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, 1996
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 (I.R.S. Employer Identification No.)
of Incorporation or Organization)
400 Birmingham Highway
Chattanooga, Tennessee 37404
(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 X 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. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $35,507,000 as of February 4, 1997 (based upon the
$13.50 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 holders of more than 10% of a class
of outstanding common stock, and no other persons, are affiliates.
As of February 4, 1997, the registrant had 11,000,000 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 1997 annual meeting of
stockholders that will be filed no later than April 30, 1997.
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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 6 herein
Item 3 Legal Proceedings Page 6 herein
Item 4 Submission of Matters to a Vote of Stockholders Page 6 herein
Part II
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters Page 7 herein
Item 6 Selected Financial Data Page 8 herein
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations Page 9 herein
Item 8 Financial Statements and Supplementary Data Page 14 herein
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure Page 14 herein
Part III
Item 10 Directors and Executive Officers of the Registrant
Pages 2 and 3 of Proxy Statement
Item 11 Executive Compensation Pages 4 and 5 of Proxy Statement
Item 12 Security Ownership of Certain Beneficial Owners and
Management Page 7 of Proxy Statement
Item 13 Certain Relationships and Related Transactions
Pages 4 and 9 of Proxy Statement
Part IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K Page 16 herein
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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.
2
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PART I
ITEM 1. BUSINESS
General
Covenant Transport, Inc. ("Covenant," or the "Company") is a long-haul truckload
carrier specializing in the express time-in-transit and time-definite
transportation of freight over transcontinental traffic lanes. Covenant routes
the majority of its trucks between the West Coast and the Northeast and
Southeast, using primarily twoperson driver teams to provide reliable, expedited
service. Covenant targets the West Coast market because its predominantly
team-operated fleet can compete effectively for transcontinental shipments.
Covenant was founded by David and Jacqueline Parker in 1985 with 25 tractors and
50 trailers. In eleven years of operating, the Company's fleet has grown to
1,629 tractors and 3,048 trailers, and in 1996 revenue grew to $236.3 million.
All of the Company's revenue growth was internal until 1995, when it acquired
certain assets of two Dalton, Georgia-based truckload carriers that specialized
in transporting carpet to the Pacific Northwest. The two carriers had operated
approximately 60 tractors before the acquisitions. The Company's corporate
structure includes Covenant Transport, Inc. a Nevada holding company organized
in May 1994, and its wholly owned operating subsidiary, Covenant Transport,
Inc., a Tennessee corporation organized in November 1985.
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. Covenant's sales force emphasizes the long-haul,
time-sensitive freight that railroads, rail-truck intermodal combinations, and
less service-oriented carriers typically do not divert with lower rates.*
The Company's primary customers include retailers and manufacturers of goods
such as garments, consumer electronics, appliances, carpet, textiles, and tires.
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 10% or more of the Company's revenue during any of
the last three fiscal years.
In 1995, Covenant initiated dedicated fleet service for several customers. The
Company offers dedicated fleets to replace private fleets formerly owned and
operated by a shipper or to cover customers' high volume, predictable movements.
Dedicated operations offer greater compensation, more predictability, and higher
driver satisfaction than other operations in certain situations. While 100
tractors were assigned to dedicated fleets at year-end 1995, this number was
reduced to approximately 30 tractors at year-end 1996. Management intends to
continue to use this approach for servicing certain customers and may expand
this niche again in the future.*
Covenant conducts its central dispatch from its headquarters in Chattanooga,
Tennessee. 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 satellitebased 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
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*May contain "forward-looking" statements.
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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.
As an additional service to customers, the Company offers electronic data
interchange ("EDI"), which permits real-time information flow, reductions or
eliminations in paperwork, and fewer clerical personnel. EDI permits customers
to receive updates as to cargo position, delivery times, and other information.
It also allows customers to electronically communicate delivery, local
distribution, and account payment instructions.
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, from
seeking freight that requires no driver loading or unloading, to the welcome
sign at the Company's headquarters: "At Covenant, A Satisfied Driver Is Our #1
Concern." 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. Management
believes the Company maintains an excellent relationship with its drivers by
conducting regular surveys, working continuously to address concerns, responding
to suggestions, and keeping its commitments.*
Covenant differentiates itself 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. At December, 31,
1996, teams operated over 65% 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 1997, the Company ceased leasing its
personnel from a third party leasing company and employed them directly. At
December 31, 1996, the Company employed 3,007 drivers and 466 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 1,629 tractors had an average age of 16.8 months at
December 31, 1996, 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, 1996, the Company owned 3,048 trailers. Most of the Company's
trailers were 53-feet long by 102-inch wide, dry vans. the Company also operated
approximately 150 53-foot temperature-controlled trailers. At year end the
trailers had a fleetwide average age of 24 months.
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*May contain "forward-looking" statements.
4
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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 expedited,
time-definite, 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. In addition to competing with other
trucking companies, the Company competes with railroads and rail-truck
intermodal service. The Company participates in the air-freight market by
cost-effectively transporting deferred shipments for air-freight carriers or by
dividing such shipments. The Company 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. Because rail and
railtruck intermodal service generally has created downward pressure on
truckload rates, particularly on traffic that is not time-sensitive, the Company
focuses on transporting long-haul traffic with required pick-up time and
offering guaranteed delivery within specified hours-in-transit, rather than
providing all types of service requested by all shippers.*
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 will have 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 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 fuel storage tanks at any of its locations. Management believes
that its operations are in material compliance with current laws and
regulations.
Safety
Covenant maintains an active safety and loss prevention program. The DOT has
given the Company a "satisfactory" safety and fitness rating. The Company
verifies the driving records of all new drivers before they complete the
Company's orientation.
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*May contain "forward-looking" statements.
5
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Fuel Availability and Cost
The Company actively manages its fuel costs. The Company's drivers purchase
virtually all of the Company's fuel through service centers with which the
Company has negotiated volume purchasing discounts. In 1996, a sharp increase in
fuel prices occurred nationwide as a result of a perceived shortage in supply.
