SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-24960
Covenant Transport, Inc.
(Exact name of registrant as specified in its charter)
Nevada 88-0320154
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
400 Birmingham Hwy.
Chattanooga, TN 37419
(423) 821-1212
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive office)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for 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 (March 31, 1999).
Class A Common Stock, $.01 par value: 12,561,550 shares
Class B Common Stock, $.01 par value: 2,350,000 shares
Exhibit Index is on Page 13
1
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PART I
FINANCIAL INFORMATION
PAGE
NUMBER
Item 1. Financial statements
Condensed Consolidated Balance Sheets as of December 31, 1998 3
and March 31, 1999 (Unaudited)
Condensed Consolidated Statements of Income for the three 4
months ended March 31, 1998 and 1999 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the three 5
months ended March 31, 1998 and 1999 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition 8
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
PART II
OTHER INFORMATION
PAGE
NUMBER
Item 1. Legal Proceedings 13
Items 2, 3, 4, and 5. Not applicable 13
Item 6. Exhibits and reports on Form 8-K 13
2
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<TABLE>
<CAPTION>
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
December 31, March 31,
1998 1999
----------------- ------------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,926 $ 794
Accounts receivable, net of allowance of $1,065 in 1998 and
$1,218 in 1999 51,789 50,557
Drivers' advances and other receivables 2,476 3,492
Tire and parts inventory 1,929 2,126
Prepaid expenses 5,325 6,861
Deferred income taxes 1,674 2,034
----------------- ------------------
Total current assets 66,119 65,864
Property and equipment, at cost 282,358 281,222
Less accumulated depreciation and amortization 81,821 80,280
----------------- ------------------
Net property and equipment 200,537 200,942
Other 6,303 6,284
----------------- ------------------
Total assets $ 272,959 $ 273,090
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt 1,943 1,747
Accounts payable 3,485 9,116
Accrued expenses 12,914 14,560
Accrued income tax 1,404 2,306
----------------- ------------------
Total current liabilities 19,746 27,729
Long-term debt, less current maturities 84,331 72,895
Deferred income taxes 27,359 27,675
----------------- ------------------
Total liabilities 131,437 128,299
Stockholders' equity:
Class A common stock, $.01 par value; 20,000,000 shares authorized;
12,560,250 and 12,561,550 shares issued and outstanding as of 1998 and 126 126
1999, respectively
Class B common stock, $.01 par value; 5,000,000 shares authorized;
2,350,000 shares issued and outstanding as of 1998 and 1999 24 24
Additional paid-in-capital 78,261 78,280
Retained earnings 63,112 66,361
----------------- ------------------
Total stockholders' equity 141,522 144,791
================= ==================
Total liabilities and stockholders' equity $ 272,959 $ 273,090
================= ==================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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<TABLE>
<CAPTION>
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(In thousands except per share data)
Three months ended Three months ended
March 31, 1998 March 31, 1999
---------------------- ----------------------
(unaudited) (unaudited)
<S> <C> <C>
Revenue $ 79,824 $ 97,764
Operating expenses:
Salaries, wages, and related expenses 35,242 44,836
Fuel, oil, and road expenses 15,921 17,338
Revenue equipment rentals and purchased transportation 5,002 8,161
Repairs 1,925 1,943
Operating taxes and licenses 2,317 2,407
Insurance 2,424 2,795
General supplies and expenses 4,438 5,582
Depreciation and amortization, including 6,773 7,971
gain on disposition of equipment ---------------------- ---------------------
Total operating expenses 74,042 91,033
---------------------- ---------------------
Operating income 5,781 6,731
Interest expense 1,461 1,301
---------------------- ---------------------
Income before income taxes 4,320 5,430
Income tax expense 1,645 2,181
---------------------- ---------------------
Net income $ 2,675 $ 3,249
====================== =====================
Basic and diluted earnings per share $ .20 $ .22
Weighted average shares outstanding 13,361 14,912
Adjusted weighted average shares and
assumed conversions outstanding 13,387 15,040
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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<TABLE>
<CAPTION>
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(In thousands)
Three months ended Three months ended
March 31, 1998 March 31, 1999
--------------------- ---------------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,675 $ 3,249
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on receivables 15 153
Depreciation and amortization 7,761 8,101
Deferred income tax expense 1,276 (44)
Gain on disposition of property and equipment (988) (130)
