SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number 0-24960
Covenant Transport, Inc.
(Exact name of registrant as specified in its charter)
Nevada 88-0320154
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
400 Birmingham Hwy.
Chattanooga, TN 37419
(423) 821-1212
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive office)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days.
YES X NO __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date (April 26, 2000).
Class A Common Stock, $.01 par value: 12,566,450 shares
Class B Common Stock, $.01 par value: 2,350,000 shares
Exhibit Index is on Page 13
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PART I
FINANCIAL INFORMATION
Page Number
Item 1. Financial statements
Condensed Consolidated Balance Sheets as of December 31,1999
and March 31, 2000 (Unaudited) 3
Condensed Consolidated Statements of Income for the three months
ended March 31, 1999 and 2000 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and 2000 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
PART II
OTHER INFORMATION
Page Number
Item 1. Legal Proceedings 13
Items 2, 3, 4 and 5. Not applicable 13
Item 6. Exhibits and reports on Form 8-K 13
2
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<TABLE>
<CAPTION>
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
December 31, March 31,
1999 2000
----------------- -----------------
ASSETS (unaudited)
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,046 $ 729
Accounts receivable, net of allowance of $1,040 in 1999
and 2000 75,038 71,462
Drivers' advances and other receivables 4,789 7,517
Tire and parts inventory 3,046 3,295
Prepaid expenses 9,567 11,638
Deferred income taxes 1,310 918
Income taxes receivable 4,506 4,619
----------------- -----------------
Total current assets $ 99,302 $ 100,178
Property and equipment, at cost 349,672 357,749
Less accumulated depreciation and amortization 80,638 87,016
----------------- -----------------
Net property and equipment 269,034 270,733
Other 15,638 15,790
----------------- -----------------
Total assets $ 383,974 $ 386,701
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks outstanding in excess of bank balances $ 3,599 $ 7,243
Current maturities of long-term debt 4,218 2,549
Accounts payable 7,260 5,271
Accrued expenses 17,136 17,934
----------------- -----------------
Total current liabilities 32,213 32,997
Long-term debt, less current maturities 140,497 139,818
Deferred income taxes 47,412 47,977
----------------- -----------------
Total liabilities 220,122 220,792
Stockholders' equity:
Class A common stock, $.01 par value; 20,000,000 shares authorized;
12,564,250 and 12,566,450 shares issued and outstanding as of 1999 and 126 126
2000, respectively
Class B common stock, $.01 par value; 5,000,000 shares authorized;
2,350,000 shares issued and outstanding as of 1999 and 2000 24 24
Additional paid-in-capital 78,313 78,337
Retained earnings 85,389 87,422
----------------- -----------------
Total stockholders' equity 163,852 165,909
----------------- -----------------
Total liabilities and stockholders' equity $ 383,974 $ 386,701
================= =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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<TABLE>
<CAPTION>
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(In thousands except share and per share data)
Three months ended March 31,
(unaudited)
----------------------------------------------
1999 2000
---- ----
<S> <C> <C>
Revenue $ 97,764 $ 126,481
Operating expenses:
Salaries, wages, and related expenses 44,836 53,945
Fuel, oil, and road expenses 17,338 21,012
Revenue equipment rentals and purchased
transportation 8,161 18,719
Repairs 1,943 3,008
Operating taxes and licenses 2,407 3,285
Insurance 2,795 3,376
General supplies and expenses 5,582 7,439
Depreciation and amortization, including gain on
disposal of equipment 7,971 10,010
------------------ ------------------
Total operating expenses 91,033 120,794
------------------ ------------------
Operating income 6,731 5,687
Interest expense 1,301 2,303
------------------ ------------------
Income before income taxes 5,430 3,384
Income tax expense 2,181 1,351
------------------ ------------------
Net income $ 3,249 $ 2,033
================== ==================
Basic earnings per share $ 0.22 $ 0.14
Diluted earnings per share $ 0.22 $ 0.14
Weighted average shares outstanding 14,912 14,916
Adjusted weighted average shares and assumed
conversions outstanding 15,040 14,982
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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<TABLE>
<CAPTION>
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(In thousands)
Three months ended March 31,
(unaudited)
--------------------------------------------
1999 2000
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,249 $ 2,033
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on receivables 153 20
Depreciation and amortization 8,101 10,686
Deferred income tax expense (44) 957
Gain on disposition of property and equipment (130) (675)
Changes in operating assets and liabilities:
Receivables and advances (57) 361
Prepaid expenses (1,536) (2,071)
Tire and parts inventory (197) (249)
Accounts payable and accrued expenses 8,159 (1,191)
------------------ -----------------
Net cash flows provided by operating activities 17,698 9,871
Cash flows from investing activities:
Acquisition of property and equipment (20,627) (16,640)
Proceeds from disposition of property and equipment 12,389 5,149
------------------ -----------------
Net cash flows used in investing activities (8,238) (11,491)
Cash flows from financing activities:
Changes in checks outstanding in excess of bank
balances - 3,644
Deferred costs - (17)
Exercise of stock option 20 24
Proceeds from issuance of long-term debt 8,000 12,000
Repayments of long-term debt (19,612) (14,348)
------------------ -----------------
Net cash flows provided by/(used in) financing activities (11,592) 1,303
------------------ -----------------
Net change in cash and cash equivalents (2,132) (317)
Cash and cash equivalents at beginning of period 2,926 1,046
------------------ -----------------
Cash and cash equivalents at end of period $ 794 $ 729
================== =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per share data)
Note 1. Basis of Presentation
The condensed consolidated financial statements include the accounts of
Covenant Transport, Inc., a Nevada holding company, and its wholly-owned
subsidiaries (the Company). All significant intercompany balances and
transactions have been eliminated in consolidation.