The Company historically has been able to pass through most increases in fuel
prices and taxes to customers in the form of higher rates. As of December 31,
1996, the Company had entered into fuel surcharge agreements with a majority of
its customers. The fuel surcharges are adjusted weekly based on the national
weekly average price of diesel fuel published by the Department of Energy.
Management expects to maintain the fuel surcharges and seek additional rate
increases in response to the increased cost of fuel.*
ITEM 2. PROPERTIES
Truckload carriers minimize fixed operational costs by delivering full trailer
loads from origin to destination, rather than incurring the costs of operating
pick-up and delivery stations to complement line haul service. Covenant
maintains eight strategically-located terminals. The terminals provide centers
for recruiting drivers in intermediate locations on primary traffic lanes and
providing a base for such drivers in proximity to their homes, serving as a
transfer location for trailer relays on transcontinental routes, providing
maintenance service at two locations, as alternatives to commercial shops, and
providing parking space for equipment dispatch and maintenance.
The Company's headquarters and main terminal was relocated during the last week
of 1996 to leased property near Chattanooga, Tennessee on approximately 75 acres
of land. 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 facility. The Company's other maintenance facility is at Oklahoma
City. The Company also leases facilities in Greer, South Carolina; Pomona,
California; Dallas, Texas; El Paso, Texas; Delanco, New Jersey; and
Indianapolis, Indiana. The former headquarters in Chattanooga and the Greer
terminal facilities are leased from related parties.
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, personal injury, property damage, and physical damage claims.
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, 1996, no matters were
submitted to a vote of security holders.
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*May contain "forward-looking" statements.
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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 Nasdaq National Market
under the Nasdaq symbol "CVTI" since October 28, 1994, the date of the Company's
initial public offering. 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 October 28, 1994 to December 31, 1996.
Period High Low
- - -------------------------------------------------- --------------- -----------
Calendar Year 1994
4th Quarter ........................... $ 20.50 $ 16.00
Calendar Year 1995
1st Quarter ........................... $ 19.875 $ 14.00
2nd Quarter ........................... $ 16.75 $ 10.625
3rd Quarter ........................... $ 17.25 $ 12.50
4th Quarter ........................... $ 14.875 $ 11.25
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
The prices reported reflect interdealer quotations without retail mark-ups,
mark-downs or commissions, and may not represent actual transactions. As of
February 4, 1997, the Company had 35 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 $70 million line of credit, $25 million in senior
notes due October 2005, and the operating lease covering the new 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.*
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*May contain "forward-looking" statements.
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ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
Years Ended December 31,
1992 1993 1994 1995 1996
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(in thousands except per share and operating data amounts)
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Statement of Operations Data:
Revenue ...................... $55,991 $ 81,911 $ 131,926 $ 180,346 $ 236,267
Operating expenses:
Salaries, wages, and related
expenses .................. 22,664 34,629 57,675 83,747 108,818
Fuel, oil, and road expenses 13,403 17,573 27,282 37,802 55,340
Revenue equipment rentals and
purchased transportation. 1,779 1,703 2,785 1,230 605
Repairs .................... 1,076 1,363 2,285 3,569 4,293
Operating taxes and licenses 1,364 2,125 3,479 4,679 6,065
Insurance (1) .............. 2,482 3,374 4,510 4,907 6,115
General supplies and expenses 3,408 5,921 8,650 9,648 12,825
Depreciation and amortization 4,059 5,850 9,310 16,045 22,139
--------------------------------------------------
Total operating expenses . 50,235 72,538 115,976 161,627 216,200
--------------------------------------------------
Operating income ......... 5,756 9,373 15,950 18,719 20,067
Interest expense ............. 3,108 3,765 4,736 4,162 5,987
--------------------------------------------------
Income before income taxes ... 2,648 5,608 11,214 14,557 14,080
Income tax expense ........... 856 1,722 3,951 5,274 5,102
--------------------------------------------------
Net income (2) ............... $1,792 $3,886 $ 7,263 $ 9,283 $ 8,978
==================================================
Net income per share ......... $ 0.18 $ 0.39 $ 0.69 $ 0.70 $ 0.67
Weighted average common
shares outstanding .......... 10,000 10,000 10,496 13,350 13,350
Balance Sheet Data:
Net property and equipment ... $37,700 $46,975 $ 87,882 $ 127,408 $ 144,384
Total assets ................. 47,542 61,628 112,552 169,381 187,148
Long-term debt, less current
maturities .................. 30,655 37,225 27,734 80,150 83,110
Stockholders' equity ......... $1,816 $5,703 $63,469 $ 72,752 $81,730
Operating Data:
Operating ratio (3) .......... 89.7% 88.6% 87.9% 89.6% 91.5%
Average revenue per loaded
mile (4) .................... $ 1.03 $ 1.05 $ 1.09 $ 1.09 $ 1.10
Empty miles percentage ....... 5.0% 6.0% 5.4% 5.6% 5.2%
Average length of haul in miles 1,829 1,821 1,840 1,811 1,780
Average miles per tractor
per year .................... 150,676 157,756 159,921 148,669 150,778
Average revenue per tractor
per week .................... 2,849 3,008 3,165 2,942 2,994
Weighted average tractors for
year (5) .................... 379 518 796 1,179 1,509
Total tractors at end of
period (5) .................. 427 621 1,001 1,343 1,629
Total trailers at end of
period (5) .................. 786 966 1,651 2,554 3,048
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(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 $1,702,000 in
1992, $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.
(4) Includes fuel surcharge in 1996. Excluding the fuel surcharge, the Company
estimates that average revenue per loaded mile was $1.09.