Changes in operating assets and liabilities:
Receivables and advances (1,701) (57)
Prepaid expenses (3,973) (1,536)
Tire and parts inventory (66) (197)
Accounts payable and accrued expenses 2,000 8,159
---------------------- ---------------------
Net cash flows provided by operating activities 6,998 17,698
Cash flows from investing activities:
Acquisition of property and equipment (29,834) (20,627)
Proceeds from disposition of property and equipment 9,895 12,389
---------------------- ---------------------
Net cash flows used in investing activities (19,939) (8,238)
Cash flows from financing activities:
Exercise of stock option 50 20
Proceeds from issuance of long-term debt 22,000 8,000
Repayments of long-term debt (4,366) (19,612)
---------------------- ---------------------
Net cash flows provided by/(used in) financing activities 17,684 (11,592)
---------------------- ---------------------
Net change in cash and cash equivalents 4,744 (2,132)
Cash and cash equivalents at beginning of period 2,610 2,926
---------------------- ---------------------
Cash and cash equivalents at end of period $ 7,353 $ 794
====================== =====================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per share data)
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, 1998
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, 1998.
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
Statements of Income:
<TABLE>
<CAPTION>
Three months ended Three months ended
March 31, 1998 March 31,1999
--------------------- ---------------------
<S> <C> <C>
Numerator:
Net Income $ 2,675 $ 3,249
Denominator:
Denominator for basic earnings
per share - weighted-average shares 13,361 14,912
Effect of dilutive securities:
Employee stock options 26 128
====================== =====================
Denominator for diluted earnings per share -
adjusted weighted-average shares and assumed
conversions 13,387 15,040
====================== =====================
Basic earnings per share $ .20 $ .22
====================== =====================
Diluted earnings per share $ .20 $ .22
====================== =====================
</TABLE>
Note 3. Audit
The Internal Revenue Service has completed its audit of the Company's tax
return for 1995. The Company was not assessed for any additional tax
having received a no change letter for the applicable period.
Note 4. Income Taxes
Income tax expense varies from the amount computed by applying the federal
corporate income tax rate of 37% to income before income taxes primarily
due to state income taxes, net of federal income tax effect, which were
approximately 2.1% higher in the quarter ended March 31, 1999, as compared
with the quarter ended March 31, 1998.
6
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Note 5. Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. The statement established accounting
and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded on the balance sheet as either an asset or liability measured at
its fair value. SFAS No. 133 requires that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. The Company may engage in hedging activities
using futures, forward contracts, options, and swaps to hedge the impact
of market fluctuations on energy commodity prices and interest rates. The
Company is currently assessing the effect, if any, on its financial
statements of implementing SFAS No. 133. The Company will be required to
adopt the standard in 2000.
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.
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company grew its revenue 22.5%, to $97.8 million in the three months ended
March 31, 1999, from $79.8 million during the same period of 1998. The Company's
pretax margin increased to 5.6% of revenue from 5.4% of revenue. A significant
increase in fleet size to meet customer demand as well as an increase in the
freight rates contributed to revenue growth over this period. In addition to
internal growth, the Company completed two acquisitions during 1998. In August
1998, the Company acquired certain assets of Gouge Trucking, Inc., a $4 million
annual revenue carrier located in North Carolina. In October 1998, the Company
purchased all of the outstanding capital stock of Southern Refrigerated
Transportation, Inc., ("SRT"), a $23 million annual revenue carrier based in
southwest Arkansas. Additionally, the Company formed a new division, Covenant
Transport Logistics, in October 1998. The Company intends to continue to grow
both internally and through acquisitions, with the main constraint on internal
growth being the ability to recruit and retain sufficient numbers of qualified
drivers. (*)
The Company has increased net income approximately 21.5%, to $3.2 million in the
three months ended March 31, 1999, from $2.7 million during the same period of
1998. Several factors contributed to the increase, including declining fuel
prices and negotiating higher freight rates from customers. Although higher
driver compensation partially offset the increased freight rates, management
believes the Company benefited from attracting and retaining more drivers.
