SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-Q/A
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 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
incorporation or organization) identification number)
400 Birmingham Hwy.
Chattanooga, TN 37419
(423) 821-0121
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive office)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days.
YES X NO ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date (June 30, 1998)
Class A Common Stock, $.01 par value: 12,554,600 shares
Class B Common Stock, $.01 par value: 2,350,000 shares
Exhibit Index is on Page 13
Page 1 of 14
<PAGE>
PART I
FINANCIAL INFORMATION
PAGE
NUMBER
Item 1. Financial statements
Condensed consolidated balance sheets as of December 31, 1997
and June 30, 1998 (unaudited) 3
Condensed consolidated statements of operations for the three
and six months ended June 30, 1997 and 1998 (unaudited) 4
Condensed consolidated statements of cash flows for the six
months ended June 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
and 3. Not applicable
Items 4. Submission of Matters to a vote of Security Holders 13
Item 5. Not applicable
Item 6. Exhibits and reports on Form 8-K 13
Page 2 of 14
<PAGE>
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS December 31 June 30
1997 1998
Current assets:
Cash and cash equivalents $ 2,609,520 $ 110,530
Accounts receivable, net of allowance of $810,000
in 1997 and $942,251 in 1998 37,792,308 46,223,198
Drivers advances and other receivables 964,575 1,414,690
Tire and parts inventory 1,120,684 1,588,872
Prepaid expenses 3,773,556 7,037,185
Deferred income taxes 1,111,000 1,111,485
------------- -------------
Total current assets 47,371,643 57,485,960
Property and equipment, at cost 228,931,936 252,892,002
Less accumulated depreciation and amortization 67,310,934 65,621,230
------------- -------------
Net property and equipment 161,621,002 187,270,772
Other 6,263,491 5,327,377
------------- -------------
Total assets $ 215,256,136 $ 250,084,109
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 1,565,639 $ 1,481,930
Accounts payable 5,328,346 5,122,715
Accrued expenses 9,073,554 11,314,004
Accrued income taxes 724,815 36,769
------------- -------------
Total current liabilities 16,692,354 17,955,418
Long-term debt, less current maturities 80,811,783 77,557,987
Deferred income taxes 22,155,000 24,120,607
------------- -------------
Total liabilities 119,659,137 119,634,012
Stockholders' equity:
Class A common stock, $.01 par value; 11,010,250
and 12,554,600 shares issued and outstanding
as of December 1997 and June 30, 1998 110,103 125,546
respectively
Class B common stock, $.01 par value; 2,350,000
shares issued and outstanding 23,500 23,500
Additional paid-in-capital 50,634,369 78,237,510
Retained earnings 44,829,027 52,063,541
------------- -------------
Total stockholders' equity 95,596,999 130,450,097
------------- -------------
Total liabilities and stockholders' equity $ 215,256,136 $ 250,084,109
============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3 of 14
<PAGE>
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1997 1998 1997 1998
---- ---- ----- ----
<S> <C> <C> <C> <C>
Revenue $ 70,059,872 $ 89,010,384 $ 132,647,730 $ 168,834,010
Operating expenses:
Salaries, wages, and related expenses 31,707,144 39,906,749 59,392,373 75,148,452
Fuel, oil and road expenses 14,912,295 16,334,048 30,471,920 32,256,016
Revenue equipment rentals and purchased
transportation 1,105,296 5,429,421 1,532,684 10,431,303
Repairs 1,304,095 1,808,598 2,571,528 3,643,364
Operating taxes and licenses 1,814,210 2,061,861 3,347,722 4,378,819
Insurance 1,904,821 2,304,017 3,690,729 4,818,080
General supplies and expenses 3,861,624 5,002,419 7,552,614 9,440,491
Depreciation and amortization, including gain on
disposition of equipment 6,332,759 7,262,487 12,688,787 14,035,438
------------- ------------- ------------- -------------
Total operating expenses 62,942,244 80,109,600 121,248,357 154,151,963
------------- ------------- ------------- -------------
Operating income 7,117,628 8,900,784 11,399,373 14,682,047
Interest expense 1,477,113 1,542,378 2,844,600 3,003,537
------------- ------------- ------------- -------------
Income before income taxes 5,640,515 7,358,402 8,554,773 11,678,510