(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, 1996, the Company increased its
revenue at a compounded annual growth rate of 42.3%, as revenue increased to
$236.3 million in 1996 from $131.9 million in 1994. A significant increase in
fleet size to meet customer demand contributed to revenue growth over this
period. The Company's operating ratio (operating expenses as a percentage of
revenue) increased to 91.5% in 1996 from 89.6% in 1995 and 87.9% in 1994. The
increase resulted principally from high fuel prices in 1996 and overcapacity of
equipment and lower shipping demand in 1995. In addition, during 1995 and 1996
the Company faced significant rate pressure. The Company continued its growth
strategy throughout 1995 and 1996 despite lower margins to achieve greater
market recognition. Net income was $9.0 million in 1996, $9.3 million in 1995,
and $7.3 million in 1994.*
The Company completed its initial public offering during November 1994. The
Company sold 3.35 million Class A common shares which generated $50.5 million in
net proceeds. The proceeds were used to reduce debt then outstanding and to
purchase revenue equipment. Interest expense was reduced in the fourth quarter
of 1994 and subsequently has increased through the fourth quarter 1996 as the
Company incurred new debt to expand its equipment fleet. Interest expense was
$6.0 million in 1996, $4.2 million in 1995, and $4.7 million in 1994, which
reflects an increase in average debt balances combined with more favorable
interest rates. The Company has provided for substantially all of its capital
needs through a $70 million credit agreement, a $25 million senior note
agreement, and an operating lease covering its new headquarters and terminal
facility.*
The following table sets forth the percentage relationship of certain items to
revenue for the years ended December 31, 1994, 1995 and 1996:
1994 1995 1996
-------------------------
Revenue ........................................... 100.0% 100.0% 100.0%
Operating expenses:
Salaries, wages, and related expenses ....... 43.7 46.4 46.1
Fuel, oil, and road expenses ................ 20.7 21.0 23.4
Revenue equipment rentals and purchased
transportation ........................... 2.1 0.7 0.2
Repairs ..................................... 1.7 2.0 1.8
Operating taxes and licenses ................ 2.6 2.6 2.6
Insurance ................................... 3.4 2.7 2.6
General supplies and expenses ............... 6.6 5.3 5.4
Depreciation and amortization ............... 7.1 8.9 9.4
-------------------------
Total operating expenses ................ 87.9 89.6 91.5
-------------------------
Operating income ................... 12.1 10.4 8.5
Interest expense ............... .................. 3.6 2.3 2.5
-------------------------
Income before income taxes ........................ 8.5 8.1 6.0
Income tax expense ................................ 3.0 2.9 2.2
-------------------------
Net income ........................................ 5.5% 5.2% 3.8%
=========================
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 a 28.0%
increase in weighted average tractors, to 1,509 during 1996 from 1,179 during
1995, as the Company expanded to meet demand from new customers and higher
volume from existing customers. Tractor productivity also increased, as average
miles per tractor increased to 150,778 in 1996 from 148,669 in 1995, and
deadhead decreased to 5.2% of total miles in 1996 from 5.6% in 1995. Average
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* May include "forward-looking" statements.
8
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revenue per loaded mile was $1.10 in 1996 and $1.09 in 1995. Net of $1.6 million
in fuel surcharge revenue, revenue per loaded mile was $1.09 in 1996.
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% 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 longer average tenure of driving
employees and an increase in per-mile compensation in August 1996. Non-driving
employee payroll expense increased to 5.4% of revenue in 1996 from 5.1% in 1995
because of pay increases and because the Company added proportionately more
non-driver personnel than revenue equipment to support its growth. During the
fourth quarter of 1996, the Company slowed its addition of non-driver personnel.
These increases were more than offset by a reduction in health insurance,
employer paid taxes, and workers' compensation costs to 6.8% of revenue in 1996
from 8.2% in 1995, as the Company negotiated lower insurance premiums and
terminated a relationship with an employee leasing company that formerly had
employed substantially all of the Company's personnel.*
Fuel, oil, and road expenses increased $17.5 million (46.4%), to $55.3 million
in 1996 from $37.8 million in 1995. As a percentage of revenue, fuel, oil, and
road expenses increased to 23.4% in 1996 from 21.0% in 1995. The increase was
primarily a result of increased fuel prices during 1996, which was partially
offset by $1.6 million in fuel surcharges paid by customers. Additionally, motel
costs increased in 1996 compared with 1995 because of an increase in per motel
allowance given to 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% in 1996 from 0.7% in 1995, as the Company reduced the percentage of its
fleet financed under operating leases during 1996.
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% in 1996 from 2.0% in
1995 because the Company negotiated more favorable parts and warranty
agreements.
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% in 1996 from 2.7% in 1995, as the Company negotiated reduced premiums.
General supplies and expenses, consisting primarily of driver recruiting and
communications expenses, 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% 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 on
revenue equipment rentals. Amortization expense remained constant in each period
and relates to deferred debt costs incurred and covenants not to compete from
two 1995 asset acquisitions.
As a result of the foregoing, the Company's operating ratio increased to 91.5%
in 1996 from 89.6% in 1995.
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% in 1996 from 2.3% in 1995. 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.
The Company's effective tax rate was 36.2% in 1996 and 1995.
- - --------
*May contain "forward-looking" statements.
9
<PAGE>
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).
Comparison of Year Ended December 31, 1995 to Year Ended December 31, 1994
Revenue increased $48.4 million (36.7%), to $180.3 million in 1995 from $131.9
million in 1994. The revenue increase was primarily generated by a 48.1%
increase in weighted average tractors, to 1,179 during 1995 from 796 during
1994, as the Company expanded to meet demand from new customers and higher
volume from existing customers. The increase in tractors was partially offset by
a decrease in average miles per tractor to 148,669 in 1995 from 159,921 in 1994,
as an industry-wide overcapacity of equipment and a slowing economy reduced
utilization. In addition, deadhead increased to 5.6% of total miles from 5.4%.
Average revenue per loaded mile was $1.09 in 1995 and 1994.
Salaries, wages, and related expenses increased $26.0 million (45.2%), to $83.7
million in 1995 from $57.7 million in 1994. As a percentage of revenue,
salaries, wages, and related expenses increased to 46.4% in 1995 from 43.7% in
1994. Driver wages as a percentage of revenue increased to 32.8% in 1995 from
31.0% in 1994 primarily as a result of a wage increase in July 1994. Employee
leasing company charges relating to health insurance, employer paid taxes, and
workers' compensation increased to 8.2% of revenue in 1995 from 7.9% in 1994.
