SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
(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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED).
For the transition period from to
Commission file number 0-24960
COVENANT TRANSPORT, INC.
(Exact name of registrant as specified in its charter)
Nevada 88-0320154
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
400 Birmingham Highway
Chattanooga, Tennessee 37419
(Address of Principal Executive Offices)
(Zip Code)
Registrant's telephone number, including area code: 423/821-1212
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: $0.01 Par Value
Class A Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $85.9 million as of March 20, 2000 (based upon the
$14.625 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 5% of a class
of outstanding common stock, and no other persons, are affiliates.
As of March 27, 2000, the registrant had 12,566,450 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 2000 annual meeting of
stockholders that will be filed no later than April 30, 2000.
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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 5 herein
Item 3 Legal Proceedings Page 6 herein
Item 4 Submission of Matters to a Vote of
Security Holders Page 6 herein
Part II
--------
Item 5 Market for the Registrant's Common
Equity and Related Stockholder
Matters Page 6 herein
Item 6 Selected Financial Data Page 8 herein
Item 7 Management's Discussion and Analysis
of Financial Condition and Results of
Operations Page 9 herein
Item 7A Quantitative and Qualitative
Disclosures About Market Risk Page 16 herein
Item 8 Financial Statements and Supplementary
Data Page 17 herein
Item 9 Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure Page 17 herein
Part III
--------
Item 10 Directors and Executive Officers of the
Registrant Pages 2-3 of Proxy Statement
Item 11 Executive Compensation Pages 5-8 of Proxy Statement
Item 12 Security Ownership of Certain
Beneficial Owners and Management Pages 9-10 of Proxy Statement
Item 13 Certain Relationships and Related
Transactions Page 4 of Proxy Statement
Part IV
--------
Item 14 Exhibits, Financial Statement
Schedules, and Reports on
Form 8-K Page 18 herein
- -----------------------
This report contains "forward-looking statements." 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.
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PART I
ITEM 1. BUSINESS
General
Covenant Transport, Inc. ("Covenant" or the "Company") is a truckload carrier
that offers just-in-time and other premium transportation service for customers
throughout the United States. Covenant was founded by David and Jacqueline
Parker in 1985 with 25 tractors and 50 trailers. In fourteen years of operating,
the Company's fleet has grown to 3,521 tractors and 6,199 trailers, and in 1999
revenue grew to $472.7 million. In recent years, the Company has grown both
internally and through acquisitions, although prior to 1997 most growth was
internal. The Company has completed eight acquisitions since 1995. In the past
two years the Company has purchased the stock of three significant corporations
and the trucking assets of another corporation. In October 1998, Covenant
acquired all of the outstanding stock of Southern Refrigerated Transport, Inc.,
a $23 million annual revenue truckload carrier (referred to as "SRT"), located
in southwest Arkansas. In October 1999, the Company purchased the trucking
assets of ATW, Inc. ("ATW"), a long-haul team service carrier. ATW was based in
Greensboro, North Carolina and generated approximately $40 million in annual
revenue. In November 1999, the Company purchased all of the outstanding capital
stock of Harold Ives Trucking Co. and Terminal Truck Broker, Inc. (together,
"Harold Ives"), near Little Rock, Arkansas.
At December 31, 1999, the Company's corporate structure included Covenant
Transport, Inc., a Nevada holding company organized in May 1994 and its wholly
owned subsidiaries: Covenant Transport, Inc., a Tennessee corporation organized
in November 1985; Covenant Asset Management, Inc., a Nevada corporation; CIP,
Inc., a Nevada corporation; Covenant.com, Inc., a Nevada corporation; Bud Meyer
Truck Lines, Inc., a Minnesota corporation; Southern Refrigerated Transport,
Inc., an Arkansas corporation; Tony Smith Trucking, Inc., an Arkansas
corporation; Harold Ives Trucking Co., an Arkansas corporation; and Terminal
Truck Broker, Inc., an Arkansas corporation.
Operations
Covenant approaches its operations as an integrated effort of marketing,
customer service, and fleet management. The Company's customer service and
marketing personnel emphasize both new account development and expanded service
for current customers. Customer service representatives provide day-to-day
contact with customers, while the sales force targets driver-friendly freight
that will increase lane density.
The Company's primary customers include manufacturers, retailers, and other
transportation companies. Other transportation companies primarily consist of
less than truckload and air freight carriers, third-party freight consolidators,
and freight forwarders who seek Covenant's expedited and just-in-time service.
In 1999, other transportation companies were Covenant's two largest customers,
and manufacturing was the largest industry served. No single customer accounted
for 10% or more of the Company's revenue during any of the last three fiscal
years.
Covenant conducts its operations from its headquarters in Chattanooga,
Tennessee. The former Bud Meyer and Harold Ives Trucking operations have been
centralized in Chattanooga as well. SRT's operations center remains in
headquarters Ashdown, Arkansas, and the Harold Ives brokerage headquarters
remains in Stuttgart, Arkansas.
Fleet managers at each operations center plan load coverage according to
customer information requirements and relay pick-up, delivery, routing, and
fueling instructions to the Company's drivers. The fleet managers attempt to
route most of the Company's trucks over selected operating lanes. The resulting
lane density assists the Company in balancing traffic between eastbound and
westbound movements, reducing empty miles, and improving the reliability of
delivery schedules.
Covenant utilizes proven technology, including the Qualcomm OmnitracsTM and
SensortracsTM systems, to increase operating efficiency and improve customer
service and fleet management. The Omnitracs system is a satellite based tracking
and communications system that permits direct communication between drivers and
fleet managers. The Omnitracs system also updates the tractor's position every
30 minutes to permit shippers and the Company to locate freight and accurately
estimate pick-up and delivery times. The Company uses the Sensortracs system to
monitor engine idling time, speed, and performance, and other factors that
affect operating efficiency. All of the Company's
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tractors have been equipped with the Qualcomm systems since 1995 and the Company
has added Qualcomm systems, if necessary, to the tractors obtained in its
acquisitions.
As an additional service to customers, the Company offers electronic data
interchange ("EDI"), which allows customers and the Company to communicate
electronically, permitting real-time information flow, reductions or
eliminations in paperwork, and fewer clerical personnel. With EDI customers can
receive updates as to cargo position, delivery times, and other information. It
also allows customers to communicate electronically delivery, local
distribution, and account payment instructions. Since 1997, the Company has used
a document imaging system to reduce paperwork and enhance access to important
information.
Drivers and Other Personnel
Driver recruitment, retention, and satisfaction are essential to Covenant's
success, and the Company has made each of these factors a primary element of its
strategy. Driver-friendly operations are emphasized throughout the Company. The
Company has implemented automatic programs to signal when a driver is scheduled
to be routed toward home, and fleet managers are assigned specific tractor
units, regardless of geographic region, to foster positive relationships between
the drivers and their principal contact with the Company. In addition, Covenant
has offered per-mile wage increases to Company drivers in each year since 1996,
and continues to aggressively seek rate increases from customers in part to fund
higher driver pay.
Covenant differentiates its primary dry van business from many shorter-haul
truckload carriers by its use of driver teams. Driver teams permit the Company
to provide expedited service over its long average length of haul, because
driver teams are able to handle longer routes and drive more miles while
remaining within Department of Transportation ("DOT") 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, 1999, teams operated over 40.0% of the Company's
tractors. The tractors of Bud Meyer, SRT, and Harold Ives are operated primarily
by single drivers. The single driver fleets operate fewer miles per tractor and
experience more empty miles but these higher expenses are being offset by higher
revenue per loaded mile because of reduced employee expense and the benefits of
increased density on Company lanes.
Covenant is not a party to a collective bargaining agreement and its employees
are not represented by a union. At December 31, 1999, the Company employed
approximately 5,000 drivers and approximately 1,065 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 3,521 tractors had an average age of 15 months at
December 31, 1999, 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, 1999, the Company's fleet of 6,199 trailers had an average age
of 40.5 months. Approximately 82% of the Company's trailers were 53-feet long by
102-inch wide, dry vans. The Company also operated approximately 1,052 53-foot
and approximately 37 48-foot temperature-controlled trailers.
Competition
The United States trucking industry is highly competitive and includes thousands
of for-hire motor carriers, none of which dominates the market. Service and
price are the principal means of competition in the trucking industry. The
Company targets primarily the market segment that demands just-in-time and other
premium services. Management believes that this segment generally offers higher
freight rates than the segment that is less dependent upon timely service and
that the Company's size and use of driver teams are important in competing in
this segment. The
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Company competes to some extent with railroads and rail-truck intermodal service
but differentiates itself from rail and rail-truck intermodal carriers on the
basis of service because rail and rail-truck intermodal movements are subject to
delays and disruptions arising from rail yard congestion, which reduces the
effectiveness of such service on traffic with time-definite pick-up and delivery
schedules.
Regulation
The Company is a common and contract motor carrier of general commodities.
Historically, the Interstate Commerce Commission (the "ICC") and various state
agencies regulated motor carriers' operating rights, accounting systems, mergers
and acquisitions, periodic financial reporting, and other matters. In 1995,
federal legislation preempted state regulation of prices, routes, and services
of motor carriers and eliminated the ICC. Several ICC functions were transferred
to the DOT. Management does not believe that regulation by the DOT or by the
states in their remaining areas of authority has had a material effect on the
Company's operations. The Company's employee and independent contractor drivers
also must comply with the safety and fitness regulations promulgated by the DOT,
including those relating to drug and alcohol testing and hours of service. The
DOT has rated the Company "satisfactory," which is the highest safety and
fitness rating.
The DOT presently is considering proposals to amend the hours-in-service
requirements applicable to truck drivers. Any change which reduces the potential
or practical amount of time that drivers can spend driving could adversely
affect the Company. We are unable to predict the nature of any changes that may
be adopted. The DOT also is considering requirements that trucks be equipped
with certain equipment that the DOT believes would result in safer operations.