Income tax expense 2,088,000 2,798,600 3,164,000 4,444,000
------------- ------------- ------------- -------------
Net income $ 3,552,515 $ 4,559,802 $ 5,390,773 $ 7,234,510
============= ============= ============= =============
Earnings per share:
Basic and diluted earnings per share $ 0.27 $ 0.32 $ 0.40 $ 0.52
============= ============= ============= =============
Weighted average common shares outstanding 13,350 14,392 13,350 13,877
============= ============= ============= =============
Adjusted weighted average common shares and
assumed conversions outstanding 13,350 14,413 13,350 13,901
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 4 of 14
<PAGE>
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(unaudited)
1997 1998
Cash flows from operating activities:
Net income $ 5,390,773 $ 7,234,510
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on receivables 193,195 180,000
Depreciation and amortization 12,809,956 15,667,923
Deferred income taxes 3,284,000 1,965,532
Gain on disposition of property and equipment (121,169) (1,632,485)
Changes in operating assets and liabilities:
Receivables and advances (4,588,491) (8,484,911)
Prepaid expenses (645,445) (3,264,114)
Tire and parts inventory (111,115) (468,188)
Accounts payable and accrued expenses 5,012,986 1,346,854
------------- -------------
Net cash flow provided by operating activities 21,224,690 12,545,121
Cash flows from investing activities:
Acquisition of property and equipment (32,130,066) (57,231,541)
Proceeds from disposition of property and equipment 5,803,350 17,906,352
------------- -------------
Net cash flow used in investing activities (26,326,716) ( 39,325,189)
Cash flows from financing activities:
Proceeds from issuance of long-term debt 14,000,000 38,000,000
Repayments of long-term debt (12,000,000) (41,337,507)
Exercise of stock options -- 67,424
Proceeds from equity offering -- 27,551,160
------------- -------------
Net cash flow provided by financing activities 2,000,000 24,281,077
------------- -------------
Net change in cash and cash equivalents (3,102,026) (2,498,991)
Cash and cash equivalents at beginning of period 3,491,543 2,609,520
Cash and cash equivalents at end of period $ 389,517 $ 110,530
============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 5 of 14
<PAGE>
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Basis of Presentation
The condensed consolidated financial statements include the accounts of
Covenant Transport, Inc., a Nevada holding company, and its wholly-owned
subsidiaries (the Company). All significant intercompany balances and
transactions have been eliminated in consolidation.
The financial statements have been prepared, without audit, in accordance
with generally accepted accounting principles, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, the accompanying financial statements include all adjustments
which are necessary for a fair presentation of the results for the interim
periods presented, such adjustments being of a normal recurring nature.
Certain information and footnote disclosures have been condensed or
omitted pursuant to such rules and regulations. The December 31, 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:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
1997 1998 1997 1998
<S> <C> <C> <C> <C>
---- ---- ---- ----
Numerator:
Net Income $ 3,552,515 $ 4,559,802 $ 5,390,773 $ 7,234,510
Denominator:
Denominator for basic earnings per
share -- weighted-average shares 13,350,000 14,392,000 13,350,000 13,877,000
Effect of dilutive securities:
Employee stock options -- 21,040 -- 23,940
------------- ------------- ------------- -------------
Denominator for diluted earnings
per share -- adjusted weighted-
average shares and assumed
conversions 13,350,000 14,413,040 13,350,000 13,900,940
============= ============= ============= =============
Basic earnings per share: $ 0.27 $ 0.32 $ 0.40 $ 0.52
============= ============= ============= =============
Diluted earnings per share: $ 0.27 $ 0.32 $ 0.40 $ 0.52
============= ============= ============= =============
</TABLE>
Page 6 of 14
<PAGE>
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 35% to income before income taxes primarily
due to state income taxes, net of federal income tax effect, which were
approximately 1% higher in the quarter ended June 30, 1998 as compared