Changes in several operating statistics and expense categories are expected to
result from actions the Company took in 1997 and 1998. The operations of Bud
Meyer Truck Lines, acquired in 1997, and SRT use predominately single-driver
tractors, as opposed to the primarily team-driver tractor fleet operated by
Covenant's long-haul, dry van operation. The single driver fleets operate fewer
miles per tractor and experience more empty miles. In addition, Bud Meyer's
operations must bear additional expenses of fuel for refrigeration units,
pallets, and depreciation and interest expense of more expensive trailers
associated with temperature-controlled service. The additional expenses and
lower productive miles are offset by generally higher revenue per loaded mile
and the reduced employee expense of compensating only one driver. The Company's
operating statistics and expenses are expected to shift in future periods with
the mix of single, team, and temperature-controlled operations.
The Company initiated the use of owner-operators of tractors in 1997 and had
contracted with approximately 211 owner-operators as of March 31, 1999.
Owner-operators provide a tractor and a driver and bear all operating expenses
in exchange for a fixed lease payment per mile. The Company does not have the
capital outlay of purchasing the tractor. As of March 31, 1999, the Company had
financed approximately 577 tractors under operating leases as compared to 316
tractors under operating leases as of March 31, 1998. The lease payments to
owner-operators and the financing of tractors under operating leases appear as
operating leases under revenue equipment rentals and purchased transportation.
Expenses associated with owned equipment, such as interest and depreciation, are
not incurred, and for owner-operator tractors, driver compensation, fuel,
communications, and other expenses are not incurred. Because obtaining equipment
from owner-operators and under operating leases effectively shifts financing
expenses from interest to "above the line" operating expenses, the Company
intends to evaluate its efficiency using pretax margin and net margin rather
than operating ratio.
The following table sets forth the percentage relationship of certain items to
revenue for the three months ended March 31:
<TABLE>
<CAPTION>
1998 1999
---------------- -----------------
<S> <C> <C>
Revenue 100.0% 100.0%
Operating expenses:
Salaries, wages, and related expenses 44.1 45.9
Fuel, oil, and road expenses 20.0 17.7
Revenue equipment rentals and purchased
transportation 6.3 8.3
Repairs 2.4 2.0
Operating taxes and licenses 2.9 2.5
Insurance 3.0 2.9
General supplies and expenses 5.6 5.6
Depreciation and amortization 8.5 8.2
---------------- -----------------
Total operating expenses 92.8 93.1
---------------- -----------------
Operating income 7.2 6.9
Interest expense 1.8 1.3
---------------- -----------------
Income before income taxes 5.4 5.6
Income tax expense 2.1 2.2
================ =================
Net income 3.4% 3.3%
================ =================
</TABLE>
8
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COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999
TO THREE MONTHS ENDED MARCH 31, 1998
Revenue increased $17.9 million (22.5%), to $97.8 million in the 1999 period
from $79.8 million in the 1998 period. The revenue increase was primarily
generated by a 25.3% increase in weighted average tractors, to 2,662 during the
1999 period from 2,125 during the 1998 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 Gouge Trucking,
Inc. and SRT during August and October of 1998, respectively. The Company's
average revenue per loaded mile increased to approximately $1.18 during the 1999
period from $1.15 during the 1998 period. The increase was attributable to
per-mile rate increases negotiated by the Company. 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 1999 period from $1.08 in the
1998 period.