The cost of the equipment, if required, could adversely affect the Company's
profitability if shippers are unwilling to pay higher rates to fund the purchase
of such equipment.
The Company's operations are subject to various federal, state, and local
environmental laws and regulations, implemented principally by the Federal
Environmental Protection Agency and similar state regulatory agencies, governing
the management of hazardous wastes, other discharge of pollutants into the air
and surface and underground waters, and the disposal of certain substances. If
the Company should be involved in a spill or other accident involving hazardous
substances, if any such substances were found on the Company's property, or if
the Company were found to be in violation of applicable laws and regulations,
the Company could be responsible for clean-up costs, property damage, and fines
or other penalties, any one of which could have a materially adverse effect on
the Company. The Company does not have on-site underground fuel storage tanks at
any of its locations. Management believes that its operations are in material
compliance with current laws and regulations.
Fuel Availability and Cost
The Company actively manages its fuel costs by routing the Company's
drivers through fuel centers with which the Company has negotiated volume
discounts. Average fuel prices rose sharply in the second half of 1999. During
the fourth quarter the cost of fuel was in the range at which the Company
received fuel surcharges. Even with the fuel surcharges, the high price of fuel
hurt the Company's profitability. Although the Company historically has been
able to pass through most increases in fuel prices and taxes to customers in the
form of higher rates and surcharges, the increases usually are not fully
recovered. The Company does not collect surcharges on fuel used for non-revenue
miles, which includes out-of-route miles, as well as fuel used while the tractor
is idling, or approximately ten persent of annual fuel purchases. At December
31, 1999, approximately 12.0% of the Company's projected 2000 purchases of fuel
were subject to hedging contracts.
ITEM 2. PROPERTIES
Covenant maintains fifteen terminals located on its major traffic lanes. The
terminals are in Chattanooga, Tennessee; Lake City, Minnesota; Oklahoma City,
Oklahoma; French Camp, California; Long Beach, California; Dalton, Georgia;
Pomona, California; Hutchins, Texas; El Paso, Texas; Laredo, Texas; Delanco, New
Jersey; Indianapolis, Indiana; Ashdown, Arkansas; Little Rock, Arkansas; and
Stuttgart, Arkansas. The terminals provide driver recruiting centers, a base for
drivers in proximity to their homes, transfer locations for trailer relays on
transcontinental routes, and parking space for equipment dispatch and
maintenance.
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The Company's headquarters and main terminal are located on approximately 75
acres of property in Chattanooga, Tennessee that include an office building of
approximately 82,000 square feet, the Company's 48,200 square-foot principal
maintenance facility, and a truck wash. The Company initiated work on an
approximately 100,000 square foot addition to the office building during the
fourth quarter of 1999. The Company's other maintenance facilities are Oklahoma
City, Oklahoma; Dalton, Georgia; Lake City, Minnesota; and Little Rock,
Arkansas.
ITEM 3. LEGAL PROCEEDINGS
The Company from time to time is a party to litigation arising in the ordinary
course of its business, substantially all of which involves claims for personal
injury and property damage incurred in the transportation of freight. The
Company maintains insurance covering losses in excess of a $2,500 deductible
from cargo loss and physical damage claims, and losses in excess of a $5,000
deductible from personal injury and property damage. The Company maintains a
fully insured workers' compensation plan for its employees. Each of the primary
insurance policies has a limit of $1.0 million per occurrence, and the Company
carries excess liability coverage, which management believes is adequate. 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, 1999, no matters were
submitted to a vote of security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
The Company's Class A Common Stock has been traded on the National Market under
the symbol "CVTI." The following table sets forth for the calendar periods
indicated the range of high and low sales price for the Company's Class A Common
Stock as reported by Nasdaq from January 1, 1998 to December 31, 1999.
Period High Low
Calendar Year 1998
1st Quarter $23.000 $14.375
2nd Quarter $23.313 $15.000
3rd Quarter $20.500 $9.188
4th Quarter $19.500 $9.250
Calendar Year 1999
1st Quarter $20.625 $12.375
2nd Quarter $16.000 $11.125
3rd Quarter $18.938 $15.250
4th Quarter $18.250 $13.375
As of March 27, 2000, the Company had approximately 46 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 $130 million line of credit, $25 million in senior
notes due October 2005, and the operating lease covering the
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Company's headquarters and terminal facility. Future payments of cash dividends
will depend upon the financial condition, results of operations, and capital
commitments of the Company, restrictions under then-existing agreements, and
other factors deemed relevant by the Board of Directors.
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ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
(In thousands except per share and operating data amounts)
Years Ended December 31,
---- ---- ---- ---- ----
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue $ 180,346 $ 236,267 $ 297,861 $ 370,546 $ 472,741
Operating expenses:
Salaries, wages, and related expenses 83,747 108,818 131,522 164,589 202,420
Fuel, oil, and road expenses 37,802 55,340 64,910 68,292 84,465
Revenue equipment rentals and
purchased transportation 1,230 605 8,492 24,250 49,260
Repairs 3,569 4,293 5,885 8,366 10,078
Operating taxes and licenses 4,679 6,065 7,514 9,393 10,988
Insurance 4,907 6,115 8,656 10,370 12,458
General supplies and expenses 9,648 12,825 16,277 19,397 24,791
Depreciation and amortization 16,045 22,139 26,482 30,192 35,591
-----------------------------------------------------------------------------
Total operating expenses 161,627 216,200 269,738 334,849 430,051
-----------------------------------------------------------------------------
Operating income 18,719 20,067 28,123 35,697 42,690
Interest expense 4,162 5,987 6,273 5,924 5,513
-----------------------------------------------------------------------------
Income before income taxes 14,557 14,080 21,850 29,773 37,177
Income tax expense 5,274 5,102 8,148 11,490 14,900
-----------------------------------------------------------------------------
Net income $ 9,283 $ 8,978 $ 13,702 $ 18,283 $ 22,277
=============================================================================
Basic earnings per share $ 0.70 $ 0.67 $ 1.03 $ 1.27 $ 1.49
Diluted earnings per share 0.70 0.67 1.03 1.27 1.48
Weighted average common shares
outstanding 13,350 13,350 13,360 14,393 14,912
Adjusted weighted average common
shares and assumed conversions 13,350 13,353 13,360 14,440 15,028
outstanding
Balance Sheet Data:
Net property and equipment $127,408 $ 144,384 $ 161,621 $ 200,537 $ 269,034
Total assets 169,381 187,148 215,256 272,959 379,466
Long-term debt, less current maturities 80,150 83,110 80,812 84,331 140,497
Stockholders' equity $ 72,752 $ 81,730 $ 95,597 $ 141,522 $ 163,852
Selected Operating Data:
Pretax margin 8.1% 6.0% 7.3% 8.0% 7.9%
Average revenue per loaded mile (1) $ 1.09 $ 1.10 $ 1.13 $ 1.18 $ 1.20
Average revenue per total mile $ 1.03 $ 1.04 $ 1.07 $ 1.10 $ 1.11
Average length of haul in miles 1,811 1,780 1,653 1,508 1,452
Average miles per tractor per year 148,669 150,778 149,117 144,000 144,601
Average revenue per tractor per week $ 2,942 $ 2,994 $ 3,059 $ 3,045 $ 3,078
Weighted average tractors for year (2) 1,179 1,509 1,866 2,333 2,929
Total tractors at end of period (2) 1,343 1,629 2,136 2,608 3,521
Total trailers at end of period (2) 2,554 3,048 3,948 4,526 6,199
</TABLE>
(1) Includes fuel surcharge in 1996 and 1997. Excluding the fuel surcharge, the
Company estimates that average revenue per loaded mile was $1.09 and $1.12,
respectively.
(2) Includes monthly rental tractors and excludes monthly rental
trailers.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Except for the historical information contained herein, the discussion in this
annual report contains forward-looking statements that involve risk,
assumptions, and uncertainties that are difficult to predict. Words such as
"believe," "may," "could," "expects," "likely," variations of these words, and
similar expressions, are intended to identify such forward-looking statements.
The Company's actual results could differ materially from those discussed
herein. Factors that could cause or contribute to such differences include, but
are not limited to, those discussed below in the section entitled "Factors That
May Affect Future Results" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," as well as those discussed
elsewhere in this annual report.
OVERVIEW
During the three-year period ended December 31, 1999, the Company increased its
revenue at a compounded annual growth rate of 26.0%, as revenue increased to
$472.7 million in 1999, from $236.3 million in 1996. 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 seven acquisitions during
the three-year period ended 1999. The acquired operations generated
approximately $190 million in combined revenue. 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.
Over the same three-year period, the Company increased its net income at a
compound rate of approximately 35.3% to $22.3 million in 1999, from $9.0 million
in 1996. Earnings per share (diluted) increased at a compounded rate of 30.2%,
reflecting the issuance of 1,540,000 Company shares in a 1998 stock offering.
Several factors contributed to the increase, including negotiating higher
freight rates from substantially all customers. Although higher driver
compensation partially offset the increased freight rates, management believes
the Company benefited from attracting and retaining more drivers. The Company
makes no assurance that its revenue and earnings will continue to grow at the
historical rates.
Changes in several operating statistics and expense categories are expected to
result from actions the Company's acquisitions of Bud Meyer, SRT, and Harold
Ives. These operations use predominately single-driver tractors, as opposed to
the primarily team-driver tractor fleet operated by Covenant's long-haul
operation. The single driver fleets operate fewer miles per tractor and
experience more empty miles. 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. In addition, the Company's refrigerated
services 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 Company's operating statistics and expenses
are expected to shift in future periods with the mix of single, team, and
temperature-controlled operations.
