% of revenue) from $4.1
million in the 1997 period (5.4% of revenue).
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998
TO NINE MONTHS ENDED SEPTEMBER 30, 1997
Revenue increased $56.4 million (27.1%), to $264.4 million in the 1998 period
from $208.0 million in the 1997 period. The revenue increase was primarily
generated by a 27.4% increase in weighted average tractors, to 2,252 during the
1998 period from 1,767 during the 1997 period, as the Company expanded
internally to serve new customers and higher volume from existing customers, as
well as externally through the acquisitions of Bud Meyer Truck Lines in October
1997 and Gouge Trucking, Inc. during August of 1998. The Company's average
revenue per loaded mile increased to approximately $1.17 during the 1998 period
from $1.12 during the 1997 period. The increase was attributable to per-mile
rate increases negotiated by the Company as well as higher revenue per loaded
mile at Bud Meyer Truck Lines. The increase in average revenue per loaded mile
more than offset an increase in the empty miles percentage. Revenue per total
mile increased to $1.10 in the 1998 period from $1.06 in the 1997 period.
Salaries, wages, and related expenses increased $24.5 million (26.2%), to $117.7
million in the 1998 period from $93.2 million in the 1997 period. As a
percentage of revenue, salaries, wages, and related expenses decreased to 44.5%
of revenue in the 1998 period from 44.8% in the 1997 period. Driver wages as a
percentage of revenue decreased to 32.4% in the 1998 period from 33.2% in the
1997 period as the use of owner-operators more than offset a pay increase that
went into effect in April 1998. The Company also experienced a slight increase
in non-driving employee payroll expense to 5.4% in the 1998 period from 5.2% in
the 1997 period.
Fuel, oil, and road expenses increased $3.2 million (7.1%), to $49.1 million in
the 1998 period from $45.9 million in the 1997 period. As a percentage of
revenue, fuel, oil, and road expenses decreased to 18.6% of revenue in the 1998
period from 22.1% in the 1997 period primarily as a result of improved fuel
prices during the 1998 period, as well as the increased use of owner-operators
who pay for their fuel purchases. The expense for owner-operators is reflected
in revenue equipment rentals and purchased transportation expense category. Fuel
surcharges were not in effect during the 1998 period and amounted to nearly $.01
per mile during the 1997 period.
Revenue equipment rentals and purchased transportation increased $13.3 million
(400.2%), to $16.7 million in the 1998 period from $3.3 million in the 1997
period. As a percentage of revenue, revenue equipment rentals and purchased
transportation increased to 6.3% of revenue in the 1998 period from 1.6% in the
1997 period. During 1997, the Company began using owner-operators, 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 also entered into
operating leases of 241 tractors during the fourth quarter of 1997 and 74
tractors during the third quarter of 1998 for a total of 390 tractor leases.
Repairs increased $1.7 million (40.1%), to $5.9 million in the 1998 period from
$4.2 million in the 1997 period. As a percentage of revenue, repairs increased
to 2.2% in the 1998 period from 2.0% of revenue in the 1997 period, primarily a
result of an increase in the number of tractors and trailers damaged in
accidents experienced by the Company and an increase in deductible limits under
the Company's physical damage insurance to $5,000 compared with $2,500.
Operating taxes and licenses increased approximately $1.6 million (30.8%), to
$6.8 million in the 1998 period from $5.2 million in the 1997 period. As a
percent of revenue, operating taxes and licenses remained essentially constant
at 2.6% in the 1998 period and 2.5% in the 1997 period.
Insurance increased $1.5 million (26.7%), to $7.3 million in the 1998 period
from $5.8 million in the 1997 period. As a percentage of revenue, insurance
remained essentially constant at 2.8% of revenue in the 1998 period and in the
1997 period as an increase in accident claims and higher deductible limits
($5,000 compared with $2,500) were offset by a reduction in insurance premiums
per million dollars of revenue.
General supplies and expenses, consisting primarily of driver recruiting,
communications, and facilities expenses, increased $2.4 million (21.1%), to
$14.0 million in the 1998 period from $11.5 million in the 1997 period. As a
percentage of revenue, general supplies and expenses decreased to 5.3% of
revenue in the 1998 period from 5.5% in the 1997 period. The 1998 decrease is
primarily related to the fixed nature of a portion of these costs which was more
effectively spread over higher revenue.
Depreciation and amortization, consisting primarily of depreciation of revenue
equipment, increased $2.4 million (12.5%), to $21.9 million in the 1998 period
from $19.5 million in the 1997 period. As a percentage of revenue, depreciation
and amortization decreased to 8.3% of revenue in the 1998 period from 9.4% in
the 1997 period as the Company utilized more owner operators and leased more
revenue equipment. In addition, greater revenue per tractor more efficiently
spread this fixed expense.