The financial statements have been prepared, without audit, in accordance
with generally accepted accounting principles, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, the accompanying financial statements include all adjustments
which are necessary for a fair presentation of the results for the interim
periods presented, such adjustments being of a normal recurring nature.
Certain information and footnote disclosures have been condensed or
omitted pursuant to such rules and regulations. The December 31, 1999
Condensed Consolidated Balance Sheet was derived from the audited balance
sheet of the Company for the year then ended. It is suggested that these
condensed consolidated financial statements and notes thereto be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K for the year ended December 31, 1999.
Results of operations in interim periods are not necessarily indicative of
results to be expected for a full year.
Note 2. Basic and Diluted Earnings Per Share
The following table sets forth for the periods indicated the calculation
of net earnings per share included in the Company's Condensed Consolidated
Statements of Income:
<TABLE>
<CAPTION>
(in thousands except per share data) Three months ended March 31,
1999 2000
---- ----
<S> <C> <C>
Numerator:
Net Income $ 3,249 $ 2,033
Denominator:
Denominator for basic earnings
per share - weighted-average shares 14,912 14,916
Effect of dilutive securities:
Employee stock options 128 66
--------------------- ---------------------
Denominator for diluted earnings per share - adjusted
weighted-average shares and assumed conversions 15,040 14,982
===================== =====================
Basic earnings per share $ .22 $ .14
===================== =====================
Diluted earnings per share $ .22 $ .14
===================== =====================
</TABLE>
Note 3. Income Taxes
Income tax expense varies from the amount computed by applying the federal
corporate income tax rate of 35% to income before income taxes primarily
due to state income taxes, net of federal income tax effect, plus the
effect of nondeductible amortization of goodwill. Effective income tax
expense approximates 40% in the quarters ended March 31, 2000, and 1999.
6
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Note 4. Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. The statement established accounting
and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded on the balance sheet as either an asset or liability measured at
its fair value. SFAS No. 133 requires that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. The Company may engage in hedging activities
using futures, forward contracts, options, and swaps to hedge the impact
of market fluctuations on energy commodity prices and interest rates. The
Company is currently assessing the effect, if any, on its financial
statements of implementing SFAS No. 133. The Company will be required to
adopt the standard in 2001.
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the discussion in this
quarterly 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. Forward-looking information is subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. Without limitation, these risks and uncertainties include economic
factors such as recessions, downturns in customers' business cycles, surplus
inventories, inflation, fuel price increases, and higher interest rates; the
resale value of the Company's used revenue equipment; the availability and
compensation of qualified drivers; competition from trucking, rail, and
intermodal competitors; and the ability to identify acceptable acquisition
targets and negotiate, finance, and consummate acquisitions and integrate
acquired companies. Readers should review and consider the various disclosures
made by the Company in its press releases, stockholder reports, and public
filings, as well as the factors explained in greater detail in the Company's
annual report on Form 10-K.
The Company grew its revenue 29.4%, to $126.5 million in the three months ended
March 31, 2000, from $97.8 million during the same period of 1999. 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. Most of the
revenue growth was generated by three acquisitions acquired during the fourth
quarter of 1999. In October 1999, the Company purchased the trucking assets of
ATW, Inc. ("ATW"), a $40 million annual revenue carrier located in North
Carolina. In November 1999, the Company purchased all of the outstanding capital
stock of both Harold Ives Trucking Co. and Terminal Truck Broker, Inc.
(collectively, "Harold Ives"), which generated a combined $65 million of annual
trucking and brokerage 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.