The Company also initiated the use of owner-operators of tractors in 1997. The
Company's contracted with an average of 134 owner-operators in 1998 and an
average of 285 owner-operators in 1999. Owner-operators provide a tractor and a
driver and bear all operating expenses in exchange for a fixed lease payment per
mile. In addition, the Company does not have the capital outlay of purchasing
the tractor. In 1997, the Company also financed approximately 240 tractors under
operating leases. In 1998, the Company financed 185 tractors and 69 trailers
under operating leases. In 1999, the Company financed an additional 220 tractors
and 381 trailers under operating leases. The lease payments to owner-operators
and the financing of tractors under operating leases appear as operating
expenses under revenue equipment rentals and purchased transportation. Expenses
associated with owned equipment, such as interest and depreciation, are not
incurred, and for owner-operator tractors, driver compensation, fuel,
communications, and other expenses are not incurred. Because obtaining equipment
from owner-operators and under operating leases effectively shifts financing
expenses from interest to "above the line" operating expenses, the Company
intends to evaluate its efficiency using pretax margin and net margin rather
than operating ratio.
In March 2000, the Company reached an agreement in principle with five other
publicly traded truckload carriers to form a transportation brokerage,
logistics, and purchasing company called "Transplace.com." Upon negotiation and
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closing of a formal agreement, Covenant would contribute approximately $5
million in cash and the intangible assets of its brokerage and logistics
business. In exchange, Covenant would receive a 13% ownership interest in
Transplace.com. Management currently is unable to fully predict the impact of
the proposed transaction.
The following table sets forth the percentage relationship of certain items to
revenue for each of the three years-ended December 31:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenue 100.0% 100.0% 100.0%
Operating expenses:
Salaries, wages, and related expenses 44.2 44.4 42.8
Fuel, oil, and road expenses 21.8 18.4 17.9
Revenue equipment rentals and purchased
transportation 2.9 6.5 10.4
Repairs 2.0 2.3 2.1
Operating taxes and licenses 2.5 2.5 2.3
Insurance 2.9 2.8 2.6
General supplies and expenses 5.5 5.2 5.2
Depreciation and amortization 8.9 8.1 7.5
------------- ------------- -------------
Total operating expenses 90.6 90.4 91.0
------------- ------------- -------------
Operating income 9.4 9.6 9.0
Interest expense 2.2 1.6 1.2
------------- ------------- -------------
Income before income taxes 7.3 8.0 7.9
Income tax expense 2.7 3.1 3.2
------------- ------------- -------------
Net income 4.6% 4.9% 4.7%
============= ============= =============
</TABLE>
COMPARISON OF YEAR ENDED DECEMBER 31, 1999 TO YEAR ENDED DECEMBER 31, 1998
Revenue increased $102.2 million (27.6%), to $472.7 million in 1999 from $370.5
million in 1998. The revenue increase was primarily generated by a 25.5%
increase in weighted average tractors, to 2,929 in 1999, from 2,333 in 1998, as
the Company expanded internally to serve new customers and higher volumes from
existing customers, as well as externally through the acquisitions of Gouge in
August 1998, SRT in October 1998, ATW in September 1999, and Harold Ives in
November 1999. The Company's average revenue per loaded mile increased to
approximately $1.20 in 1999, from $1.18 in 1998. The increase was attributable
primarily to per-mile rate increases negotiated by the Company. The increase in
average revenue per loaded mile more than offset an increase in the empty miles
percentage. Revenue per total mile increased to approximately $1.11 in 1999,
from $1.10 in 1998.
Salaries, wages, and related expenses increased $37.8 million (23.0%), to $202.4
million in 1999, from $164.6 million in 1998. As a percentage of revenue,
salaries, wages, and related expenses decreased to 42.8% in 1999, from 44.4% in
1998. Driver wages as a percentage of revenue decreased to 30.7% in 1999, from
32.3% in 1998, because the Company utilized more owner-operators and a larger
percentage of single-driver tractors from the operations of SRT, and Harold
Ives, which only have one driver to be compensated. A driver wage increase that
went into effect in October 1999, and an additional increase planned for early
2000 are expected to increase driver wages as a percentage of revenue in future
periods. The Company experienced an increase in non-driving employee payroll
expense to 6.1% of revenue in the 1999 period from 5.5% of revenue in the 1998
period due to the start up of Covenant Transport Logistics and the acquisitions
of SRT and Harold Ives. Health insurance, employer paid taxes, and workers'
compensation decreased to 5.8% of revenue in 1999, from 6.3% in 1998. The
decrease as a percentage of revenue was primarily the result of improved group
health insurance rates in 1999 as compared to the 1998 rates.
Fuel, oil, and road expenses increased $16.2 million (23.7%), to $84.5 million
in 1999, from $68.3 million in 1998. As a percentage of revenue, fuel, oil, and
road expenses decreased to 17.9% in 1999 from 18.4% in 1998. During 1999,
average fuel costs for the year increased approximately $0.10 per gallon versus
1998. The increase in 1999 was more than offset by fuel surcharges, fuel hedges,
and by the increased usage of owner-operators who pay for their own fuel
purchases. However, fuel prices rose sharply during the fourth quarter of 1999
and remain elevated at levels much higher than the average in 1998 or 1999.
Thus, fuel, oil, and road expenses are anticipated to increase as a percentage
of revenue in 2000. Fuel surcharges amounted to nearly $.006 per mile or
approximately $2.4 million during 1999. Fuel surcharges were not triggered
during 1998. The Company's percentage of fuel purchases that are
10
<PAGE>
hedged was approximately 18.5% in 1999 and is approximately 12% for the year
2000.
Revenue equipment rentals and purchased transportation increased $25.0 million
(103.1%), to $49.3 million in 1999, from $24.3 million in 1998. As a percentage
of revenue, revenue equipment rentals and purchased transportation increased to
10.4% in 1999 from 6.5% in 1998. 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 to an average
of 285 in 1999, compared to 134 in 1998, an increase of 112.7%. The Company also
entered into additional operating leases. During 1999, an average of
approximately 497 tractors were leased compared to an average of approximately
220 leased tractors during 1998. The equipment leases will increase this expense
category in the future, while reducing depreciation and interest. The Company
also formed a logistics division in the fourth quarter of 1998 that is being
reflected in this expense category as well.
Repairs increased $1.7 million (20.5%), to $10.1 million in 1999, from $8.4
million in 1998. As a percentage of revenue, repairs decreased to 2.1% in 1999,
from 2.3% in 1998. As a percentage of revenue, repairs decreased due to the
increased number of owner-operators who are responsible for their own repairs,
which more than offset additional repairs associated with a slight increase in
fleet age.
Operating taxes and licenses increased $1.6 million (17.0%), to $11.0 million in
1999, from $9.4 million in 1998. As a percentage of revenue, operating taxes and
licenses decreased to 2.3% in 1999, from 2.5% in 1998, due to increased revenue
per tractor more efficiently spreading this largely fixed cost.
Insurance, consisting primarily of premiums for liability, physical damage, and
cargo damage insurance, and claims, increased $2.1 million (20.1%), to $12.5
million in 1999, from $10.4 million in 1998. As a percentage of revenue,
insurance decreased to 2.6% in 1999, from 2.8% in 1998, as the Company continued
to reduce premiums per million dollars of revenue. Insurance costs are expected
to rise nationwide in 2000, and the Company may be subject to increased costs in
this area.
General supplies and expenses, consisting primarily of headquarters and other
terminal lease expense, driver recruiting expenses, and communications,
increased $5.4 million (27.8%), to $24.8 million in 1999, from $19.4 million in
1998. As a percentage of revenue, general supplies and expenses remained
essentially constant at 5.2% in the 1999 and the 1998 periods.
Depreciation and amortization, consisting primarily of depreciation of revenue
equipment, increased $5.4 million (17.9%), to $35.6 million in 1999, from $30.2
million in 1998. As a percentage of revenue, depreciation and amortization
decreased to 7.5% in 1999, from 8.1% in 1998, because the Company utilized more
owner operators, leased more revenue equipment, and realized an increase in
revenue per tractor per week, which more efficiently spread this fixed cost over
a larger revenue base. Amortization expense relates to deferred debt costs
incurred and covenants not to compete from two 1995, one 1998, and two 1999
business acquisitions, as well as goodwill from two 1997, two 1998, and three
1999 acquisitions. Depreciation and amortization expense is net of any gain or
loss on the sale of tractors and trailers. Gain on sale of tractors and trailers
was $1.9 million in 1998, and $67,000 in 1999. The market for used tractors
deteriorated late in 1999, and into 2000. If the prices for used equipment
remain depressed, the Company may recognize less gain or a loss on the sale of
its tractors and trailers, which would impact depreciation and amortization as a
percentage of revenue.
Interest expense decreased $0.4 million (6.9%), to $5.5 million in 1999, from
$5.9 million in 1998. As a percentage of revenue, interest expense decreased to
1.2% in 1999, from 1.6% in 1998, as the result of utilizing more owner-operators
and leasing more revenue equipment.
As a result of the foregoing, the Company's pretax margin remained essentially
constant at 7.9% in 1999, compared with 8.0% in 1998.
The Company's effective tax rate was 40.1% in 1999, and 38.6% in 1998, due to
the Company paying taxes to a greater number of states.
11
<PAGE>
As a result of the factors described above, net income increased $4.0 million
(21.9%), to $22.3 million in 1999 (4.7% of revenue), from $18.3 million in 1998
(4.9% of revenue).
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31, 1997
Revenue increased $72.6 million (24.4%), to $370.5 million in 1998, from $297.9
million in 1997. The revenue increase was primarily generated by a 25.0%
increase in weighted average tractors, to 2,333 in 1998, from 1,866 in 1997, as
the Company expanded internally to serve new customers and higher volumes from
existing customers, as well as externally through the acquisitions of Bud Meyer
in October 1997, Gouge in August 1998, and SRT in October 1998. The Company's
average revenue per loaded mile increased to approximately $1.18 in 1998, from
$1.13 in 1997. The increase was attributable to per-mile rate increases
negotiated by the Company as well as higher revenue per loaded mile at Bud
Meyer. The increase in average revenue per loaded mile more than offset an
increase in the empty miles percentage. Revenue per total mile increased to
approximately $1.10 in 1998, from $1.07 in 1997.