Fuel, oil, and road expenses increased $10.5 million (38.6%), to $37.8 million
in 1995 from $27.3 million in 1994. As a percentage of revenue, fuel, oil, and
road expenses increased to 21.0% in 1995 from 20.7% in 1994. The increase was
primarily a result of increased fuel prices in the fourth quarter of 1995.
Revenue equipment rentals and purchased transportation decreased $1.6 million
(55.8%), to $1.2 million in 1995 from $2.8 million in 1994. As a percentage of
revenue, revenue equipment rentals decreased to 0.7% in 1995 from 2.1% in 1994,
as the Company rented more tractors under month-to-month leases for new drivers
awaiting delivery of new Company-owned tractors and had more revenue equipment
under operating leases during 1994.
Repairs increased $1.3 million (56.2%), to $3.6 million in 1995 from $2.3
million in 1994. As a percentage of revenue, repairs increased to 2.0% in 1995
from 1.7% in 1994 due to the large number of used tractors that were sold in
1995 and the associated minor repairs to those tractors.
Insurance, consisting primarily of premiums for liability, physical damage, and
cargo damage insurance, increased $0.4 million (8.9%), to $4.9 million in 1995
from $4.5 million in 1994. As a percentage of revenue, insurance decreased to
2.7% in 1995 from 3.4% in 1994, as the Company's safety record continued to
improve and result in premium reductions.
General supplies and expenses, consisting primarily of driver recruiting
expenses, communications, and agent commissions, increased $1.0 million (11.5%),
to $9.6 million in 1995 from $8.6 million in 1994. As a percentage of revenue,
general supplies and expenses decreased to 5.3% in 1995 from 6.6% in 1994.
Decreases in driver recruiting expenses and agent commissions as a percent of
revenue represented the majority of the changes.
Depreciation and amortization, consisting primarily of depreciation of revenue
equipment, increased $6.7 million (72.3%), to $16.0 million in 1995 from $9.3
million in 1994. As a percentage of revenue, depreciation and amortization
increased to 8.9% in 1995 from 7.1% in 1994, as the utilization of equipment
decreased in 1995 and the Company reduced its reliance on revenue equipment
rentals. Amortization expense in 1995 related to deferred debt costs incurred in
1995 and covenants not to compete related to two 1995 asset acquisitions.
As a result of the foregoing, the Company's operating ratio increased to 89.6%
in 1995 from 87.9% in 1994.
Interest expense decreased to $4.2 million (2.3%) of revenue in 1995 from $4.7
million (3.6%) of revenue in 1994. Higher average debt balances ($58.4 million
in 1995 compared with $54.5 million in 1994) were offset by lower average
interest rates (7.3% in 1995 compared with 8.7% in 1994) and a larger revenue
base.
10
<PAGE>
The Company's effective tax rate was 36.2% in 1995 compared with 35.2% in 1994.
As a result of the factors described above, net income increased to $9.3 million
in 1995 (5.2% of revenue) from $7.3 million in 1994 (5.5% 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, 1996, were funds provided by
operations, borrowings under its $70 million credit agreement, funds provided
from its $25 million in senior notes due October 2005, and an operating lease
covering its new headquarters and terminal facility.*
The Company's primary source of cash flow from operations is net income
increased by depreciation and deferred income taxes. Historically, financing
increases in receivables and advances associated with the Company's revenue
growth has been a significant use of cash provided by operations, and management
anticipates that it will be a significant use in the future. In 1996, a decrease
in receivables and advances was attributable to collection of a $5.0 million
other receivable and rectifying an accounts receivable imbalance caused by
delays in billing for shipments in 1995 while the Company converted to new
billing software. These factors depressed cash provided by operating activities
in 1995 and inflated it in 1996. The Company's number of days outstanding in
accounts receivable increased from 39 days in 1994, to 71 days in 1995, and then
decreased to 46 days in 1996.*
Net cash provided by operating activities was $39.1 million in 1996, $9.1
million in 1995, and $15.4 million in 1994. The primary sources of funds from
operations in 1996 were net income of $9.0 million and non-cash adjustments
including depreciation of $22.8 million, deferred income taxes of $4.0 million,
accounts receivable of $3.0 million, and accounts payable of $1.7 million. The
primary operating use of funds by operating activities was to fund an increase
in prepaid expenses.
Net cash used in investing activities was $38.9 million in 1996, $55.7 million
in 1995, and $50.2 million in 1994. Such amounts were used primarily to acquire
additional revenue equipment as the Company expanded its operations. The Company
expects capital expenditures (primarily for revenue equipment), net of
trade-ins, to be approximately $50.0 million in 1997.*
Net cash provided by financing activities was $2.8 million in 1996, $42.1
million in 1995, and $38.5 million in 1994. In 1994, the initial public offering
provided $50.5 million in net proceeds. Approximately $35.4 million was used to
pay down debt and the remainder was used to purchase property and equipment. The
cash provided by financing activities in 1996 and 1995 related primarily to
borrowings under the Company's $70 million credit agreement and $25 million in
senior notes due October 2005. At December 31, 1996, the Company had outstanding
debt of $83.1 million. Interest rates on this debt ranged from 6.2% to 7.5%.
At December 31, 1996, approximately $58.1 million was drawn under the Company's
$70 million credit agreement. The credit agreement is with a syndicate of banks
and provides for outstanding borrowing to bear interest at the London Interbank
Offered Rate (LIBOR) plus an applicable margin of between 0.375% and 1.0%. At
December 31, 1996, the applicable margin was 0.625%. 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 for two
years. An additional $25 million interest rate swap agreement was completed in
1996 to fix interest rates on $25 million from February 1997 until February 1999
at 5.9% plus the applicable margin. All remaining borrowings under the credit
agreement are at one, two, or three month LIBOR plus the applicable margin.
- - --------
* May contain "forward-looking" statements.
11
<PAGE>
The Company also had outstanding $25 million in senior notes due October 2005
that were placed with an insurance company. The notes bear interest at 7.39%,
payable semi-annually. Principal payments are due in equal annual installments
beginning in October 2001. Proceeds of the senior notes were used to reduce
borrowings under the $70 million credit agreement.