with the quarter ended June 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
<PAGE>
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company's revenue grew 27.3%, to $168.8 million in the six months ended
June 30, 1998, compared with $132.6 million during the same period of 1997. The
Company was able to increase the revenue per tractor to over $3,000 per tractor
per week, which had a positive effect on fixed expenses as a percentage of
revenue. The Company's pretax margin expanded to 6.9% of revenue from 6.4% 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. 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 as it might with owned equipment. In addition, for 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 and six months ended June 30, 1997 and 1998:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Salaries, wages, and related expenses 45.2 44.8 44.8 44.5
Fuel, oil, and road expenses 21.3 18.4 23.0 19.1
Revenue equipment rentals and purchased
transportation 1.6 6.1 1.1 6.2
Repairs 1.9 2.0 1.9 2.2
Operating taxes and licenses 2.6 2.3 2.5 2.6
Insurance 2.7 2.6 2.8 2.8
General supplies and expenses 5.5 5.6 5.7 5.6
Depreciation and amortization, including gain on
disposition of equipment 9.0 8.2 9.6 8.3
---- ---- ---- ----
Total operating expenses 89.8 90.0 91.4 91.3
---- ---- ---- ----
Operating income 10.2 10.0 8.6 8.7
Interest expense 2.1 1.7 2.1 1.8
---- ---- ---- ----
Income before income taxes 8.1 8.3 6.5 6.9
Income tax expense 3.0 3.2 2.4 2.6
---- ---- ---- ----
Net income 5.1% 5.1% 4.1% 4.3%
===== ===== ===== =====
Page 8 of 14
</TABLE>
<PAGE>
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998 TO THREE MONTHS
ENDED JUNE 30, 1997
Revenue increased $18.9 million (27.0%), to $89.0 million in the 1998 period
from $70.1 million in the 1997 period. The revenue increase was primarily
generated by a 28.9% increase in weighted average tractors, to 2,268 during the
1998 period from 1,759 during the 1997 period, as the Company expanded
internally to meet demand from new customers and higher volume from existing
customers, as well as externally through the acquisitions of Trans-Roads, Inc.
and Bud Meyer Truck Lines, Inc. during August and October of 1997, respectively.
The Company's average revenue per loaded mile increased to approximately $1.17
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 empty miles percentage.
Revenue per total mile increased to $1.10 in the 1998 period from $1.07 in the
1997 period ($1.06 without fuel surcharge).
Salaries, wages, and related expenses increased $8.2 million (25.9%), to $39.9
million in the 1998 period from $31.7 million in the 1997 period. As a
percentage of revenue, salaries, wages and related expenses decreased to 44.8%
of revenue in the 1998 period from 45.2% in the 1997 period. Driver wages as a
percentage of revenue decreased to 32.9% in the 1998 period from 33.3% in the
1997 period as the use of owner-operators more than offset a $ .025 per mile pay
increase that went into effect in April 1998. Non-driving employee payroll
expense remained essentially constant at 5.3% in the 1998 period and 5.2% in the
1997 period.
Fuel, oil, and road expenses increased $1.4 million (9.5%), to $16.3 million in
the 1998 period from $14.9 million in the 1997 period. As a percentage of
revenue, fuel, oil and road expenses decreased to 18.4% of revenue in the 1998
period from 21.3% in the 1997 period primarily as a result of improved fuel
prices during the 1998 period. 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 $4.3
million(391.2%), to $5.4 million in the 1998 period from $1.1 million in the
1997 period. As a percentage of revenue, revenue equipment rentals and purchased
transportation increased to 6.1% in the 1998 period from 1.6% in the 1997
period. During 1997, the Company began using owner-operators of revenue
equipment, who provide a tractor and driver and cover all of their operating
expenses in exchange for a fixed payment per mile. Accordingly, expenses such as
driver salaries, fuel, repairs, depreciation, and interest normally associated
with Company-owned equipment are consolidated in revenue equipment rentals and
purchased transportation when owner-operators are utilized. The Company also
entered into operating leases of 241 tractors during 1997.