Salaries, wages, and related expenses increased $33.1 million (25.1%), to $164.6
in 1998, from $131.5 million in 1997. As a percentage of revenue, salaries,
wages, and related expenses increased to 44.4% in 1998 from 44.2% in 1997.
Driver wages as a percentage of revenue decreased to 32.3% in 1998, from 32.7%
in 1997, primarily because the use of owner-operators more than offset a $0.025
per mile pay increase for employee drivers that went into effect in April 1998.
Non-driving employee payroll expense increased to 5.5% of revenue in 1998 from
5.3% in 1997. Although the Company continued to reduce the number of non-driving
employees per tractor, a larger number of participants in the Company's bonus
program contributed to the increase. Health insurance, employer paid taxes, and
workers' compensation increased to 6.3% of revenue in 1998, from 6.1% in 1997.
The increase as a percentage of revenue was primarily the result of a higher
state unemployment tax rate in 1998, as compared to the 1997 tax rate.
Fuel, oil, and road expenses increased $3.4 million (5.2%), to $68.3 million in
1998, from $64.9 million in 1997. As a percentage of revenue, fuel, oil, and
road expenses decreased to 18.4% in 1998, from 21.8% in 1997. The increase
reflects the greater number of tractors in service in 1998. The decrease as a
percentage of revenue was primarily the result of improving fuel prices during
1998, as well as the increased use of owner-operators who pay for their fuel
purchases. The expense for owner-operators is reflected in the revenue equipment
rentals and purchased transportation expense category. Fuel surcharges were not
in effect during 1998, and amounted to nearly $0.01 per mile or approximately
$2.4 million during 1997.
Revenue equipment rentals and purchased transportation increased $15.8 million
(185.5%), to $24.2 million in 1998, from $8.5 million in 1997. As a percentage
of revenue, revenue equipment rentals and purchased transportation increased to
6.5% in 1998, from 2.9% in 1997. During 1998, the Company increased its use of
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.
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 contracted with an average of 134 owner-operators during
1998. The Company also entered into operating leases for approximately 240
tractors during the fourth quarter of 1997, as well as 185 tractors and 69
trailers during 1998. The equipment leases will increase this expense category
in the future, while reducing depreciation and interest. The Company also formed
a logistics division in the fourth quarter of 1998, that is being reflected in
this expense category as well.
Repairs increased $2.5 million (42.2%), to $8.4 million in 1998, from $5.9
million in 1997. As a percentage of revenue, repairs increased 2.3% in 1998 from
2.0% in 1997. The increase was attributable to an increase in fleet size, a
slight increase in fleet age, the costs associated with preparing certain Bud
Meyer equipment for trade-in, as well as an increase in repairs related to the
change to a higher deductible limit under the Company 's physical damage
insurance ($5,000 compared to $2,500).
Operating taxes and licenses increased $1.9 million (25.0%), to $9.4 million in
1998, from $7.5 million in 1997. As a percentage of revenue, operating taxes and
licenses remained essentially constant at 2.5% in the 1998 period and in the
1997 period.
Insurance, consisting primarily of premiums for liability, physical damage, and
cargo damage insurance, and claims, increased $1.7 million (19.8%), to $10.4
million in 1998, from $8.7 million in 1997. As a percentage of revenue,
12
<PAGE>
insurance decreased to 2.8% in 1998, from 2.9% in 1997, as the Company continued
to reduce premiums per million dollars of revenue.
General supplies and expenses, consisting primarily of headquarters and other
terminal lease expense, driver recruiting expenses, communications, and
utilities, increased $3.1 million (19.2%), to $19.4 million in 1998, from $16.3
million in 1997. As a percentage of revenue, general supplies and expenses
decreased to 5.2% in 1998, from 5.5% in 1997. The 1998 decrease as a percentage
of revenue is related to the termination of the lease of the former headquarters
as well as the fixed nature of a portion of these costs which was more
effectively spread over higher revenue.
Depreciation and amortization, consisting primarily of depreciation of revenue
equipment, increased $3.7 million (14.0%), to $30.2 million in 1998, from $26.5
million in 1997. As a percentage of revenue, depreciation and amortization
decreased to 8.1% in 1998, from 8.9% in 1997, as the Company utilized more owner
operators, leased more revenue equipment, and realized an increase in revenue
per tractor per week, which more efficiently spread this fixed cost over a
larger revenue base. Amortization expense relates to deferred debt costs
incurred and covenants not to compete from two 1995 and one 1998 asset
acquisitions, as well as goodwill from two 1997 and two 1998 acquisitions.
Interest expense decreased $0.3 million (5.6%), to $5.9 million in 1998, from
$6.3 million in 1997. As a percentage of revenue, interest expense decreased to
1.6% in 1998, from 2.2% in 1997, as the result of utilizing more
owner-operators, leasing more revenue equipment, and averaging lower debt
balances related to the Company's secondary stock offering in April 1998.
As a result of the foregoing, the Company's pretax margin improved to 8.0% in
1998, from 7.3% in 1997.
The Company's effective tax rate was 38.6% in 1998, and 37.3% in 1997, due to
the Company paying taxes to a greater number of states.
As a result of the factors described above, net income increased $4.6 million
(33.4%), to $18.3 million in 1998 (4.9% of revenue) from $13.7 million in 1997
(4.6% of revenue).
LIQUIDITY AND CAPITAL RESOURCES
The growth of the Company's business has required significant investments in new
revenue equipment. The Company historically 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 December 31, 1999,
were funds provided by operations and borrowings under its primary credit
agreement, which had maximum available borrowing of $130.0 million at December
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 1999 were net
income increased by depreciation and amortization and deferred income taxes. 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 growth in the business.
The Company's number of days sales in accounts receivable decreased from 48 days
in 1998, to 45 days in 1999. Net cash provided by operating activities was $44.5
million in 1999, and $39.9 million in 1998.
Net cash used in investing activities was $80.8 million in 1999 and $59.1
million in 1998. Such amounts were used primarily to acquire additional revenue
equipment as the Company expanded its operations. In addition, approximately
$10.8 million represented the purchase price for the assets of ATW, of which
approximately $1.5 million was allocated to goodwill, and approximately $15.0
million represented the purchase price for the acquisition of Harold Ives, of
which approximately $4.4 million was allocated to goodwill. The Company expects
capital expenditures, primarily for revenue equipment (net of trade-ins) and the
approximately 100,000 square foot addition to the Company's headquarters to be
approximately $40 million in 2000, exclusive of acquisitions.
Net cash provided by financing activities was $34.5 million in 1999, and $19.5
million in 1998. The primary source of cash for 1999 and 1998 was provided by
borrowings under the Credit Agreement. In 1998, funds were also
13
<PAGE>
provided by the proceeds from the sale of Company shares. The Company sold
1,540,000 shares and certain stockholders of the Company sold 960,000 shares of
Class A Common Stock in a public offering effective April 30, 1998. The Company
received net proceeds of $27.5 million in connection with the offering. The
proceeds were used to reduce the Company's indebtedness under the revolving line
of credit. The indebtedness was incurred primarily to acquire revenue equipment.
The Company did not receive any proceeds from the sale of shares of Class A
Common Stock by the selling stockholders.
At December 31, 1999, the Company had outstanding debt of $144.7 million,
primarily consisting of $96.0 million drawn under the Credit Agreement, $25.0
million in 10-year senior notes, $20.2 million in term equipment financing, a
$3.0 million interest bearing note to the former primary stockholder of SRT
related to the acquisition, and $0.5 million in notes related to non-compete
agreements. Interest rates on this debt range 5.9% to 9.0%.
The Credit Agreement is with a group of banks and has a maximum borrowing limit
of $130.0 million. Borrowings related to revenue equipment are limited to the
lesser of 90% of net book value of revenue equipment or $130.0 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, that is adjusted quarterly between 0.125% and 0.275%
per annum based on cash flow coverage, is due on the daily unused portion of the
Credit Agreement. The Company, and all subsidiaries, are parties to the Credit
Agreement and related documents.
The Company renewed the Credit Agreement in June 1999. The Credit Agreement
revolves through December 31, 2000, and then has a three-year term out if not
renewed. Payments for interest are due quarterly in arrears with principal
payments due in twelve equal quarterly installments beginning in 2001, if not
renewed. 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 0.55% and 0.925% based
on cash flow coverage. At December 31, 1999, the margin was 0.60%. In October
1995, the Company placed $25 million in 10-year senior notes with an insurance
company. The notes bear interest at 7.39%, payable semi-annually, and mature on
October 1, 2005. Principal payments are due in equal annual installments
beginning in the seventh year of the notes. Proceeds of the notes were used to
reduce borrowings under the Credit Agreement.
In December 1997, the Company engaged in a sale-and-leaseback transaction
involving 199 of the Company's tractors that had been newly acquired or were
awaiting delivery. The proceeds of the sale were used to reduce debt under the
Credit Agreement. The Company entered into a three-year lease of the equipment,
with a 5.15% implied interest rate and a residual value guaranteed by the
Company at a level equal to the Company's salvage value on owned tractors.
The Company's headquarters facility was completed in December 31, 1996. The cost
of the approximately 75 acres and construction of the headquarters and shop
buildings was approximately $15 million. The Company financed the land and
improvements under a "build to suit" operating lease. The Company is currently
constructing an approximately 100,000 square foot addition to the office
building and is improving an additional 58 acres of land. The estimated cost of
these activities in 2000 is $15 million.
The Credit Agreement, senior notes, and the headquarters and terminal lease
agreement contain certain restrictions and covenants relating to, among other
things, dividends, tangible net worth, cash flow, acquisitions and dispositions,
and total indebtedness. All of these instruments are cross-defaulted. The
Company was in compliance with the agreements at December 31, 1999.