The Company took possession of its new headquarters and terminal facility in
December 1996. The facility was constructed under a "build-to-suit" operating
lease and is expected to increase the Company's annual facilities costs by
approximately $750,000.*
The $70 million 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, 1996.
Inflation and Fuel Costs
With the exception of occasional fuel price increases, inflation has had a
minimal effect upon the Company's profitability in recent years. In 1996, a
sharp increase in fuel prices occurred nationwide as a result of a perceived
shortage in supply. The Company historically has been able to pass through most
increases in fuel prices and taxes to customers in the form of higher rates. As
of December 31, 1996, the Company had entered into fuel surcharge agreements or
obtained rate increases from the majority of its customers. The fuel surcharges
are adjusted weekly based on the national weekly average price of diesel fuel
published by the Department of Energy. Management expects to maintain the fuel
surcharges and seek additional rate increases. Most of the Company's operating
expenses are inflation-sensitive, with inflation generally producing increased
costs of operation. Increases in fuel prices that are not fully recovered
through fuel surcharges or rate increases may affect Covenant more than some
other carriers. Fuel expense comprises a larger percentage of revenue for
Covenant than many other carriers because of Covenant's long average length of
haul. Accordingly, the Company expects that inflation will affect its costs
other than fuel no more than it affects those of other truckload carriers.*
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 related equipment
repair increases. As a result of lower Company net income in January and
February, first quarter net income historically has been lower than net income
in each of the other three quarters of the year. The Company's equipment
utilization typically improves substantially between May and October of each
year because of the industry's seasonal shortage of equipment on traffic
originating in California. The seasonal shortage has occurred between May and
August because California produce carriers' equipment is diverted to
refrigerated traffic during those months and during September and October as a
result of an increased amount of 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 1994, 1995, and
1996. 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.*
Equipment First Second Third Fourth
Utilization Quarter Quarter Quarter Quarter
- - -----------------------------------------------------------------------
1994 37,492 40,632 40,695 40,922
1995 35,467 38,029 38,186 36,941
1996 35,067 38,462 38,989 38,036
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.
Resale of Used Revenue Equipment. The Company historically has
recognized a gain on the sale of its revenue equipment. The market for
used equipment has experienced greater supply than demand in 1995 and
1996. 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 is,
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,
railintermodal 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's audited financial statements, including its consolidated balance
sheets and consolidated statements of income, cash flows, and stockholders'
equity, and notes related thereto, are contained at pages 20 to 30 of this
report. The supplementary quarterly financial data follows:
- - --------
* May contain "forward-looking" statements.
12
<PAGE>
Quarterly Financial Data:
First Second Third Fourth
Quarter Quarter Quarter Quarter
1996 1996 1996 1996
--------------------------------------------
Revenue ............ $49,458 $59,626 $63,022 $64,161
Operating income ... 2,122 6,092 6,768 5,084
Income before taxes 754 4,600 5,186 3,540
Income taxes ....... 272 1,676 1,868 1,286
Net income ......... 482 2,924 3,318 2,254
Net income per share $ 0.04 $ 0.22 $ 0.25 $ 0.17
First Second Third Fourth
Quarter Quarter Quarter Quarter
1995 1995 1995 1995
---------------------------------------------
Revenue ............ $38,409 $44,635 $47,130 $50,171
Operating income ... 4,047 4,258 5,148 5,265
Income before taxes 3,275 3,276 4,064 3,945
Income taxes ....... 1,179 1,181 1,460 1,454
Net income ......... 2,096 2,092 2,604 2,491
Net income per share $ 0.16 $ 0.16 $ 0.20 $ 0.19
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, 1996, 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 pages 2, 3, and 9 of the Registrant's Proxy Statement for the 1997
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 4 through 6 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 7 of the Proxy Statement is incorporated
herein by reference.
13
<PAGE>
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 Transactions" on page 9 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, 1996.
(c) 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.
10.4+ 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.
10.5+ 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.
10.8+ Incentive Stock Plan.
10.9+ 401(k) Plan.
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-AMBO Bank, N.V., Atlanta Agency.
10.15++++ Second Amendment to Credit Agreement and Waiver dated April 12, 1996.
14
<PAGE>
Exhibit
Number Description
10.16++++ First Amendment to Note Purchase Agreement and Waiver dated April 1,
1996.
21+ List of subsidiaries.
23.1 Consent of Coopers & Lybrand L.L.P., independent accountants (page
31 herein).
27 Financial Data Schedule (page 32 herein)
- - --------------
+ 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.
15
<PAGE>
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: February 11, 1997 By: /s/ Bradley A. Moline
------------------------------- ---------------------
Bradley A. Moline
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, President, and Chief
David R. Parker Executive Officer (principal executive
officer) February 11, 1997
/s/ Bradley A. Moline Treasurer and Chief Financial Officer
Bradley A. Moline (principal financial and accounting
officer) February 11, 1997
/s/ R. H. Lovin, Jr.
R. H. Lovin, Jr. Director February 11, 1997
/s/ Michael W. Miller
Michael W. Miller Director February 11, 1997
/s/ William T. Alt
William T. Alt Director February 11, 1997
/s/ Hugh O. Maclellan, Jr.
Hugh O. Maclellan, Jr. Director February 11, 1997
/s/ Mark A. Scudder
Mark A. Scudder Director February 11, 1997
16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Covenant Transport, Inc.
We have audited the accompanying consolidated balance sheets of Covenant
Transport, Inc. and Subsidiary (the "Company") as of December 31, 1995 and 1996
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1996.
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 above present fairly, in all
material respects, the consolidated financial position of Covenant Transport,
Inc. and Subsidiary as of December 31, 1995 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
Knoxville, Tennessee Coopers & Lybrand L.L.P.