The Company's pretax margin decreased to 2.7% of revenue from 5.6% of revenue,
and the Company's net income decreased approximately 37.4%, to $2.0 million for
the three months ended March 31, 2000, from $3.2 million during the same period
of 1999. Several factors contributed to the decrease, including increased fuel
costs, lower utilization of equipment and a soft freight environment as compared
to the previous year. The Company merged the operations of Bud Meyer and Harold
Ives into the Chattanooga headquarters during the first quarter of 2000, which
impacted utilization of equipment.
The Company is continuing to grow its owner-operator fleet and finance equipment
under operating leases. As of March 31, 2000, the Company had contracted with
approximately 645 owner-operators as compared to approximately 215 at March 31,
1999. Owner-operators provide a tractor and a driver and bear all operating
expenses in exchange for a fixed payment per mile. The Company does not have the
capital outlay of purchasing the tractor. As of March 31, 2000, the Company had
financed approximately 747 tractors and 450 trailers under operating leases as
compared to 577 tractors and 69 trailers under operating leases as of March 31,
1999. The payments to owner-operators and the financing of equipment under
operating leases are recorded in 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, 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 evaluates its efficiency using pretax margin and net margin rather than
operating ratio.
The Company announced the intent to merge its logistics business with five other
transportation companies into a company called Transplace.com, which will
operate as an Internet-based global transportation logistics company.
Transplace.com also intends to develop programs for the cooperative purchasing
of products, supplies, and services. Additionally, Covenant intends to
contribute $5.0 million in cash for initial funding toward the venture. Assuming
the closing of the Transplace.com transaction, Covenant will no longer operate
its own transportation logistics or brokerage business.
8
<PAGE>
The following table sets forth the percentage relationship of certain items to
revenue:
Three Months Ended March 31,
1999 2000
--------------- ---------------
Revenue 100.0% 100.0%
Operating expenses:
Salaries, wages, and related expenses 45.9 42.7
Fuel, oil, and road expenses 17.7 16.6
Revenue equipment rentals and purchased
transportation 8.3 14.8
Repairs 2.0 2.4
Operating taxes and licenses 2.5 2.6
Insurance 2.9 2.7
General supplies and expenses 5.6 5.9
Depreciation and amortization 8.2 7.9
--------------- ---------------
Total operating expenses 93.1 95.5
--------------- ---------------
Operating income 6.9 4.5
Interest expense 1.3 1.8
--------------- ---------------
Income before income taxes 5.6 2.7
Income tax expense 2.2 1.1
Net income 3.3% 1.6%
=============== ===============
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2000 TO THREE MONTHS ENDED MARCH 31,
1999
Revenue increased $28.7 million (29.4%), to $126.5 million in the 2000 period
from $97.8 million in the 1999 period. The revenue increase was primarily
generated by a 35.0% increase in weighted average tractors, to 3,594 during the
2000 period from 2,662 during the 1999 period. Most of the increase came from
the acquisitions of Harold Ives and ATW. The Company also raised its freight
rate approximately $0.04 per mile versus the 1999 period. The Company's growth
was partially offset by a 6.4% decrease in revenue per tractor per week to
$2,677 in the 2000 quarter from $2,857 in the 1999 quarter. Revenue per tractor
per week was negatively impacted by the addition of Harold Ives, which operates
single-driver tractors that produce less revenue. Also, the Company experienced
a large number of tractors without drivers, primarily caused by the merger of
the operations of Bud Meyer Truck Lines, Inc. and Harold Ives into the
Chattanooga facility. The Company has corrected the driver problem.
Salaries, wages, and related expenses increased $9.1 million (20.3%), to $53.9
million in the 2000 period from $44.8 million in the 1999 period. As a
percentage of revenue, salaries, wages, and related expenses decreased to 42.7%
in the 2000 period from 45.9% in the 1999 period. Driver wages as a percentage
of revenue decreased to 29.6% in the 2000 period from 32.7% in the 1999 period
as the Company utilized more owner-operators and a larger percentage of
single-driver tractors from the operations of Harold Ives, which have only one
driver to be compensated. A driver wage increase effective April 1, 2000 is
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
6.9% of revenue in the 2000 period from 6.3% of revenue in the 1999 period due
to the acquisition of Terminal Truck Broker, Inc. which pays out a significant
percentage of its net revenue in salaries.