INFLATION AND FUEL COSTS
Most of the Company's operating expenses are inflation-sensitive, with inflation
generally producing increased costs of operations. During the past three years,
the most significant effects of inflation have been on revenue equipment prices
and the compensation paid to the drivers. Innovations in equipment technology
and comfort have resulted in higher tractor prices, and there has been an
industry-wide increase in wages paid to attract and retain qualified drivers.
The Company historically has limited the effects of inflation through increases
in freight rates and certain cost control efforts.
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<PAGE>
In addition to inflation, fluctuations in fuel prices can affect profitability.
Fuel expense comprises a larger percentage of revenue for Covenant than many
other carriers because of Covenant's long average length of haul. Most of the
Company's contracts with customers contain fuel surcharge provisions. Although
the Company historically has been able to pass through most long-term increases
in fuel prices and taxes to customers in the form of surcharges and higher
rates, increases usually are not fully recovered. In the fourth quarter of 1999,
fuel prices escalated rapidly and have remained high. This has increased the
Company's cost of operating.
SEASONALITY
In the trucking industry, revenue generally decreases as customers reduce
shipments during the winter holiday season and as inclement weather impedes
operations. At the same time, operating expenses generally increase, with fuel
efficiency declining because of engine idling and weather creating more
equipment repairs. First quarter net income historically has been lower than net
income in each of the other three quarters of the year because of the weather.
The Company's equipment utilization typically improves substantially between May
and October of each year because of the trucking industry's seasonal shortage of
equipment on traffic originating in California and the Company's ability to
satisfy some of that requirement. The seasonal shortage typically occurs between
May and August because California produce carriers' equipment is fully utilized
for produce during those months and does not compete for shipments hauled by the
Company's dry van operation. During September and October, business increases as
a result of increased retail merchandise shipped in anticipation of the
holidays.
The table below sets forth quarterly information reflecting the Company's
equipment utilization (miles per tractor per period) during 1997, 1998, and
1999. 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.
<TABLE>
<CAPTION>
Equipment Utilization Table
(Miles Per Tractor Per Period)
First Quarter Second Quarter Third Quarter Fourth Quarter
----------------- ------------------ ----------------- ----------------
<S> <C> <C> <C> <C>
1997 34,389 37,325 38,850 38,314
1998 34,828 35,796 36,455 36,813
1999 33,739 37,011 37,585 36,132
</TABLE>
YEAR 2000
To date, the Company's information and non-information systems have experienced
no adverse impact from the transition to the Year 2000. In addition, the Company
is not aware of any material Year 2000 related issues with any of its shippers,
suppliers, or other third parties with whom it has business relationships.
Through December 31, 1999, the Company spent approximately $250,000 to address
Year 2000 issues. The Company does not expect to incur any significant
additional costs relating to Year 2000 issues.
FACTORS THAT MAY AFFECT FUTURE RESULTS
A number of factors over which the Company has little or no control may affect
the Company's future results. Factors that might cause such a difference
include, but are not limited to, the following:
Economic Factors. 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.
Fuel Price. The price of diesel fuel escalated rapidly in late 1999 and early
2000. Fuel is one of the Company's largest operating expense, and high fuel
prices have a negative impact on the Company's profitability. Continued high
fuel prices may affect the Company's future results.
15
<PAGE>
Resale of Used Revenue Equipment. The Company historically has recognized a gain
on the sale of its revenue equipment. The market for used tractors experienced a
sharp drop in late 1999 and into 2000. If the prices for used equipment remain
depressed, the Company could find it necessary to dispose of its equipment at
lower prices or retain some of its equipment longer, with a resulting increase
in operating expenses.
Recruitment, Retention, and Compensation of Qualified Drivers. Competition for
drivers is intense in the trucking industry. There was in 1999, 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, curtail the Company's growth, or experience the adverse effects of
tractors without drivers.
Competition. The trucking industry is highly competitive and fragmented. The
Company competes with other truckload carriers, private fleets operated by
existing and potential customers, railroads, rail-intermodal service, and to
some extent with air-freight service. Competition is based primarily on service,
efficiency, and freight rates. Many competitors offer transportation service at
lower rates than the Company. The Company's results could suffer if it cannot
obtain higher rates than competitors that offer a lower level of service.
Regulation. The trucking industry is subject to various governmental
regulations. The DOT is considering a proposal that may limit the
hours-in-service during which a driver may operate a tractor and a proposal that
would require installing certain safety equipment on tractors. Although the
Company is unable to predict the nature of any changes in regulations, the cost
of any changes, if implemented, may adversely affect the profitability of the
Company.
Acquisitions. A significant portion of the Company's growth has occurred through
acquisitions, and acquisitions are an important component of the Company's
growth strategy. Management must continue to identify desirable target companies
and negotiate, finance, and close acceptable transactions or the Company's
growth could suffer.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
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 1999, diesel fuel expenses
represented 16.7% of the Company's total operating expenses and 15.2% of total
revenue. The Company uses purchase commitments through suppliers to reduce a
portion of its exposure to fuel price fluctuations. At December 31, 1999, the
national average price of diesel fuel as provided by the U.S. Department of
Energy was $1.298 per gallon. At December 31, 1999, the notional amount for
purchased commitments during 2000 was 9.5 million gallons. At December 31, 1999,
the price of the notional 9.5 million gallons would have produced approximately
$1.5 million of income to offset increased fuel prices if the price of fuel
remained the same as of December 31, 1999. At December 31, 1999, a ten percent
change in the price of fuel would increase or decrease the gain on fuel purchase
commitments by $1.2 million.
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 0.925%. At
December 31, 1999, the Company had drawn $96 million under the Credit Agreement,
which is subject to variable rates. Considering all debt outstanding, each
one-percentage point increase or decrease in LIBOR would affect the Company's
pretax interest expense by $960,000 on an annualized basis.
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.
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<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's audited consolidated balance sheets, statements of income, cash
flows, stockholders' equity, and notes related thereto, are contained at Pages
21 to 35 of this report. The supplementary quarterly financial data follows:
<TABLE>
<CAPTION>
Quarterly Financial Data:
(In thousands except per share amounts)
Fourth Third Second First
Quarter Quarter Quarter Quarter
1999 1999 1999 1999
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenue $141,662 $120,104 $113,211 $ 97,764
Operating income 12,379 12,468 11,112 6,731
Income before taxes 10,672 11,188 9,887 5,430
Income taxes 4,278 4,486 3,955 2,181
Net income 6,394 6,702 5,932 3,249
Net income per share $ 0.43 $ 0.45 $ 0.40 $ 0.22
Fourth Third Second First
Quarter Quarter Quarter Quarter
1998 1998 1998 1998
--------------- --------------- --------------- --------------
Revenue $ 106,146 $ 95,566 $ 89,010 $ 79,824
Operating income 10,723 10,293 8,901 5,781
Income before taxes 9,185 8,910 7,358 4,320
Income taxes 3,582 3,463 2,799 1,645
Net income 5,603 5,447 4,559 2,675
Net income per share $ 0.38 $ 0.37 $ 0.32 $ 0.20
</TABLE>
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, 1999, 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 to 3 and Page 12 of the Registrant's Proxy Statement for the
2000 annual meeting of stockholders, which will be filed with the Securities and
Exchange Commission in accordance with Rule 14a-6 promulgated under the
Securities Exchange Act of 1934, as amended (the "Proxy Statement") is
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information respecting executive compensation set forth under the caption
"Executive Compensation" on Pages 5 to 8 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 Pages 9 to 10 of the Proxy Statement is
incorporated herein by reference.
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<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" and "Certain and Relationships and Related Transactions" on Page
4 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 consolidated financial statements are set forth at the
following pages of this report:
Report of Independent Accountants...........................................21
Consolidated Balance Sheets.................................................22
Consolidated Statements of Income...........................................23
Consolidated Statements of Stockholders' Equity.............................24
Consolidated Statements of Cash Flows.......................................25
Notes to Consolidated Financial Statements..................................26
2. Financial Statement Schedules.
Financial statement schedules are not required because all required information
is included in the financial statements.
3. Exhibits.
See list under Item 14(c) below, with management compensatory plans and
arrangements being listed under Exhibits 10.1, 10.2, and 10.9.
(b) Reports on Form 8-K during the fourth quarter ended December 31, 1999.
One Form 8-K was filed on November 16, 1999, with respect to the acquisition
of Harold Ives Trucking Co. and Terminal Truck Broker, Inc.
(c) Exhibits
Exhibit
Number Reference Description
3.1 (1) Restated Articles of Incorporation.
3.2 (1) Amended By-Laws dated September 27, 1994.
4.1 (1) Restated Articles of Incorporation.
4.2 (1) Amended By-Laws dated September 27, 1994.
10.1 (1) Incentive Stock Plan filed as Exhibit 10.9.
10.2 (1) 401(k) Plan filed as Exhibit 10.10.
10.3 (2) Note Purchase Agreement dated October 15,
1995, among Covenant Transport, Inc., a
Tennessee corporation and CIG & Co., filed
as Exhibit 10.12.
10.4 (3) 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.
10.5 (3) First Amendment to Note Purchase Agreement and
Waiver dated April 1, 1996, filed as Exhibit 10.16.
10.6 (4) Waiver to Note Purchase Agreement dated March 31,
1997, filed as Exhibit 10.12.
10.7 (5) Second Amendment to Note Purchase Agreement dated
December 30, 1997, filed as Exhibit 10.19.
18
<PAGE>
10.8 (6) Stock Purchase Agreement made and entered into as
of October 5, 1998, by and among Covenant
Transport, Inc., a Nevada corporation; Smith
Charitable Remainder Trust; Southern Refrigerated
Transport, Inc., an Arkansas corporation; Tony
Smith Trucking, Inc., an Arkansas corporation; and
Tony and Kathy Smith, husband and wife and
residents of Arkansas, filed as Exhibit 10.22.