January 31, 1997
17
<PAGE>
COVENANT TRANSPORT, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
1995 1996
---------------------------
ASSETS
Current assets:
Cash and cash equivalents ...................... $ 461,288$ 3,491,543
Accounts receivable, net of allowance of $400,000
in 1995 and $500,000 in 1996 ................. 29,737,998 29,955,577
Drivers advances and other receivables ......... 6,984,564 3,230,857
Tire and parts inventory ....................... 801,460 880,086
Prepaid expenses ............................... 2,692,158 3,781,003
Deferred income taxes .......................... 176,000 248,000
--------------------------
Total current assets ............................. 40,853,468 41,587,066
Property and equipment, at cost .................. 49,428,386 183,136,067
Less accumulated depreciation and amortization ... 22,020,359 38,752,116
--------------------------
Net property and equipment ....................... 127,408,027 144,383,951
Other ............................................ 1,119,484 1,177,158
--------------------------
Total assets ..................................... $169,380,979 $187,148,175
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ........... 50,000 50,000
Accounts payable ............................... 3,512,918 3,892,208
Accrued expenses ............................... 3,152,199 4,480,151
-------------------------
Total current liabilities ........................ 6,715,117 8,422,359
Long-term debt, less current maturities ......... 80,150,000 83,110,000
Deferred income taxes ............................ 9,764,000 13,886,000
-------------------------
Total liabilities ................................ 96,629,117 105,418,359
Stockholders' equity:
Class A common stock, $.01 par value; 11,000,000
shares issued and outstanding ................. 110,000 110,000
Class B common stock, $.01 par value; 2,350,000
shares issued and outstanding ................. 23,500 23,500
Additional paid-in-capital ..................... 50,469,596 50,469,596
Retained earnings .............................. 22,148,766 31,126,720
-------------------------
Total stockholders' equity ....................... 72,751,862 81,729,816
-------------------------
Total liabilities and stockholders' equity ....... $169,380,979 $187,148,175
=========================
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
COVENANT TRANSPORT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
1994 1995 1996
----------------------------------------
Revenue ................................ $131,925,595 $180,345,922 $236,266,945
Operating expenses:
Salaries, wages, and related expenses 57,675,16 83,746,833 108,817,623
Fuel, oil, and road expenses ......... 27,282,162 37,801,823 55,340,234
Revenue equipment rentals and purchased
transportation ..................... 2,785,100 1,230,163 604,924
Repairs .............................. 2,284,890 3,568,778 4,293,141
Operating taxes and licenses ......... 3,479,169 4,679,137 6,064,652
Insurance ............................ 4,509,514 4,907,330 6,114,526
General supplies and expenses ........ 8,649,766 9,647,976 12,825,287
Depreciation and amortization, including
gain on disposition of equipment ... 9,309,866 16,045,415 22,139,456
---------------------------------------
Total operating expenses ........... 115,975,627 161,627,455 216,199,843
---------------------------------------
Operating income ................... 15,949,968 18,718,467 20,067,102
Interest expense ....................... 4,735,413 4,161,668 5,987,148
---------------------------------------
Income before income taxes ............. 11,214,555 14,556,799 14,079,954
Income tax expense ..................... 3,951,198 5,274,000 5,102,000
---------------------------------------
Net income ............................ $ 7,263,357 $ 9,282,799 $ 8,977,954
=======================================
Earnings per share:
Net income .............................$ 0.69 $ 0.70 $ 0.67
=======================================
Weighted average shares outstanding .... 10,495,616 13,350,000 13,350,000
=======================================
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
COVENANT TRANSPORT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, and 1996
Series I Class A Class B Additional Total
Preferred Common Common Paid-In Retained Stockholders'
Stock Stock Stock Capital Earnings Equity
--------------------------------------------------------------
Balances at
January 1, 1994 $25,000 $51,500 $23,500 $ -- $5,602,610 $5,702,610
Conversion of
preferred stock
to common
stock (25,000) 25,000 -- -- -- --
Proceeds from
issuance of common
stock, net of
related costs
of $4,771,904 -- 33,500 -- 50,469,596 -- 50,503,096
Net income .... -- -- -- -- 7,263,357 7,263,357
----------------------------------------------------------------
Balances at
December 31, 1994 -- 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
================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
COVENANT TRANSPORT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
1994 1995 1996
------------------------------------------
Cash flows from operating activities:
Net income ................... $ 7,263,357 $ 9,282,799 $ 8,977,954
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for losses on receivable 86,910 150,000 407,655
Depreciation and amortization 9,421,387 16,787,219 22,781,481
Deferred income tax expense 2,851,219 4,673,000 4,050,000
Loss (Gain) on disposition of property
and equipment .............. (111,521) (741,804) (642,025)
Changes in operating assets and liabilities:
Receivables and advances (5,755,283) (19,610,235) 3,010,662
Prepaid expenses ........ (388,231) (1,298,535) (1,088,845)
Tire and parts inventory (235,443) (301,696) (78,626)
Other assets ................. (9,070) -- --
Accounts payable and accrued expenses 2,282,315 185,885 1,707,242
------------------------------------------
Net cash flows provided by operating
activities 15,405,640 9,126,633 39,125,498
Cash flows from investing activities:
Acquisition of property and
equipment ................... (53,606,143) (72,431,927) (49,142,303)
Proceeds from disposition of property
and equipment .............. 3,389,349 16,942,319 10,219,276
Covenant not to compete ...... -- (200,000) --
------------------------------------------
Net cash flows from investing
activities: (50,216,794) (55,689,608) (38,923,027)
Cash flows from financing activities:
Proceeds from issuance of stock 50,503,096 -- --
Proceeds from issuance of long-term
debt ....................... 39,024,009 84,000,000 3,000,000
Repayments of long-term debt (51,061,139) (41,494,926) (40,000)
Deferred debt issuance cost -- (358,172) (132,216)
------------------------------------------
Net cash flows provided by
financing activities 38,465,966 42,146,902 2,827,784
------------------------------------------
Net change in cash and cash
equivalents 3,654,812 (4,416,073) 3,030,255
Cash and cash equivalents at
beginning of period 1,222,549 4,877,361 461,288
------------
Cash and cash equivalents at end
of period $ 4,877,361 $ 461,288 $ 3,491,543
==========================================
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest ................ $ 4,750,707 $ 3,607,927 $ 5,905,000
==========================================
Income taxes ............ $ 959,979 $ 601,000 $ 795,000
==========================================
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
COVENANT TRANSPORT, INC. AND SUBSIDIARY
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 operating subsidiary, Covenant Transport, Inc., a
Tennessee corporation. All significant intercompany balances and transactions
have been eliminated in consolidation.