Salaries, wages, and related expenses increased $9.6 million (27.2%), to
$44.8 million in the 1999 period from $35.2 million in the 1998 period. As a
percentage of revenue, salaries, wages, and related expenses increased to 45.9%
in the 1999 period from 44.1% in the 1998 period. Driver wages as a percentage
of revenue increased to 32.7% in the 1999 period from 31.5% in the 1998 period
as the use of owner-operators partially offset a $.025 pay increase that went
into effect in April 1998. The Company also experienced an increase in
non-driving employee payroll expense to 6.1% of revenue in the 1999 period from
5.3% of revenue in the 1998 period due to the start up of Covenant Transport
Logistics and the acquisition of SRT.
Fuel, oil, and road expenses increased $1.4 million (8.9%), to $17.3 million in
the 1999 period from $15.9 million in the 1998 period. As a percentage of
revenue, fuel, oil, and road expenses decreased to 17.7% of revenue in the 1999
period from 20.0% in the 1998 period primarily as a result of improved fuel
prices during the 1999 period as well as the increased use of owner-operators
who pay for fuel purchases. The expense for owner-operators is reflected in the
revenue equipment rentals and purchased transportation category.
Revenue equipment rentals and purchased transportation increased $3.2 million
(63.2%), to $8.2 million in the 1999 period from $5.0 million in the 1998
period. As a percentage of revenue, revenue equipment rentals and purchased
transportation increased to 8.3% in the 1999 period from 6.3% in the 1998
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
increased the fleet size of owner-operators during the 1999 period (averaged 197
in the 1999 period compared to 116 in the 1998 period). The Company also entered
into additional operating leases. During the 1999 period, 577 tractors were
leased compared to 316 leased tractors during the 1998 period.
Repairs remained constant at $1.9 million in the 1999 and 1998 periods. As a
percentage of revenue, repairs returned to more normal levels at 2.0% in the
1999 period from 2.4% in the 1998 period. The 1998 increase was primarily the
result of costs related to the preparation of certain equipment for trade-in
following the Bud Meyer Truck Lines, Inc. acquisition. The gain on sale
of equipment in the first quarter of 1998 partially offset the increased
expense.(*)
Operating taxes and license increased approximately $90,000 (3.9%), to $2.4
million in the 1999 period from $2.3 million in the 1998 period. As a percent of
revenue, operating taxes and licenses returned to more normal levels at 2.5% in
the 1999 period from 2.9% in the 1998 period. The 1998 expense as a percent of
revenue was elevated by an unusual concentration of permits that normally would
be issued over two quarters.(*)
Insurance, consisting primarily of premiums for liability, physical damage, and
cargo damage insurance, and claims, increased $0.4 million (15.3%), to $2.8
million in the 1999 period from $2.4 million in the 1998 period. As a percentage
of revenue, insurance decreased to 2.9% in the 1999 period from 3.0% in the 1998
period, as the Company continued to reduce premiums per million dollars of
revenue.
General supplies and expenses, consisting primarily of driver recruiting,
communications expenses, and facilities expenses, increased $1.1 million
(25.8%), to $5.6 million in the 1999 period from $4.4 million in the 1998
period. As a percentage of revenue, general supplies and expenses remained
constant at 5.6% in the 1999 and 1998 periods.
Depreciation and amortization, consisting primarily of depreciation of revenue
equipment, increased $1.2 million (17.7%), to $8.0 million in the 1999 period
from $6.8 million in 1998 period. As a percentage of revenue, depreciation and
amortization decreased to 8.2% in the 1999 period from 8.5% in the 1998 period
as the Company utilized more owner-operators and leased more revenue equipment
through operating leases. Amortization expense relates to deferred debt costs
incurred and covenants not to compete from two 1995 and one 1998 asset
acquisitions, as well as goodwill from two 1997 and two 1998 acquisitions.
9
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Interest expense decreased $0.2 million (11.0%), to $1.3 million in the 1999
period from $1.5 million in the 1998 period. As a percentage of revenue,
interest expense decreased to 1.3% in the 1999 period from 1.8% in the 1998
period, as the Company financed more equipment under operating leases,
contracted with more owner-operators during the 1999 period, and benefited from
an improvement in cash from operations.