10.9 (7) Amendment No. 2 to the Incentive Stock Plan, filed
as Exhibit 10.10.
10.10 (7) Amended and Restated Credit Agreement dated June
18, 1999, filed as Exhibit 10.11.
10.11 (8) Stock Purchase Agreement made and entered into as
of November 15, 1999, by and among Covenant
Transport, Inc., a Tennessee corporation; Harold
Ives; Marilu Ives, Tommy Ives, Garry Ives, Larry
Ives, Sharon Ann Dickson, and the Tommy Denver Ives
Irrevocable Trust; Harold Ives Trucking Co.; and
Terminal Truck Broker, Inc.
21 (9) List of subsidiaries.
23 (9) Consent of PricewaterhouseCoopers LLP, independent
accountants.
27 (9) Financial Data Schedule.
- --------------------------------------------------------------------------------
References:
Previously filed as an exhibit to and incorporated by reference from:
(1) Form S-1, Registration No. 33-82978, effective October 28, 1994.
(2) Form 10-K for the year ended December 31, 1995.
(3) Form 10-Q for the quarter ended March 31, 1996.
(4) Form 10-Q for the quarter ended March 31, 1997.
(5) Form 10-K for the period ended December 31, 1997.
(6) Form 10-K for the period ended December 31, 1998.
(7) Form 10-Q for the quarter ended September 30, 1999.
(8) Form 8-K for the event dated November 16, 1999.
(9) Filed herewith.
19
<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: April 4, 2000 By: /s/ Joey B. Hogan
Joey B. Hogan
Treasurer and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Position Date
/s/ David R. Parker Chairman of the Board, President,
David R. Parker and Chief Executive Officer
(principal executive officer) April 4, 2000
/s/ Joey B. Hogan Treasurer and Chief Financial
Joey B. Hogan Officer (principal financial
and accounting officer) April 4, 2000
/s/ R. H. Lovin, Jr.
R. H. Lovin, Jr. Director April 4, 2000
Michael W. Miller Director
William T. Alt Director
/s/ Robert E. Bosworth
Robert E. Bosworth Director April 4, 2000
/s/ Hugh O. Maclellan, Jr.
Hugh O. Maclellan, Jr. Director April 4, 2000
/s/ Mark A. Scudder
Mark A. Scudder Director April 4, 2000
20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Covenant Transport, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Covenant
Transport, Inc. and its subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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 of these statements in accordance with auditing standards generally
accepted in the United States, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Knoxville, Tennessee
February 9, 2000
21
<PAGE>
<TABLE>
<CAPTION>
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(In thousands except share data)
1998 1999
------------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,926 $ 1,046
Accounts receivable, net of allowance of $1,065 in 1998 and
$1,040 in 1999 51,789 75,038
Drivers advances and other receivables 2,476 4,789
Tire and parts inventory 1,929 3,046
Prepaid expenses 5,325 9,567
Deferred income taxes 1,674 1,310
Income taxes receivable - 4,506
------------------- -----------------
Total current assets 66,119 99,302
Property and equipment, at cost 282,358 349,672
Less accumulated depreciation and amortization 81,821 80,638
------------------- -----------------
Net property and equipment 200,537 269,034
Other 6,303 15,638
------------------- -----------------
Total assets $272,959 $383,974
=================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks written in excess of bank balance - 3,599
Current maturities of long-term debt 1,943 4,218
Accounts payable 3,485 7,260
Accrued expenses 12,914 17,136
Accrued income tax 1,404 -
------------------- -----------------
Total current liabilities 19,746 32,211
Long-term debt, less current maturities 84,331 140,497
Deferred income taxes 27,359 47,412
------------------- -----------------
Total liabilities 131,436 220,120
Commitments and contingent liabilities
Stockholders' equity:
Class A common stock, $.01 par value; 20,000,000 shares
authorized; 12,560,250 and 12,564,250 shares issued and 126 126
outstanding as of 1998 and 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 78,313
Retained earnings 63,112 85,389
------------------- -----------------
Total stockholders' equity 141,523 163,852
------------------- -----------------
Total liabilities and stockholders' equity $272,959 $383,974
=================== =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
<TABLE>
<CAPTION>
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
(In thousands except per share data)
1997 1998 1999
---------------- ---------------- -------------
<S> <C> <C> <C>
Revenue $ 297,861 $ 370,546 $472,741
Operating expenses:
Salaries, wages, and related expenses 131,522 164,589 202,420
Fuel, oil, and road expenses 64,910 68,292 84,465
Revenue equipment rentals and purchased
transportation 8,492 24,250 49,260
Repairs 5,885 8,366 10,078
Operating taxes and licenses 7,514 9,393 10,988
Insurance 8,656 10,370 12,458
General supplies and expenses 16,277 19,397 24,791
Depreciation and amortization, including gain on
disposition of equipment 26,482 30,192 35,591
---------------- ---------------- ---------------
Total operating expenses 269,738 334,849 430,051
---------------- ---------------- ---------------
Operating income 28,123 35,697 42,690
Interest expense 6,273 5,924 5,513
---------------- ---------------- ---------------
Income before income taxes 21,850 29,773 37,177
Income tax expense 8,148 11,490 14,900
---------------- ---------------- ---------------
Net income $13,702 $18,283 $ 22,277
================ ================ ===============
Basic earnings per share: $1.03 $1.27 $1.49
Diluted earnings per share: $1.03 $1.27 $1.48
Weighted average shares outstanding 13,360 14,393 14,912
Adjusted weighted average shares and assumed conversions
outstanding 13,360 14,440 15,028
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
<TABLE>
<CAPTION>
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
(In thousands)
Class A Class B Additional Total
Common Common Paid-In Retained Stockholders'
Stock Stock Capital Earnings Equity
------------- ------------- --------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1997 $ 110 $ 24 $ 50,469 $ 31,127 $ 81,730
Exercise of employee stock options -- -- 165 -- 165
Net income -- -- -- 13,702 13,702
------------- ------------- --------------- -------------- -----------------
Balances at December 31, 1997 110 24 50,634 44,829 95,597
Exercise of employee stock options -- -- 157 -- 157
Secondary offering 16 -- 27,470 -- 27,486
Net income -- -- -- 18,283 18,283
------------- ------------- --------------- -------------- -----------------
Balances at December 31, 1998 126 24 78,261 63,112 141,523
Exercise of employee stock options -- -- 52 -- 52
Net income -- -- -- 22,277 22,277
------------- ------------- --------------- -------------- -----------------
Balances at December 31, 1999 $ 126 $24 $ 78,313 $ 85,389 $163,852
============= ============= =============== ============== =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
<TABLE>
<CAPTION>
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
(In thousands)
1997 1998 1999
-------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $13,702 $18,283 $22,277
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on receivables 458 456 131
Depreciation and amortization 27,364 32,075 35,658
Deferred income tax expense 4,354 4,146 9,137
Gain on disposition of property and equipment (882) (1,883) (67)
Changes in operating assets and liabilities:
Receivables and advances (2,581) (12,554) (11,974)
Prepaid expenses 200 (1,075) (3,321)
Tire and parts inventory (156) (617) (750)
Accounts payable and accrued expenses 2,787 1,072 (6,606)
-------------------------------------------------------
Net cash provided by operating activities 45,246 39,903 44,485
Cash flows from investing activities:
Acquisition of property and equipment (54,028) (80,303) (101,653)
Proceeds from disposition of property and equipment 32,023 27,760 46,632
Acquisition of intangibles (1,250) (220) --
Acquisition of business- Bud Meyer(1) (4,350) -- --
Acquisition of business- SRT(2) -- (6,295) --
Acquisition of business- ATW -- -- (10,775)
Acquisition of business- Harold Ives(3) -- -- (15,031)
-------------------------------------------------------
Net cash used in investing activities (27,605) (59,058) (80,827)
Cash flows from financing activities:
Proceeds from equity offering -- 27,485 --
Exercise of stock option 165 157 52
Proceeds from issuance of long-term debt -- 84,000 93,500
Repayments of long-term debt (18,564) (92,094) (62,503)
Other (124) (77) (186)
Checks in excess of bank balance -- -- 3,599
-------------------------------------------------------
Net cash provided by/(used in) financing activities (18,523) 19,471 34,462
-------------------------------------------------------
Net change in cash and cash equivalents (882) 316 (1,880)
Cash and cash equivalents at beginning of period 3,492 2,610 2,926
-------------------------------------------------------
Cash and cash equivalents at end of period $2,610 $2,926 $1,046
=======================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $6,147 $6,021 $5,823
=======================================================
Income taxes $2,927 $5,675 $12,108
=======================================================
</TABLE>
(1) Acquisition of business presented net of acquired cash of $0.3 million and
receivable from officer of acquired company of $0.5 million.
(2) Acquisition of business presented net of acquired cash of $1.5 million and
a note payable to former shareholder of acquired company in the amount of
$3.0 million.
(3) Acquisition of business presented net of acquired cash of $3.9 million and
receivable from a former shareholder of acquired company of $3.5 million.
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Covenant Transport, Inc. (the "Company") is a long-haul
truckload carrier that offers premium transportation services, such as team and
refrigerated services, to customers throughout the United States.
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 subsidiaries, Covenant Transport, Inc.,
a Tennessee corporation; Harold Ives Trucking Co., an Arkansas corporation;
Terminal Truck Broker, Inc., an Arkansas corporation (Harold Ives Trucking Co.
and Terminal Truck Broker, Inc. referred together as "Harold Ives"); Bud Meyer
Truck Lines, Inc., a Minnesota corporation, ("Bud Meyer") Southern Refrigerated
Transport, Inc., an Arkansas corporation; Tony Smith Trucking, Inc. (Southern
Refrigerated Transport, Inc. and Tony Smith Trucking, Inc. referred together as
"SRT"); Covenant.com, Inc., a Nevada corporation; Covenant Asset Management,
Inc., a Nevada corporation; and CIP, Inc., a Nevada corporation. All significant
intercompany balances and transactions have been eliminated in consolidation.