Fuel, oil, and road expenses increased $3.7 million (21.2%), to $21.0 million in
the 2000 period from $17.3 million in the 1999 period. As a percentage of
revenue, fuel, oil, and road expenses decreased to 16.6% of revenue in the 2000
period from 17.7% in the 1999 period. Fuel costs increased approximately 48% per
gallon in the first quarter of 2000 versus the first quarter of 1999. This
increase was partially offset by fuel surcharges, fuel hedges, and by the
increased usage of owner-operators who pay for their own fuel purchases. The
expense for owner-operators is reflected in the revenue equipment rentals and
purchased transportation category. The Company's percentage of fuel purchases
that are hedged is approximately 13% for the remainder of 2000.
Revenue equipment rentals and purchased transportation increased $10.6 million
(129.4%), to $18.7 million in the 2000 period from $8.2 million in the 1999
period. As a percentage of revenue, revenue equipment rentals and purchased
transportation increased to 14.8% in the 2000 period from 8.3% in the 1999
period. The majority of the increase is due to growth in the owner-operator
fleet. The Company increased the number of owner-operators in its fleet to an
average of 582 in the 2000 period compared to 197 in the 1999 period.
Owner-operators provide a tractor and driver and cover all of their operating
expenses in exchange for a fixed payment per mile. Accordingly, expenses such as
driver salaries, fuel, repairs, depreciation, and interest normally associated
with Company-owned equipment are consolidated in revenue equipment rentals and
purchased transportation when owner-operators are utilized. The Company also
entered into additional operating leases. As of March 31, 2000, the Company had
financed approximately 747 tractors and 450 trailers under operating leases as
compared to 577 tractors and 69 trailers under operating leases as of March 31,
1999.
9
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Repairs increased approximately $1.1 million (54.8%), to $3.0 million in the
2000 period from $1.9 million in the 1999 period. As a percentage of revenue,
repairs increased to 2.4% in the 2000 period from 2.0% in the 1999 period. The
increase was primarily the result of an increase in the number of tractors and
trailers available for routine maintenance.
Operating taxes and licenses increased approximately $0.9 million (36.5%), to
$3.3 million in the 2000 period from $2.4 million in the 1999 period. As a
percent of revenue, operating taxes and licenses remained essentially constant
at 2.6% in the 2000 period and 2.5% in the 1999 period.
Insurance, consisting primarily of premiums for liability, physical damage, and
cargo damage insurance, and claims, increased $0.6 million (20.8%), to $3.4
million in the 2000 period from $2.8 million in the 1999 period. As a percentage
of revenue, insurance decreased to 2.7% in the 2000 period from 2.9% in the 1999
period, as the Company continued to reduce premiums per million dollars of
revenue.
General supplies and expenses, consisting primarily of driver recruiting,
communications expenses, and facilities expenses, increased $1.9 million
(33.3%), to $7.4 million in the 2000 period from $5.6 million in the 1999
period. As a percentage of revenue, general supplies and expenses increased to
5.9% in the 2000 period from 5.6% in the 1999 period. The 2000 increase is
primarily the result of expenses incurred from the ATW and Harold Ives
acquisition as well as the addition of the driving school located in Arkansas.
Depreciation and amortization, consisting primarily of depreciation of revenue
equipment, increased $2.0 million (25.6%), to $10.0 million in the 2000 period
from $8.0 million in 1999 period. As a percentage of revenue, depreciation and
amortization decreased to 7.9% in the 2000 period from 8.2% in the 1999 period
as the Company utilized more owner-operators and leased more revenue equipment
through operating leases. Amortization expense primarily relates to covenants
not to compete and goodwill from acquisitions.
Interest expense increased $1.0 million (77.0%), to $2.3 million in the 2000
period from $1.3 million in the 1999 period. As a percentage of revenue,
interest expense increased to 1.8% in the 2000 period from 1.3% in the 1999
period. The increase was primarily the result of higher debt balances related to
the acquisitions of ATW and Harold Ives as well as higher interest rates.
As a result of the foregoing, the Company's pretax margin decreased to 2.7% in
the 2000 periods from 5.6% in the 1999 period.
The Company's effective tax rate remained essentially constant at 39.9% in the
2000 period and 40.2% in the 1999 period.
Primarily as a result of the factors described above, net income decreased $1.2
million (37.4%), to $2.0 million in the 2000 period (1.6% of revenue) from $3.2
million in the 1999 period (3.3% of revenue).
LIQUIDITY AND CAPITAL RESOURCES
The growth of the Company's business has required significant investments in new
revenue equipment. The Company has financed its revenue equipment requirements
with borrowings under a line of credit, cash flows from operations, long-term
operating leases, and borrowings under installment notes payable to commercial
lending institutions and equipment manufacturers. The Company's primary sources
of liquidity at March 31, 2000, were funds provided by cash flow from operating
activities. The Company believes its sources of liquidity are adequate to meet
its current and projected needs.