Repairs increased approximately $500,000 (38.7%), to $1.8 million in the 1998
period from $1.3 million in the 1997 period. As a percentage of revenue, repairs
remained essentially constant at 2.0% in the 1998 period and 1.9% in the 1997
period.
Operating taxes and licenses increased approximately $248,000 (13.7%), to $2.1
million in the 1998 period from $1.8 million in the 1997 period. As a percent of
revenue, operating taxes and licenses decreased to 2.3% in the 1998 period from
2.6% in the 1997 period. The expense as a percent of revenue is the result of an
evening out from unusually high expenses in the first quarter of 1998. For the
past three years, operating taxes and licenses have historically averaged 2.6%.
Insurance increased approximately $399,000 (21.0%), to $2.3 million in the 1998
period from $1.9 million in the 1997 period. As a percentage of revenue,
insurance remained essentially constant at 2.6% of revenue in the 1998 period
and 2.7% in the 1997 period as the reduction in insurance premiums per million
dollars of revenue was partially offset by an increase in accident claims and
higher deductible limits ($5,000 compared with $2,500) .
General supplies and expenses, consisting primarily of driver recruiting,
communications expenses, facilities expenses and integration costs pertaining to
Bud Meyer Truck Lines, increased $1,141,000 (29.5%), to $5.0 million in the 1998
period from $3.9 million in the 1997 period. As a percentage of revenue, general
supplies and expenses essentially remained the same at 5.6% of revenue in the
1998 period and 5.5% for the same period in 1997.
Depreciation and amortization, consisting primarily of depreciation of revenue
equipment, increased approximately $930,000 (14.7%), to $7.3 million in the 1998
period from $6.3 million in the 1997 period. As a percentage of revenue,
depreciation and amortization decreased to 8.2% of revenue in the 1998 period
from 9.0% in the 1997 period as the Company obtained a greater percentage of its
fleet through owner operators and leased revenue equipment.
Interest expense increased approximately $65,000 (4.4%), to $1.5 million in the
1998 period from $1.5 million in the 1997 period. Interest expense decreased to
1.7% of revenue in the 1998 period from 2.1% in the 1997 period, as the Company
contracted with more owner-operators during the 1998 period and benefited from
having more leased equipment. Additionally, the Company reduced interest expense
due to the repayment of indebtedness with the proceeds from the sale of stock
during the second quarter.
Page 9 of 14
<PAGE>
As a result of the foregoing,the Company's pretax margin improved to 8.3% in the
the 1998 period versus 8.1% in the 1997 period.
The Company's effective tax rate was 38.0% 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
approximately $1,007,000 (28.4%), to $4.6 million in the 1998 period (5.1% of
revenue) from $3.6 million in the 1997 period (5.1% of revenue).
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 TO SIX MONTHS ENDED JUNE 30, 1997
Revenue increased $36.2 million (27.3%), to $168.8 million in the 1998 period
from $132.6 million in the 1997 period. The revenue increase was primarily
generated by a 25.9% increase in weighted average tractors to 2,197 during the
1998 period from 1,745 during the 1997 period, as the Company expanded
internally to meet demand from new customers and higher volume from existing
customers, as well as externally through the acquisitions of Trans-Roads, Inc.
and Bud Meyer Truck Lines, Inc. during August and October of 1997, respectively.
The Company's average revenue per loaded mile increased to approximately $1.16
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 empty miles percentage.
Revenue per total mile increased to $1.09 in the 1998 period from $1.06 in the
1997 period ($1.05 without fuel surcharge).
Salaries, wages, and related expenses increased $15.8 million (26.5%), to $75.1
million in the 1998 period from $59.4 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 32.2% in the 1998 period from 32.9% in the
1997 period as the use of owner-operators more than offset a $ .025 per mile pay
increase that went into effect in April 1998. Non-driving employee payroll
expense remained essentially constant at 5.3% in the 1998 period and 5.2% in the
1997 period.