Revenue Recognition - Revenue, drivers' wages and other direct operating
expenses are recognized on the date shipments are delivered to the customer. The
Company records revenue on a net basis for transactions on which it functions as
a broker.
Cash and Cash Equivalents - The Company considers all highly liquid investments
with a maturity of three months or less 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. Replacement tires are
expensed when placed in service.
Intangible Assets - The Company periodically evaluates the net realizability of
the carrying amount of intangible assets. Non-compete agreements are amortized
over the life of the agreement, deferred loan costs are amortized over the life
of the loan and goodwill is amortized over periods ranging from 20 to 40 years.
Property and Equipment - Depreciation is calculated on the straight-line method
over the estimated useful lives of the assets. Revenue equipment is depreciated
over five to seven years with salvage values ranging from 25% to 33 1/3%. In
accordance with industry practices, gains or losses on disposal of revenue
equipment are included in depreciation in the statements of income.
Impairment of Long-Lived Assets - The Company ensures that long-lived assets to
be disposed of are reported at the lower of the carrying value or the fair
market value less costs to sell. The Company evaluates the carrying value of
long-lived assets for impairment losses by analyzing the operating performance
and future cash flows for those assets. The Company adjusts the net book value
of the underlying assets if the sum of expected cash flows is less than book
value.
Capital Structure - The shares of Class A and B Common Stock are substantially
identical except that the Class B shares are entitled to two votes per share.
The terms of any future issuances of preferred shares will be set by the Board
of Directors.
26
<PAGE>
Insurance and Other Claims - Losses resulting from claims for personal injury,
property damage, cargo loss and damage, and other sources are covered by
insurance, subject to deductibles. Losses resulting from uninsured claims are
recognized when such losses are known and estimable.
Concentrations of Credit Risk - The Company performs ongoing credit evaluations
of its customers and does not require collateral for its accounts receivable.
The Company maintains reserves which management believes are adequate to provide
for potential credit losses. The Company's customer base spans the continental
United States.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
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 2001.
2. PROPERTY AND EQUIPMENT
A summary of property and equipment, at cost, as of December 31, 1998 and 1999
is as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1999
------------------------ ------------------------
<S> <C> <C>
Revenue equipment $256,767 $313,200
Land and improvements 7,611 9,359
Buildings and leasehold improvements 2,642 6,708
Communications equipment 10,021 12,624
Other 5,317 7,781
------------------------ ------------------------
$282,358 $349,672
======================== ========================
</TABLE>
Depreciation expense amounts were $26.9 million, $31.4 million, and $35.1
million in 1997, 1998, and 1999, respectively.
27
<PAGE>
3. OTHER ASSETS
A summary of other assets as of December 31, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1999
----------------- -----------------
<S> <C> <C>
Covenants not to compete $1,400 $2,600
Tradename -- 1,000
Goodwill 3,842 11,081
Less accumulated amortization of intangibles (950) (1,498)
----------------- -----------------
4,292 13,183
Other 2,011 $2,455
----------------- -----------------
$6,303 $15,638
================= =================
</TABLE>
4. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
(in thousands) 1998 1999
----------------- --------------------
<S> <C> <C>
Borrowings under $130 million credit agreement $ 54,000 $ 96,000
10-year senior notes 25,000 25,000
Notes to unrelated individuals for non-compete
agreements 810 550
Equipment and vehicle obligations with commercial
lending institutions, with fixed interest rates ranging
from 5.9% to 9.0% at December 31, 1999 3,464 20,165
Note payable to former SRT shareholder related to
purchase of SRT bearing interest at 6.5% with interest
payable quarterly 3,000 3,000
----------------- --------------------
86,274 144,715
Less current maturities 1,943 4,218
----------------- --------------------
$ 84,331 $140,497
================= ====================
</TABLE>
The Company is party to a credit agreement with a group of banks with maximum
borrowings of $130 million. Borrowings related to revenue equipment are limited
to the lesser of 90% of the net book value of revenue equipment or $130 million.
Working capital borrowings are limited to 85% of eligible accounts receivable.
Letters of credit are limited to an aggregate commitment of $10 million. The
credit agreement includes a "security agreement" such that the credit agreement
may be collateralized by virtually all assets of the Company if a covenant
violation occurs. A commitment fee that is adjusted quarterly between 0.125% and
0.275% per annum based on a ratio of total debt to trailing cash flow coverage
is due on the daily unused portion of the credit agreement. At December 31,
1999, the fee was 0.15% per annum. The credit agreement is guaranteed by
Covenant Transport, Inc., a Nevada corporation, Bud Meyer Truck Lines, Inc., a
Minnesota corporation, Southern Refrigerated Transport, Inc., an Arkansas
corporation, Covenant Asset Management, Inc., a Nevada corporation, CIP, Inc., a
Nevada corporation, and Covenant.com, Inc., a Nevada corporation.
The Company renewed the loan in June 1999. The credit agreement revolves through
December 31, 2000 and then has a three-year term out if not renewed. Payments
for interest are due quarterly in arrears with principal payments due in twelve
equal quarterly installments beginning in 2001 if not renewed. 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
28
<PAGE>
between 0.55% and 0.925% based on a ratio of total debt to trailing cash flow
coverage. At December 31, 1999, the margin was 0.60%.
During October 1995, the Company placed $25 million in senior notes due October
2005 with an insurance company. The term agreement requires payments for
interest semi-annually in arrears with principal payments due in four equal
annual installments beginning October 1, 2002. Interest accrues at 7.39% per
annum.
The credit agreement and senior note agreement subject the Company to certain
restrictions and covenants related to, among others, dividends, tangible net
worth, cash flow, acquisitions and dispositions, and total indebtedness.
Maturities of long term debt at December 31, 1999 are as follows:
(in thousands)
2000 $ 4,218
2001 100,178
2002 8,236
2003 3,806
2004 277
Thereafter 28,000
5. RELATED PARTY TRANSACTIONS
Transactions involving related parties not otherwise disclosed herein are as
follows:
In June 1997 the Company obtained a promissory note in the amount of $480,000
from a significant shareholder. The principal and related interest at the rate
of 7% was paid in full in May 1998. The Company also chartered an airplane owned
by a related party in the amount of $262,940 during 1998 and $42,633 during
1999. Tenn-Ga Truck Sales, Inc., a corporation wholly owned by a related party,
purchased used tractors and trailers from the Company for approximately $768,000
during 1998 and approximately $2.8 million during 1999. In December 1999, the
Company purchased approximately 105 acres of land that is adjacent to the
corporate headquarters for approximately $890,000 from a related party.
6. LEASES
The Company has operating lease commitments for office and terminal properties,
revenue equipment, computer and office equipment, exclusive of owner/operator
rentals, and month-to-month equipment rentals, summarized for the following
fiscal years:
(in thousands)
2000 $ 12,234
2001 8,757
2002 4,322
2003 2,827
2004 2,802
29
<PAGE>
Rental expense is summarized as follows for each of the three years ended
December 31:
<TABLE>
<CAPTION>
(in thousands) 1997 1998 1999
---------------- ---------------- ----------------
<S> <C> <C> <C>
Revenue equipment rentals $ 1,619 $ 5,640 $12,102
Owner/operator rentals 6,861 18,167 35,534
Terminal rentals 1,503 1,277 1,407
Other equipment rentals 1,182 1,290 1,618
---------------- ---------------- ----------------
$11,165 $26,374 $ 50,661
================ ================ ================
</TABLE>
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 July 2000 at approximately $77,000 per
month.
Covenant leased property in Chattanooga, Tennessee from the principal
stockholder of the Company. Effective July 1, 1997, the monthly rental was
approximately $15,000 per month. The Company also leased a property at Greer,
South Carolina for annual rent of $12,000 from the principal stockholder.
Effective June 1998, these two leases were terminated by the principal
stockholder without any penalties or additional payments coming due.
Included in terminal rentals are payments of $224,172, and $78,905 for the years
ended December 31, 1997, and 1998, respectively, to the principal stockholder of
the Company.
7. INCOME TAX
Income tax expense for the years ended December 31, 1997, 1998, and 1999 is
comprised of:
<TABLE>
<CAPTION>
(in thousands) 1997 1998 1999
---------------- ---------------- ----------------
<S> <C> <C> <C>
Federal, current $3,940 $5,076 $6,154
Federal, deferred 3,531 4,196 6,705
State, current 263 1,773 1,331
State, deferred 414 445 710
---------------- ---------------- ----------------
$ 8,148 $11,490 $14,900
================ ================ ================
</TABLE>
Income tax expense varies from the amount computed by applying the federal
corporate income tax rate of 35% to income before income taxes for the years
ended December 31, 1997, 1998 and 1999 as follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1998 1999
---------------- ---------------- ----------------
<S> <C> <C> <C>
Computed "expected" income tax expense $7,648 $10,420 $13,012
Adjustments in income taxes resulting from:
State income taxes, net of federal income tax effect 440 945 1,487
Permanent differences and other, net 60 125 401
---------------- ---------------- ----------------
Actual income tax expense $8,148 $11,490 $14,900
================ ================ ================
</TABLE>
30
<PAGE>
The temporary differences and the approximate tax effects that give rise to the
Company's net deferred tax liability at December 31, 1998 and 1999 are as
follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1999
------------------------ ------------------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable $ 181 $ 372
Accrued expenses 1,675 1,350
Alternative minimum tax credits 4,778 958
Investment tax credits carryforward 82 --
Intangible assets 222 --
------------------------ ------------------------
6,938 2,680
Deferred tax liability:
Property and equipment 32,623 47,098
Adjustments resulting from a change in
accounting methods for tax purposes -- 1,150
Unrealized gain on securities -- 28
Intangible assets -- 506
------------------------ ------------------------
Net deferred tax liability 25,685 46,102
Portion reflected as current asset 1,674 1,310
------------------------ ------------------------
Deferred tax liability $ 27,359 $ 47,412
======================== ========================
</TABLE>
8. COMMITMENTS AND CONTINGENT LIABILITIES
The Company, in the normal course of business, is involved in certain legal
matters for which it carries liability insurance. It is management's belief that
the losses, if any, from these lawsuits will not have a materially adverse
impact on the financial condition, operations, or cash flows of the Company.