As a result of the foregoing, the Company's pretax margin improved to 5.6% in
the 1999 period versus 5.4% in the 1998 period.
The Company's effective tax rate was 40.2% in the 1999 period compared with
38.1% in the 1998 period reflecting increased state income taxes in the 1999
period.
Primarily as a result of the factors described above, net income increased $0.6
million (21.5%), to $3.2 million in the 1999 period (3.3% of revenue) from $2.7
million in the 1998 period (3.4% of revenue).
LIQUIDITY AND CAPITAL RESOURCES
The growth of the Company's business has required significant investments in new
revenue equipment. The Company has financed its revenue equipment requirements
with borrowings under a line of credit, cash flows from operations, long-term
operating leases, and a small portion with borrowings under installment notes
payable to commercial lending institutions and equipment manufacturers. The
Company's primary sources of liquidity at March 31, 1999, were funds provided by
operations and borrowings under its primary credit agreement, which had maximum
available borrowing of $100.0 million at March 31, 1999 (the "Credit
Agreement"). 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 1999 period
were net income increased by depreciation and amortization and accounts payable
and accrued expenses. The most significant use of cash provided by operations
was to fund prepaid expenses (primarily permits for revenue equipment). Net cash
provided by operating activities was $17.7 million in the 1999 period and $7.0
million in the 1998 period. The increase in the 1999 period resulted from a
higher payables level caused by timing of the month end in March and an
improvement in the cash flows of recievables.
Net cash used in investing activities was $8.2 million and $19.9 million in the
1999 and 1998 periods, respectively. These investments were primarily to acquire
additional revenue equipment as the Company expanded its operations. The Company
expects to expend an additional $52 million on capital expenditures during the
remainder of 1999. Total projected capital expenditures, net of trade-ins, for
1999 are expected to be $60 million excluding the effect of any potential
acquisitions.(*)
Net cash used in financing activities of $11.6 million in the 1999 period
related primarily to repayment of debt under borrowings under the Credit
Agreement. This compared with net cash provided by financing activities of $17.7
million in the 1998 period. At March 31, 1999, the Company had outstanding debt
of $74.6 million, primarily consisting of approximately $43.0 million drawn
under the Credit Agreement, $25.0 million in 10-year senior notes, $3.0 million
in interest bearing note to the former primary stockholder of SRT related to the
acquisition, $3.1 million in term equipment financing, and $0.5 million in notes
related to non-compete agreements. Interest rates on this debt range from 5.3%
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 $55.0 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 0.25% per annum is due on the daily unused
portion of the Credit Agreement. The Company, including all subsidiaries, are
parties to the Credit Agreement and related documents.
The Credit Agreement revolves for 1999 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 in 2000 if not
renewed. The Company renewed the loan in December 1997 and anticipates renewing
the Credit Agreement on an annual basis. Borrowings under the Credit Agreement
are based on the banks' base rate or LIBOR and accrue interest based on one,
two, or three month LIBOR rates plus an applicable margin that is adjusted
quarterly between 0.325% and 0.75% based on cash flow coverage. At March 31,
1999, the margin was 0.425%. The Company has entered into an interest rate swap
agreement that fixes the interest rate on $10 million of borrowing under the
Credit Agreement at a rate of 5.95% plus applicable margin. The $10 million swap
agreement will expire October 29, 1999.(*)
10
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In October 1995, the Company placed $25 million in 10-year senior notes with an
insurance company. The notes bear interest at 7.39%, payable semi-annually, and
mature on October 1, 2005. Principal payments are due in equal annual
installments beginning in the seventh year of the notes. Proceeds of the notes
were used to reduce borrowings under the Credit Agreement.
The Credit Agreement, senior notes, and the headquarters and terminal lease
agreement entered into in 1996, contain certain restrictions and covenants
relating to, among other things, dividends, tangible net worth, cash flows,
acquisitions and dispositions, and total indebtedness. All of these instruments
re cross-defaulted. The Company was in compliance with the agreements at March
31, 1999.