Fuel, oil, and road expenses increased $1.8 million (5.9%), to $32.3 million in
the 1998 period from $30.0 million in the 1997 period. As a percentage of
revenue, fuel, oil and road expenses decreased to 19.1% of revenue in the 1998
period from 22.9% in the 1997 period primarily as a result of improved fuel
prices during the 1998 period. 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 $8.9
million(580.6%), to $10.4 million in the 1998 period from $1.5 million in the
1997 period. As a percentage of revenue, revenue equipment rentals and purchased
transportation increased to 6.1% in the 1998 period from 1.2% in the 1997
period. During 1997, the Company began using owner-operators of revenue
equipment, who provide a tractor and driver and cover all of their operating
expenses in exchange for a fixed payment per mile. Accordingly, expenses such as
driver salaries, fuel, repairs, depreciation, and interest normally associated
with Company-owned equipment are consolidated in revenue equipment rentals and
purchased transportation when owner-operators are utilized. The Company also
entered into operating leases of 241 tractors during 1997.
Repairs increased approximately $1.1 million (41.7%), to $3.6 million in the
1998 period from $2.6 million in the 1997 period. As a percentage of revenue,
repairs increased to 2.2% in the 1998 period from 1.9% in the 1997 period. The
increase was primarily as a result of repairs made to improve the condition of
equipment prior to the trade of older equipment and from an increase in the
number of tractors and trailers damaged in accidents experienced by the Company.
Operating taxes and licenses increased approximately $1.0 million (30.8%), to
$4.4 million in the 1998 period from $3.3 million in the 1997 period. As a
percent of revenue, operating taxes and licenses essentially remained constant
at 2.6% in the 1998 period and 2.5% in the 1997 period.
Insurance increased approximately $1.1 million (30.5%), to $4.8 million in the
1998 period from $3.7 million in the 1997 period. As a percentage of revenue,
insurance remained essentially constant at 2.9% of revenue in the 1998 period
and 2.8% in the 1997 period as the reduction in insurance premiums per million
dollars of revenue was partially offset by an increase in accident claims and
higher deductible limits ($5,000 compared with $2,500) .
General supplies and expenses, consisting primarily of driver recruiting,
communications expenses, facilities expenses and integration costs pertaining to
Bud Meyer Truck Lines, increased $1.9 million (24.9%), to $9.4 million in the
1998 period from $7.6 million in the 1997 period. As a percentage of revenue,
general supplies and expenses essentially remained the same at 5.6% of revenue
in the 1998 period and 5.7% for the same period in 1997.
Page 10 of 14
<PAGE>
Depreciation and amortization, consisting primarily of depreciation of revenue
equipment, increased approximately $1.3 million (10.6%), to $14.0 million in the
1998 period from $12.7 million in the 1997 period. As a percentage of revenue,
depreciation and amortization decreased to 8.3% of revenue in the 1998 period
from 9.6% in the 1997 period as the Company obtained a greater percentage of its
fleet through owner operators and leased revenue equipment.
Interest expense increased approximately $159,000 (5.6%), to $3.0 million in the
1998 period from $2.8 million in the 1997 period. Interest expense decreased to
1.8% of revenue in the 1998 period from 2.1% in the 1997 period, as the Company
contracted with a greater percentage of owner-operators during the 1998 period
and benefited from having leased equipment. Additionally, the Company reduced
interest expense due to the repayment 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 6.9% in
the 1998 period versus 6.4% in the 1997 period.
The Company's effective tax rate was 38.0% 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
approximately $1.8 million (34.2%), to $7.2 million in the 1998 period (4.3% of
revenue) from $5.4 million in the 1997 period (4.1% 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 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 June 30, 1998, were funds provided by
operations, borrowings under its primary credit agreement, which had maximum
available borrowing of $100 million at June 30, 1998 (the "Credit Agreement")and
the proceeds from a stock offering, which 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 $12.5 million in the 1998 period and $21.2 million in
the 1997 period, resulting from (1) an increase in receivables associated with a
billing delay caused by the Company's imaging system that has been corrected,
(2) more current payment of taxes, and (3) reduction of other accounts payable.