Page 10 of 14
Interest expense increased $159,000 (3.8%), to $4.4 million in the 1998 period
from $4.2 million in the 1997 period. Interest expense decreased to 1.7% of
revenue in the 1998 period from 2.0% in the 1997 period, as the Company financed
more equipment under operating leases and contracted with more owner-operators
during the 1998 period. Additionally, the Company reduced interest expense due
to the repayment of $27.5 million of indebtedness with the proceeds from the
sale of stock during the second quarter.
As a result of the foregoing, the Company's pretax margin improved to 7.8% in
the 1998 period versus 7.3% in the 1997 period.
The Company's effective tax rate was 38.4% in the 1998 period compared with
37.0% in the 1997 period reflecting increased state income taxes in the 1998
period.
Primarily as a result of the factors described above, net income increased $3.2
million (33.6%), to $12.7 million in the 1998 period (4.8% of revenue) from $9.5
million in the 1997 period (4.6% of revenue).
LIQUIDITY AND CAPITAL RESOURCES
The growth of the Company's business has required significant investments in new
revenue equipment. The Company has financed its revenue equipment requirements
with borrowings under a line of credit, cash flows from operations, long-term
operating leases, and a small portion with borrowings under installment notes
payable to commercial lending institutions and equipment manufacturers. The
Company's primary sources of liquidity at September 30, 1998, were funds
provided by operations, borrowings under its primary credit agreement, which had
maximum available borrowing of $100.0 million at September 30, 1998 (the "Credit
Agreement"), and the proceeds from a stock offering that closed May 1998. The
Company believes its sources of liquidity are adequate to meet its current and
projected needs.(*)
The Company's primary sources of cash flow from operations in the 1998 period
were net income increased by depreciation and amortization, deferred income
taxes, and accounts payable and accrued expenses. The most significant uses of
cash provided by operations were to fund prepaid expenses (primarily license
plates for revenue equipment) and to finance increases in receivables and
advances associated with the Company's revenue growth. Net cash provided by
operating activities was $30.4 million in the 1998 period and $34.5 million in
the 1997 period. The decrease in the 1998 period resulted from higher
receivables associated with a billing delay caused by the Company's imaging
system (which has since been corrected) and more current payment of taxes.(*)
Net cash used in investing activities was $44.9 million in the 1998 period and
$33.4 million in the 1997 period. These investments were primarily to acquire
additional revenue equipment as the Company expanded its operations.
Approximately $1.0 million represented the purchase price for the assets and
business of Gouge Trucking, Inc. of which approximately $200,000 was allocated
to goodwill and covenants-not-to-compete. The Company expects to expend an
additional $18.80 million on capital expenditures during 1998, including $10.8
million for the purchase of SRT, Inc., a $23 million annual revenue truckload
carrier acquired in October 1998, and approximately $8.0 million to acquire
additional revenue equipment. Total projected capital expenditures, net of
trade-ins, for 1998 are expected to be $53.0 million excluding the effect of any
potential acquisitions.(*)
The Company sold 1,540,000 shares and certain stockholders of the Company sold
960,000 shares effective April 30, 1998. The Company received net proceeds of
$27.5 million in connection with the offering. The proceeds were used to reduce
the Company's indebtedness under the revolving line of credit. The indebtedness
was incurred primarily to acquire revenue equipment. The Company did not receive
any proceeds from the sale of shares of Class A Common Stock by the selling
stockholders.
Net cash provided by financing activities of $12.4 million in the 1998 period
was related primarily to proceeds from the sale of Company shares as well as to
borrowings under the Credit Agreement. This compared with net cash used in
financing activities of $2.0 million in the 1997 period. At September 30, 1998,
the Company had outstanding debt of $67.1 million, primarily consisting of
approximately $38.0 million drawn under the Credit Agreement, $25.0 million in
10-year senior notes, and $4.1 million in term equipment financing. Interest
rates on this debt range from 5.8% to 10.8%.
The Credit Agreement is with a group of banks and has a maximum borrowing limit
of $100.0 million. Borrowings related to revenue equipment are limited to the
lesser of 90% of the net book value of revenue equipment or $100.0 million.
Working capital borrowings are limited to 85% of eligible accounts receivable.
Letters of credit are limited to an aggregate commitment of $10.0 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 0.125% per annum is due on the daily
unused portion of the Credit Agreement. The Company and all subsidiaries are
parties to the Credit Agreement and related documents.
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 are based on the
banks' base rate or LIBOR and accrue interest based on one, two, or three month
LIBOR rates plus an applicable margin that is adjusted quarterly between 0.325%
and 0.75% based on cash flow coverage. At September 30, 1998, the margin was
0.425%.
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The Credit Agreement, senior notes, and the 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 September 30, 1998.
YEAR 2000
The Year 2000 (Y2K) issue concerns the inability of information and
noninformation systems to recognize and process date-sensitive information after
1999 due to the use of only the last two digits to refer to a year. This problem
could affect both information systems (software and hardware) and other
equipment that relies on microprocessors. Management has completed a
Company-wide evaluation of this impact on its computer systems, applications,
and other date-sensitive equipment and has hired a nationally-recognized
consulting firm to make an independent assessment. All known remediation efforts
and testing of systems/equipment are expected to be completed by April 30, 1999.