Financial risks which potentially subject the Company to concentrations of
credit risk consist of deposits in banks in excess of the Federal Deposit
Insurance Corporation limits. The Company's sales are generally made on account
without collateral. Repayment terms vary based on certain conditions. The
Company maintains reserves which management believes are adequate to provide for
potential credit losses. The majority of the Company's customer base spans the
United States. The Company monitors these risks and believes the risk of
incurring material losses is remote.
The Company has entered into minimum purchase agreements for the purchase of
diesel fuel. The agreements provide for specified amounts of fuel at contracted
prices through 2001. At December 31, 1999, the approximate number of gallons of
fuel purchase commitments were as follows:
2000 9,500,000 gallons
2001 750,000 gallons
31
<PAGE>
9. EARNINGS PER SHARE
The following table sets forth for the periods indicated the calculation of net
earnings per share included in the Company's Consolidated Statement of Income:
<TABLE>
<CAPTION>
(in thousands except per share data) 1997 1998 1999
---------------- ---------------- ----------------
<S> <C> <C> <C>
Numerator:
Net Income $13,702 $18,283 $22,277
Denominator:
Denominator for basic earnings
per share - weighted-average shares 13,360 14,393 14,912
Effect of dilutive securities:
Employee stock options -- 47 116
---------------- ---------------- ----------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and assumed
conversions 13,360 14,440 15,028
================ ================ ================
Basic earnings per share: $ 1.03 $ 1.27 $ 1.49
================ ================ ================
Diluted earnings per share $ 1.03 $ 1.27 $ 1.48
================ ================ ================
</TABLE>
10. DEFERRED PROFIT SHARING EMPLOYEE BENEFIT PLAN
The Company has a deferred profit sharing and savings plan that covers
substantially all employees of the Company with at least six months of service.
Employees may contribute up to 17% of their annual compensation subject to
Internal Revenue Code maximum limitations. The Company may make discretionary
contributions as determined by a committee of the Board of Directors. The
Company contributed approximately $538,000, $873,000, and $782,000 in 1997,
1998, and 1999, respectively, to the profit sharing and savings plan.
32
<PAGE>
11. INCENTIVE STOCK PLAN
The Company has adopted an incentive stock plan. Awards may be in the form of
incentive stock awards or other forms. The Company has reserved 1,300,000 shares
of Class A Common Stock for distribution at the discretion of the Board of
Directors. The options vest ratively over 5 years and expire 10 years from the
date of grant. The following table details the activity of the incentive stock
option plan:
<TABLE>
<CAPTION>
Weighted Options
Average Exercisable at
Shares Exercise Price Year End
------------------ ------------------ -------------------
<S> <C> <C> <C>
Under option at December 31, 1996 383,250 $15.80 75,250
Options granted in 1997 149,000 $16.43
Options exercised in 1997 (10,250) $16.09
Options canceled in 1997 (20,500) $15.79
------------------
Under option at December 31, 1997 501,500 $15.87 143,800
Options granted in 1998 298,250 $12.21
Options exercised in 1998 (10,000) $15.68
Options canceled in 1998 (20,000) $14.80
------------------
Under option at December 31, 1998 769,750 $14.43 206,500
Options granted in 1999 202,750 $13.06
Options exercised in 1999 (4,000) $13.06
Options canceled in 1999 (35,950) $17.18
------------------
Under option at December 31, 1999 932,550 $14.14 354,150
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
Weighted- Weighted- Number Weighted-
Range of Number Average Average Exercisable Average
Exercise Prices Outstanding Remaining Exercise At Exercise
at 12/31/99 Contractual Life Price 12/31/99 Price
- ----------------------- ---------------- -------------------- ----------------- ---------------- -----------------
$10.00 to $12.99 267,750 105 $11.71 51,950 $11.43
$13.00 to $15.99 512,050 95 $14.49 184,550 $15.44
$16.00 to $20.00 152,750 71 $17.22 117,650 $16.78
</TABLE>
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. Under SFAS No. 123,
fair value of options granted are estimated as of the date of grant using the
Black-Scholes option pricing model and the following weighted average
assumptions: risk-free interest rates ranging from 5.0% to 6.0%; expected life
of 5 years; dividend rate of zero percent; and expected volatility of 18.5% for
1997, 42.0% for 1998, and 42.6% for 1999. Using these assumptions, the fair
value of the employee stock options granted in 1997, 1998, and 1999 is $600,000,
$1.2 million, and $900,000 respectively, which would be amortized as
compensation expense over the vesting period of the options. Had compensation
cost been determined in accordance with SFAS No. 123, utilizing the assumptions
detailed above, the Company's net income and net income per share would have
been reduced to the following pro forma amounts for the years ended December 31,
1997, 1998 and 1999:
33
<PAGE>
<TABLE>
<CAPTION>
(in thousands except per share data) 1997 1998 1999
<S> <C> <C> <C>
Pro forma net income 13,403 17,736 21,565
Pro forma earnings per share:
Basic $1.00 $1.23 $1.45
Diluted 1.00 1.23 1.43
</TABLE>
12. BUSINESS COMBINATIONS
In August 1997, the Company purchased certain intangible assets of Trans-Roads,
Inc. for $2.25 million, of which $1 million will be paid out over the five years
following closing.
In October 1997, the Company purchased all of the outstanding stock of Bud
Meyer. The acquisition of Bud Meyer has been accounted for under the purchase
method of accounting. Accordingly, the operating results of Bud Meyer have been
included in the consolidated operating results since the date of acquisition.
The purchase price of $5.2 million, net of cash received of $347,688 and a
receivable from an officer of Bud Meyer to the acquired company of $501,870 has
been allocated to the net assets acquired based on appraised fair values at the
date of acquisition.
In August 1998, the Company purchased certain assets of Gouge Trucking, Inc. for
approximately $1.0 million.
In October 1998, the Company purchased all of the outstanding stock of SRT. The
acquisition of SRT has been accounted for under the purchase method of
accounting. Accordingly, the operating results of SRT have been included in the
consolidated operating results since the date of acquisition. The purchase price
of $10.75 million, net of cash received of approximately $1.5 million and note
payable in the amount of $3.0 million to a former shareholder of SRT has been
allocated to the net assets acquired based on appraised fair values at the date
of acquisition.
In September 1999, the Company purchased certain assets of ATW, Inc. for $10.8
million, which included $9.3 million for property and equipment.
In November 1999, the Company purchased all of the outstanding stock of Harold
Ives. The acquisition of Harold Ives has been accounted for under the purchase
method of accounting and goodwill is being amortized over 30 years. Accordingly,
the operating results of Harold Ives have been included in the consolidated
operating results since the date of acquisition. The purchase price of $22.4
million, net of cash received of $3.9 million and a receivable from an officer
of Harold Ives to the acquired company of $3.5 million has been allocated to the
net assets acquired based on appraised fair values as set forth below at the
date of acquisition.
(in thousands)
Property and equipment $ 39,290
Current assets 15,168
Intangibles 6,621
Accounts payable and accrued expenses (8,691)
Deferred taxes (9,914)
Notes payable (27,443)
-------------------
$ 15,031
34
<PAGE>
The unaudited pro forma operating data for the Company, assuming the acquisition
of Bud Meyer occurred January 1, 1996, the acquisition of SRT occurred January
1, 1997, and the Harold Ives acquisition occurred January 1, 1998.
<TABLE>
<CAPTION>
(in thousands except per share data) 1997 1998 1999
-------------- --------------- ---------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Revenues $ 356,919 $ 451,463 $ 525,657
Net Income 13,992 20,092 23,272
Earnings per share
Basic $ 1.05 $ 1.40 $ 1.56
Diluted $ 1.05 $ 1.39 $ 1.55
</TABLE>
The unaudited pro forma information is presented for informational purposes only
and is not necessarily indicative of the operating results that would have
occurred had the acquisitions been consummated as of the above date, nor are
they indicative of future operating results.
13. SUBSEQUENT EVENTS
The Company announced the intent to merge its logistics business with five other
transportation companies into a commonly owned, Internet-based global
transportation logistics company, Transplace.com. The six companies intend to
develop programs for the cooperative purchasing of products, supplies, and
services and the achievement of other synergies. Covenant intends to contribute
$5.0 million in cash for initial funding toward the venture. Transplace.com will
focus on truckload, refrigerated, and intermodal capabilities. Assuming the
closing of the Transplace.com transaction, Covenant will no longer operate its
own transportation logistics or brokerage business.
35
SUBSIDIARIES OF THE REGISTRANT
Bud Meyer Truck Lines, Inc., a Minnesota corporation
CIP, Inc., a Nevada corporation
Covenant Asset Management, Inc., a Nevada corporation
Covenant.com, Inc., a Nevada corporation
Covenant Transport, Inc., a Tennessee corporation
Harold Ives Trucking Co., an Arkansas corporation
Southern Refrigerated Transport, Inc., an Arkansas corporation
Terminal Truck Broker, Inc., an Arkansas corporation
Tony Smith Trucking, Inc., an Arkansas corporation
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File Nos. 333-2654, 33-88686, and 333-67559) of our
report dated February 9, 2000, relating to the financial statements which appear
in Covenant Transport, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1999.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Knoxville, Tennessee
April 7, 2000
<TABLE> <S> <C>
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<NAME> COVENANT TRANSPORT, INC.
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> DEC-31-1999
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0
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</TABLE>