Net cash used in investing activities was $39.3 million in the 1998 period and
$26.3 million in the 1997 period. These investments were primarily to acquire
additional revenue equipment as the Company expanded its operations. Projected
capital expenditures for 1998 are also expected to be used primarily to acquire
additional revenue equipment. The Company expects such capital expenditures, net
of trade-ins, to be approximately $20.0 million in the remainder of 1998. Total
projected capital expenditures, net of trade-ins, for 1998 are expected to be
$60.0 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
$27.6 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 $24.3 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 provided by
financing activities of $2.0 million in the 1997 period. At June 30, 1998, the
Company had outstanding debt of $79.0 million, primarily consisting of
approximately $49.5 million drawn under the Credit Agreement, $25.0 million in
10-year senior notes, and $4.5 million in term equipment financing. Interest
rates on this debt range from 6.16% 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 Crdeit Agreement and related documents.
Page 11 of 14
<PAGE>
The Credit Agreement revolves for two years and then has a four-year term out if
not renewed. Payments for interest are due quarterly in arrears with principal
payments due in 12 equal quarterly installments beginning on the second
anniversary of the date of the Credit Agreement (or any renewal). The Company
renewed the loan in December 1997 and anticipates renewing the Credit Agreement
on an annual basis. Borrowings under the Credit Agreement may be based on the
banks' base rate or LIBOR and accrue interest based on one, two, or three month
LIBOR rates plus an applicable margin that is adjusted quarterly between 0.375%
and 0.75% based on cash flow coverage. At June 30, 1998, the margin was 0.425%
The Credit Agreement, senior notes, and headquarters and terminal lease
agreement contain certain restrictions and covenants relating to, among other
things, dividends, tangible net worth, cash flow, acquisitions and dispositions,
and total indebtedness. All of these instruments are cross-defaulted. The
Company was in compliance with the agreements at June 30, 1998.
YEAR 2000
The Company has completed a comprehensive review of its Year 2000 issues and its
internal systems (information technology ("IT") and non-IT). The majority of the
Company's application software programs are purchased from and maintained by
vendors. Therefore, the Company is working with these software vendors to verify
these applications become Year 2000 compliant.
The Company presently believes that with modifications and updates to existing
software, the cost of which is not expected to be material, the Year 2000
problem will not pose significant operational problems for the Company's
internal systems.
EXPLANATORY NOTE
This amendment to Form 10-Q for the quarterly period ended June 30, 1998, is
being filed to include the deferred income tax line in the Consolidated Balance
Sheets that was inadvertently left out of the orginal Form 10-Q. This Form
10-Q/A is filed solely to correct that error.
Page 12 of 14
<PAGE>
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None
Items 2 and 3. Not applicable
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders of Covenant Transport, Inc.
was held on May 12, 1998 for the purpose of (a)ratification of the
selection of Coopers & Lybrand L.L.P. as independent certified public
accountants for the Company and (b) electing seven directors for one-
year terms. Proxies for the meeting were solicited pursuant to Section
14(a) of the Securities Exchange Act of 1934, and there was no
solicitation in opposition to management's nominees. Each of
management's nominees for director as listed in the Proxy Statement
was elected.
The voting tabulation on the selection of accountants was
12,632,603 shares "FOR", 816 Shares "AGAINST", and 1,530 shares
"ABSTAIN". The voting tabulation on the election of directors was as
follows:
Shares Shares Shares
Voted Voted Voted
"FOR" "AGAINST" "ABSTAIN"
David R. Parker 12,611,334 0 23,615
Michael W. Miller 12,611,334 0 23,615
R. H. Lovin, Jr. 12,611,334 0 23,615
Mark A. Scudder 12,610,934 0 24,015
William T. Alt 12,610,834 0 24,115
Hugh O. Maclellan, Jr. 12,611,334 0 23,615
Robert E. Bosworth 12,610,934 0 24,015
Item 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-AMBO Bank,
N.V., Atlanta Agency.
10.15++++ Second Amendment to Credit Agreement and Waiver dated April 12,
1996.
Page 13 of 14
<PAGE>
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.
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: August 28, 1998 /s/ Joey B. Hogan
-----------------
Joey B. Hogan
Treasurer and Chief Financial Officer
Page 14 of 14
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 110,530
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