The cost of the assessment and remediation efforts for the modifications and
updates to existing software is estimated to be approximately $250,000. The
Company is also in the process of monitoring the progress of material third
parties, including shippers and suppliers, in their efforts to become Y2K
compliant and expects this project to be completed by April 30, 1999.
The Company's primary information technology systems (IT Systems) include
hardware and software for billing, dispatch, electronic data interchange (EDI),
fueling, payroll, telephone, vehicle maintenance, inventory, and satellite
communications systems. The majority of the Company's IT Systems are purchased
from and maintained by third parties. The primary IT System designed by a third
party is the satellite tracking system, which tracks equipment locations,
provides dispatch and routing information, and allows in-cab communications with
drivers. The Company's operating system that manages payroll, billing, dispatch,
vehicle maintenance, and inventory is also provided by a third party. The
Company has been informed by the providers of these systems that they are Y2K
compliant. Another significant IT System provided by a third party transmits
payroll funds to drivers and allows drivers to purchase fuel and other items
outside the Company's terminal locations. The Company has been informed by this
provider that it expects to be Y2K compliant by June 1999. Although the Company
believes it is Y2K compliant in its EDI applications, the Company has not
completed its review of Y2K compliance of EDI applications of its shippers.
The Company has reviewed its risks associated with microprocessors embedded in
facilities and equipment (Non-IT Systems). The primary Non-IT Systems includes
microprocessors in tractor engines and other components, terminal facilities,
satellite communications units, and telecommunications and other office
equipment. The Company's assessment of its revenue equipment, satellite
communications units, and office equipment Non-IT Systems has revealed low risk
of material replacement requirements. Such equipment is relatively new and was
designed to be Y2K compliant. The Company is continuing to assess its Non-IT
Systems in its terminal facilities but believes that the risk of a
service-interrupting failure in these systems is low.
The Company could be faced with severe consequences if Y2K issues are not
identified and resolved in a timely manner by the Company and material third
parties. The Company's primary risk relating to Y2K compliance is the
possibility of service disruption from third-party suppliers of satellite
communications, telephone, fueling, and financial services. A worst-case
scenario would result in the short term inability of the Company to deliver
freight for its shippers. This would result in lost revenues; however, the
amount would be dependent on the length and nature of the disruption, which
cannot be predicted or estimated. The Company is in the process of developing
contingency plans in case business interruptions do occur. Management expects
these plans to be completed by June 30, 1999.
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COVENANT TRANSPORT, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
None
Items 2, 3, 4, and 5. Not applicable.
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
3.1+ Restated Articles of Incorporation.
3.2+ Amended By-Laws dated September 27, 1994.
4.1+ Restated Articles of Incorporation.
4.2+ Amended By-Laws dated September 27, 1994.
10.3++ 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.
10.8+ Incentive Stock Plan filed as Exhibit 10.9.
10.9+ 401(k) Plan filed as Exhibit 10.10.
10.12+++ Note Purchase Agreement dated October 15, 1995, among Covenant
Transport, Inc., a Tennessee corporation and CIG & Co.
10.13+++ First Amendment to Credit Agreement and Waiver dated October 15, 1995.
10.14++++ Participation Agreement dated March 29, 1996, among Covenant
Transport, Inc., a Tennessee corporation, Lease Plan USA, Inc., and
ABN-AMRO Bank, N.V., Atlanta Agency.
10.15++++ Second Amendment to Credit Agreement and Waiver dated April 12, 1996.
10.16++++ First Amendment to Note Purchase Agreement and Waiver dated April 1,
1996.
10.17+++++Third Amendment to Credit Agreement and Waiver dated March 31, 1997,
filed as Exhibit 10.11.
10.18+++++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.
27 Financial Data Schedule.
+ 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.
++ Filed as an exhibit to the registrant's Form 10-Q for the quarter
ended March 31, 1995, and incorporated herein by reference.
+++ Filed as an exhibit to the registrant's Form 10-K for the year ended
December 31, 1995, and incorporated herein by reference.
++++ Filed as an exhibit to the registrant's Form 10-Q for the quarter
ended March 31, 1996, and incorporated herein by reference.
+++++ Filed as an exhibit to the registrant's Form 10-Q for the quarter
ended March 31, 1997, and incorporated herein by reference.
# Filed as an exhibit to the registrant's Annual Report on Form 10-K
for the period ended December 31, 1997, and incorporated herein by
reference.
(b) No reports on Form 8-K have been filed during the quarter for which
this report is filed.
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COVENANT TRANSPORT, INC.
Date: November 13, 1998 /s/ Joey B. Hogan
Joey B. Hogan
Treasurer and Chief Financial Officer
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