The Company's primary sources of cash flow from operations in the 2000 period
were net income increased by depreciation and amortization. Net cash provided by
operating activities was $9.9 million in the 2000 period and $17.7 million in
the 1999 period. The decrease in the 2000 period resulted primarily from
decreases in accounts payable and accrued expenses as a result of the timing of
the quarter end.
Net cash used in investing activities was $11.5 million and $8.2 million in the
2000 and 1999 periods, respectively. Investing activity was primarily to acquire
additional revenue equipment as the Company expanded its operations. The
increase in the 2000 period as compared to the 1999 period resulted from the
Company's purchasing additional revenue equipment offset by lower disposals of
revenue equipment. The Company expects to spend an additional $28.5 million on
capital expenditures during the remainder of 2000 (excluding planned operating
leases of equipment). Total projected net capital expenditures for 2000 are
expected to be approximately $40.0 million excluding operating leases and the
effect of any potential acquisitions.
Net cash was provided by financing activities of $1.3 million in the 2000
period, while $11.6 million was used for financing activities in the 1999
period. At March 31, 2000, the Company had outstanding debt of $142.4 million,
primarily consisting of approximately
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$102.0 million drawn under the Company's primary credit agreement (the "Credit
Agreement"), $25.0 million in 10-year senior notes, $3.0 million in an interest
bearing note to the former primary stockholder of Southern Refrigerated
Transportation, Inc. ("SRT") related to the acquisition of SRT in October 1998,
$11.8 million in term equipment financing, and $0.6 million in notes related to
non-compete agreements. Interest rates on this debt range from 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 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 $10.0 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, including all subsidiaries, are
parties to the Credit Agreement and related documents.
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 between 0.55% and 0.925% based on cash flow coverage.
At March 31, 2000, the margin was 0.70%.
In October 1995, the Company placed $25 million in 10-year senior notes with an
insurance company. The notes bear interest at 7.39%, payable semi-annually, and
mature on October 1, 2005. Principal payments are due in equal annual
installments beginning in the seventh year of the notes. Proceeds of the notes
were used to reduce borrowings under the Credit Agreement.
The Credit Agreement, senior notes, and the headquarters and terminal lease
agreement entered into in 1996, contain certain restrictions and covenants
relating to, among other things, dividends, tangible net worth, cash flows,
acquisitions and dispositions, and total indebtedness. All of these instruments
are cross-defaulted. At March 31, 2000, the Company was in compliance with the
agreements.
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 attempts to limit the effects of inflation through increases in
freight rates and certain cost control efforts.
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. At the end of the first
quarter of 2000, the national average price of diesel fuel as provided by the
U.S. Department of Energy was $1.451 as compared to $1.046 per gallon at the end
of the first quarter of 1999. 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.
11
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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 the first quarter of 2000,
diesel fuel expenses represented 14.6% of the Company's total operating expenses
and 14.0% of total revenue. The Company uses purchase commitments through
suppliers, to reduce a portion of its exposure to fuel price fluctuations. At
March 31, 2000, the national average price of diesel fuel as provided by the
U.S. Department of Energy was $1.451 per gallon. At March 31, 2000, the notional
amount for purchased commitments for the remainder of 2000 was 6.75 million
gallons. At March 31, 2000, the price of the notional 6.75 million gallons would
have produced approximately $1.7 million of income to offset increased fuel
prices if the price of fuel remained the same as of March 31, 2000. At March 31,
2000, a ten percent change in the price of fuel would increase or decrease the
gain on fuel purchase commitments by approximately $0.9 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
March 31, 2000, the Company had drawn $102.0 million under the Credit Agreement,
which is subject to variable rates. This exposes the Company to the risk that
interest rates might rise. Considering the current level of debt outstanding,
each one-percentage point increase or decrease in LIBOR would affect the
Company's pretax interest expense under the Credit Agreement by approximately
$1.0 million on an annualized basis.
The remaining $42.4 million of the Company's debt has fixed interest rates. This
exposes the Company to the risk that interest rates might fall.
The Company does not trade in derivatives with the objective of earning
financial gains on price fluctuations, nor does it trade in these instruments
when there are no underlying related exposures.
12
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
None
Items 2, 3, 4 and 5. Not applicable
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits
Exhibit
Number 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.
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.
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.
(b) No reports on Form 8-K have been filed during the quarter for which
this report is filed.
13
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COVENANT TRANSPORT, INC.
Date: May 11, 2000 /s/ Joey B. Hogan
-----------------
Joey B. Hogan
Treasurer and Chief Financial Officer
14
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