YEAR 2000
The Year 2000 ("Y2K") issue concerns the inability of computer systems to
recognize and process date-sensitive information after 1999 due to the use of
only the last two digits to refer to a year. This problem could affect both
information systems (software and hardware) and other equipment that relies on
microprocessors. Management has completed a Company-wide evaluation of this
impact on its computer systems, applications, and other date-sensitive equipment
and has hired a nationally-recognized consulting firm to perform a status study
of the Company's processes and activities related to the Company's Y2K project.
All known remediation efforts and testing of systems/equipment are expected to
be completed by July 30, 1999. The cost of the assessment and remediation
efforts for the modifications and updates to existing software is estimated to
be approximately $250,000. The Company is also in the process of monitoring the
progress of material third parties, including shippers and suppliers, in their
efforts to become Y2K compliant and expects this project to be completed by July
30, 1999.(*)
The Company's primary information technology systems ("IT Systems") include
hardware and software for billing, dispatch, electronic data interchange
("EDI"), fueling, payroll, telephone, vehicle maintenance, inventory, and
satellite communications systems. The majority of the Company's IT Systems are
purchased from and maintained by third parties. A primary IT System designed by
a third party is the satellite tracking system, which tracks equipment
locations, provides dispatch and routing information, and allows in-cab
communications with drivers. The Company's operating system that manages
payroll, billing, and dispatch was purchased from the supplier in March 1999 on
a long term lease. The Company's financial reporting system is provided by a
third party. The Company has been informed by the providers of these systems
that they are Y2K compliant. Another significant IT System provided by a third
party transmits payroll funds to drivers and allows drivers to purchase fuel and
other items outside the Company's terminal locations. The Company has been
informed by this provider that it expects to be Y2K compliant by June 30, 1999.
Although the Company believes it is Y2K compliant in its EDI applications, the
Company has not completed its review of Y2K compliance of EDI applications of
its shippers.
The Company has reviewed its risks associated with microprocessors embedded in
facilities and equipment ("Non-IT Systems"). The primary Non-IT Systems includes
microprocessors in tractor engines and other components, terminal facilities,
satellite communications units, and telecommunications and other office
equipment. The Company's assessment of its revenue equipment, satellite
communications units, and office equipment Non-IT Systems has revealed low risk
of material replacement requirements. Such equipment is relatively new and was
designed to be Y2K compliant. The Company is continuing to assess its Non-IT
Systems in its terminal facilities but believes that the risk of a
service-interrupting failure in these systems is low.(*)
The Company could be faced with severe consequences if Y2K issues are not
identified and resolved in a timely manner by the Company and material third
parties. The Company's primary risk relating to Y2K compliance is the
possibility of service disruption from third-party suppliers of satellite
communications, telephone, fueling, and financial services. A worst-case
scenario would result in the short term inability of the Company to deliver
freight for its shippers. This would result in lost revenues; however, the
amount would be dependent on the length and nature of the disruption, which
cannot be predicted or estimated. The Company is in the process of developing
contingency plans in case business interruptions do occur. Management expects
these plans to be completed by June 30, 1999.(*)
11
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks from changes in (i) certain commodity
prices and (ii) certain interest rates on its debt.
COMMODITY PRICE RISK
Prices and availability of all petroleum products are subject to political,
economic, and market factors that are generally outside the Company's control.
Because the Company's operations are dependent upon diesel fuel, significant
increases in diesel fuel costs could materially and adversely affect the
Company's results of operations and financial condition. Historically, the
Company has been able to recover a portion of short-term fuel price increases
from customers in the form of fuel surcharges. The price and availability of
diesel fuel can be unpredictable as well as the extent to which fuel surcharges
could be collected to offset such increases. For the first quarter of 1999,
diesel fuel expenses represented 16.1% of the Company's total operating
expenses. The Company uses derivative instruments, including purchased
commitments through suppliers, to reduce a portion of its exposure to fuel price
fluctuations. At March 31, 1999, the notional amount for purchased commitments
for the remainder of 1999 was 9.0 million gallons. Net unrealized losses were
approximately $0.3 million. At March 31, 1999, the national average price of
diesel fuel as provided by the U.S. Department of Energy was $1.046 per gallon.