Basis of Presentation - On May 31, 1994, the Company acquired title to
essentially all of the revenue equipment of Tenn-Ga Leasing, Inc. ("Tenn-Ga") in
exchange for assuming long-term debt and the issuance of 2,500,000 shares of
Series I preferred stock. Tenn-Ga was a revenue equipment leasing company
incorporated by a related party in 1991 to serve as a financing alternative for
a portion of the Company's revenue equipment. Substantially all of Tenn-Ga's
operating activities since inception involved leasing of revenue equipment to
the Company under operating lease agreements which were pledged as collateral
for certain Tenn-Ga borrowings. Due to the related nature of share ownership and
the operational interdependence of the companies, Tenn-Ga's results were
combined with the Company's from the inception of Tenn-Ga in January 1991
through the May 31, 1994, acquisition of Tenn-Ga's revenue equipment by the
Company in a manner similar to a pooling of interests. The preferred shares were
non-voting and had preference over the common stock in liquidation. The
preferred shares were converted into an equal number of Class A common shares at
the closing of the Company's initial public offering.
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 on 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.
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
22
<PAGE>
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.
2. OTHER ASSETS
A summary of other assets as of December 31, 1995 and 1996 is as follows:
1995 1996
--------------------------------
Covenants not to compete, net $ 362,500 $ 252,500
Deferred debt costs, net 313,623 262,486
Split dollar life insurance 307,508 425,279
Cash surrender value of life insurance 76,078 106,078
Other .............. 59,775 130,815
---------- ----------
$1,119,484 $1,177,158
========== ==========
3. PROPERTY AND EQUIPMENT
A summary of property and equipment, at cost, as of December 31, 1995 and 1996
is as follows:
1995 1996
----------------------------
Revenue equipment .. $136,465,798 $168,059,349
Land and improvements 2,949,767 3,687,215
Buildings and leasehold improvements 1,483,422 1,706,048
Communications equipment 5,507,255 6,428,634
Construction in process 739,180 131,396
Other .............. 2,282,964 3,123,425
------------ ------------
$149,428,386 $183,136,067
============ ============
Construction in process in 1995 related to the new headquarters facility being
built in Chattanooga, Tennessee and completed in December 1996. Interest
totaling $80,723 was capitalized in 1995 associated with the construction of the
Chattanooga facility and the Pomona terminal which was completed in May 1995.
4. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1995 and 1996:
1995 1996
---------------------------
Borrowings under $70 million credit agreements $55,000,000 $58,000,000
10-year senior notes 25,000,000 25,000,000
Notes to unrelated individuals for non-compete
agreements 200,000 160,000
--------------------------
80,200,000 83,160,000
Less current maturities 50,000 50,000
--------------------------
$80,150,000 $83,110,000
==========================
During January 1995, the Company entered into a $70 million credit agreement
with a group of banks. 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
23
<PAGE>
violation occurs. A commitment fee of 0.225% per annum is due on the daily
unused portion of the credit agreement.
The credit agreement revolves for the first two years and then has a three year
term out. 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
January 1996 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. Borrowings under LIBOR 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, 1996, the margin was 0.625%.
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 for two years. An additional $25 million interest rate swap
agreement was completed in 1996 to fix interest rates on $25 million from
February 1997 until February 1999 at 5.9% plus the applicable margin. All
remaining borrowings under the credit agreement are at one, two, or three month
LIBOR.
During August 1995, the Company agreed to place $25 million in senior notes due
October 2005 with an insurance company. The term agreement requires payments for
interest due 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. Revenue equipment, customer lists, and
covenants not to compete were purchased for amounts totaling $1,919,532. Note
balances are based on the present value of future payments with interest imputed
at 8%.
5. RELATED PARTY TRANSACTIONS
Transactions involving related parties not otherwise disclosed herein are as
follows:
During 1995 and 1996, the Company sold certain of its used tractors and trailers
to corporations owned by related parties for an aggregate of approximately
$9,727,909 in 1995 and $103,000 in 1996. 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.
From January 1 to September 30, 1994, the Company leased its terminal at
Oklahoma City, Oklahoma, for an aggregate of $33,000 from a related party.
Effective September 30, 1994, the Company purchased the Oklahoma City facility
for $450,000, which was the same price paid by the related party for the
facility on January 1, 1994. Prior to January 1, 1994, the facility had been
leased from an unrelated party.
On August 10, 1994, the Company purchased property located in Pomona, California
from a related party for $475,000, the same price paid for such property earlier
in 1994. Covenant completed construction of a terminal facility on the property
during 1995.
24
<PAGE>
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, 1996:
Year ending December 31:
1997 $ 3,080,000
1998 2,569,000
1999 2,336,000
2000 1,328,000
2001 1,349,000
Total rental expense is summarized as follows for the years ended December 31,
1994, 1995, and 1996:
1994 1995 1996
------------------------------------
Revenue equipment rentals $2,689,454 $ 914,034 $ 338,283
Owner/operator rentals .. 95,646 70,926 --
Terminal rentals ........ 440,089 531,948 606,424
Other equipment rentals . 312,119 451,092 505,062
---------- ---------- ----------
$3,537,308 $1,968,000 $1,449,769
========== ========== ==========
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 lessor to fix the
rental payments from January 1997 until September 1998 at approximately $87,000
per month.
Covenant leases its former headquarters terminal at Chattanooga, Tennessee, from
the principal stockholder of the Company. Effective June 1, 1993, the monthly
rental was $17,900 per month, with annual increases of 5% until the monthly
rental payments reach 1% of the property's appraised value. The Company also
leases a small terminal at Greer, South Carolina, for annual rent of $12,000
from the principal stockholder.