At March 31, 1999, a ten percent change in the price of fuel would eliminate any
1999 net unrealized losses and create a net unrealized gain of approximately
$630,000.
INTEREST RATE RISK
The Credit Agreement, provided there has been no default, carries a maximum
variable interest rate of LIBOR for the corresponding period plus 0.75%. At
March 31, 1999, the Company had drawn $43.0 million under the Credit Agreement.
Approximately $33.0 million was subject to variable rates and the remaining
$10.0 million was subject to an interest rate swap that fixed the interest rate
at 5.95% plus applicable margin per annum. The swap expires October 29, 1999.
Considering the effect of the interest rate swap and all debt outstanding, each
one-percentage point increase in LIBOR would increase the Company's pretax
interest expense by $325,000.
The Company does not trade in these derivatives with the objective of earning
financial gains on price fluctuations, nor does it trade in these instruments
when there are no underlying related exposures.
12
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
None
Items 2, 3, 4, and 5. Not applicable.
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
3.1+ Restated Articles of Incorporation.
3.2+ Amended By-Laws dated September 27, 1994.
4.1+ Restated Articles of Incorporation.
4.2+ Amended By-Laws dated September 27, 1994.
10.1++ Credit Agreement dated January 17, 1995, among Covenant Transport,
Inc., a Tennessee corporation, ABN-AMRO Bank N.V., as agent, and
certain other banks, filed as Exhibit 10.
10.2+ Incentive Stock Plan, filed as Exhibit 10.9.
10.3+ 401(k) Plan, filed as Exhibit 10.10.
10.4+++ Note Purchase Agreement dated October 15, 1995, among Covenant
Transport, Inc., a Tennessee corporation and CIG & Co., filed as
Exhibit 10.12.
10.5+++ First Amendment to Credit Agreement and Waiver dated October 15,
1995, filed as Exhibit 10.13.
10.6++++ Participation Agreement dated March 29, 1996, among Covenant
Transport, Inc., a Tennessee corporation, Lease Plan USA, Inc., and
ABN-AMRO Bank, N.V., Atlanta Agency, filed as Exhibit 10.14.
10.7++++ Second Amendment to Credit Agreement and Waiver dated April 12,
1996, filed as Exhibit 10.15.
10.8++++ First Amendment to Note Purchase Agreement and Waiver dated April 1,
1996, filed as Exhibit 10.16.
10.9+++++ Third Amendment to Credit Agreement and Waiver dated March 31,
1997, filed as Exhibit 10.11.
10.10+++++ Waiver to Note Purchase Agreement dated March 31, 1997, filed as
Exhibit 10.12.
10.11# Second Amendment to Note Purchase Agreement dated December 30, 1997,
filed as Exhibit 10.19.
10.12# Fourth Amendment to Credit Agreement dated December 31, 1997, filed
as Exhibit 10.20.
10.13# 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, filed as Exhibit 10.21.
10.14## Stock Purchase Agreement made and entered into as of October 15,
1998, by and among Covenant Transport, Inc., a Nevada corporation;
Smith Charitable Remainder Trust, Southern Refrigerated
Transportation, Inc., an Arkansas corporation, and Tony and Kathy
Smith, husband and wife and residents of Arkansas, filed as Exhibit
10.22.
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.
13
<PAGE>
# 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.
## Filed as an exhibit to the registrant's Annual Report on Form 10-K
for the period ended December 31, 1998, and incorporated herein by
reference.
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities 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: May 13, 1999 /s/ Joey B. Hogan
-----------------
Joey B. Hogan
Treasurer and Chief Financial Officer
15
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