Included in terminal rentals are payments of $253,680, $239,344, and $237,664
for the years ended December 31, 1994, 1995, and 1996, respectively, to the
principal stockholder of the Company and another related party for the rental of
terminal facilities. Included in revenue equipment rentals for 1994 are payments
of $37,270 to a related party for the rental of tractors and trailers. After
1994, the Company has not leased any equipment from this related party.
7. INCOME TAX EXPENSE
Income tax expense for the years ended December 31, 1994, 1995, and 1996 is
comprised of:
1994 1995 1996
--------------------------------------
Federal, current $1,099,979 $ 601,000 $ 795,000
Federal, deferred 2,644,219 4,380,000 3,984,000
State, current .. -- -- 257,000
State, deferred . 207,000 293,000 66,000
---------- ---------- ----------
$3,951,198 $5,274,000 $5,102,000
========== ========== ==========
25
<PAGE>
Income tax expense varies from the amount computed by applying the federal
corporate income tax rate of 34% to income before income taxes for the year
ended December 31, 1994 and 35% for the years ended December 31, 1995 and 1996
as follows:
1994 1995 1996
------------------------------------
Computed "expected" income tax expense $ 3,812,949 $5,095,000 $4,928,000
Adjustments in income taxes resulting from:
Earnings taxable to S Corporation
shareholder (225,561) -- --
State income taxes, net of federal income
taxes 145,795 189,000 183,000
Other, net ................... 33,015 (10,000) (9,000)
Change in effective tax rate . 185,000 -- --
----------- ----------- -----------
Actual income tax expense .... $ 3,951,198 $ 5,274,000 $5,102,000
=========== =========== ===========
The change in effective tax rate resulted from recording the liability related
to the net future taxable amounts at a federal rate of 35% versus 34% at
December 31, 1994, the Company's best estimate of the future effective rate.
The temporary differences and the approximate tax effects that give rise to the
Company's net deferred tax liability at December 31, 1995 and 1996 are as
follows:
1995 1996
---------------------------------------
Deferred tax assets:
Allowance for doubtful accounts (current)$ 144,000 $ 180,000
Accrued expenses (current) ... 32,000 68,000
Loss carryforwards ........... 6,160,000 9,186,000
Alternative minimum tax credits 2,174,000 2,969,000
Contributions ................ 200,000 309,000
Investment tax credits carryforward 82,000 82,000
Other ........................ 29,000 29,000
----------- -----------
8,821,000 12,823,000
Deferred tax liability:
Depreciation ................. 18,409,000 26,461,000
----------- -----------
Net deferred tax liability ... 9,588,000 13,638,000
Portion reflected as current asset 176,000 248,000
----------- -----------
Net deferred tax liability ... $ 9,764,000 $13,886,000
=========== ===========
26
<PAGE>
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 2,014,000
2005 1,393,000
2007 138,000
2009 8,692,000
2010 6,160,000
2011 7,120,000
------------------------- ---- -------------------------
$ 25,517,000 $ 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 monitors this risk and historically
has not experienced any losses on these financial instruments.
9. EARNINGS PER SHARE
Net income per share is based on the weighted average number of shares of common
stock and common stock equivalents outstanding during the period.
10. CAPITAL STRUCTURE
In May 1994, Covenant Transport, Inc., a Nevada corporation, was incorporated to
serve as the holding company of Covenant Transport, Inc., a Tennessee
corporation. In connection with this formation, the stockholders exchanged their
then held shares of the Tennessee corporation for holding company shares. This
reorganization and revised capital structure has been reflected for all periods
presented herein.
On May 27, 1994, the Company amended its articles of incorporation to authorize
20,000,000 shares of Class A common stock, 5,000,000 shares of Class B common
stock and 5,000,000 preferred shares. The Company subsequently designated
2,500,000 preferred shares as Series I preferred shares, $.01 par value, and
issued such shares, which were converted into 2,500,000 shares of Class A common
stock upon the closing of the Company's initial public offering. During November
1994, the Company completed an underwritten initial public offering of 4,370,000
shares of Class A Common Stock, 3,350,000 shares of which were offered by the
Company. The terms of future issuances of preferred shares will be set by the
Board of Directors.
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.
27
<PAGE>
11. 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 20% 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 $90,000, $326,000, and $464,000 in 1994, 1995,
and 1996, respectively, to the profit sharing and savings plan.
12. 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 670,000 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. The options expire 10 years from the date of grant. The
following table details the activity of the incentive stock option plan:
1995 1996
--------------------
Balance January 1 119,000 117,000
Granted ....... -- 267,500
Exercised ..... -- --
Canceled ...... (2,000) (1,250)
- - --------------- -------- --------
Balance December 31 117,000 283,250
=============== ======== ========
Exercisable December 31 48,000 82,500
=============== ======== ========
The FASB has issued SFAS No. 123, Accounting for Stock-Based Compensation
effective for the fiscal years beginning after December 15, 1995. The Company
intends to adopt the disclosure provisions of the Statement in 1996.
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 No. 123 for disclosure purposes only in 1996, as no options were granted in
1995. During the phase-in period of SFAS No. 123, pro forma disclosures may not
be indicative of future amounts until the new rules are applied to all awards.
For SFAS No. 123 purposes, the fair value of each employee options grant has
been estimated as of the date of grant using the Black-Scholes option pricing
model and the following weighted average assumptions: risk-free interest rate of
6.25%, expected life of 5 years, dividend rate of zero percent, and expected
volatility of 32.5%. Using these assumptions, the fair value of the employee
stock options granted in 1996 is $700,000, 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 year ended December 31,
1996:
1996
------------------
Net income:
As reported $ 8,977,954
Pro forma 8,837,954
Net income per share:
As reported 0.67
Pro forma 0.66
28
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Covenant Transport, Inc.
We consent to the incorporation by reference in the registration statements of
Covenant Transport, Inc. on Form S-8 (File No. 333-2654 and 33-88686) of our
reports dated January 31, 1997, on our audits of the consolidated financial
statements and financial statement schedule of Covenant Transport, Inc. as of
December 31, 1996 and 1995, and for each of the years in the three-year period
then ended which reports are incorporated by reference, and included,
respectively, in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Knoxville, Tennessee
February 11, 1997
29
<PAGE>
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