SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the Fiscal Year Ended December 31, 2001
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
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
400 Birmingham Highway
Chattanooga, Tennessee 37419
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 423/821-1212
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: $0.01 Par Value
Class A Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $97.2 million as of March 21, 2002 (based upon the
$15.50 per share closing price on that date as reported by Nasdaq). In making
this calculation the registrant has assumed, without admitting for any purpose,
that all executive officers, directors, and holders of more than 10% of a class
of outstanding common stock, and no other persons, are affiliates.
As of March 21, 2002, the registrant had 11,752,553 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 2002 annual meeting of
stockholders that will be filed no later than April 29, 2002.
Cross Reference Index
The following cross reference index indicates the document and location of the
information contained herein and incorporated by reference into the Form 10-K.
Document and Location
Part I
Item 1 Business Page 3 herein
Item 2 Properties Page 6 herein
Item 3 Legal Proceedings Page 7 herein
Item 4 Submission of Matters to a Vote of Security Holders Page 7 herein
Part II
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters Page 8 herein
Item 6 Selected Financial Data Page 9 herein
Page 11 herein
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 7A Quantitative and Qualitative Disclosures About Market Risk Page 23 herein
Item 8 Financial Statements and Supplementary Data Page 25 herein
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure Page 25 herein
Part III
Item 10 Directors and Executive Officers of the Registrant Page 2-3 of Proxy Statement
Item 11 Executive Compensation Pages 5-7 of Proxy Statement
Item 12 Security Ownership of Certain Beneficial Owners and
Management Pages 8-9 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 Page 26 herein
Form 8-K
-----------------------------------------
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 - Factors That May
Affect Future Results" for additional information and factors to be considered
concerning forward-looking statements.
2
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 services for customers
throughout the United States. Covenant was founded by David and Jacqueline
Parker in 1985 with 25 tractors and 50 trailers. In sixteen years of operating,
the Company's fleet has grown to 3,700 tractors and 7,702 trailers, and in 2001
revenue was $547.0 million. The Company has completed nine acquisitions since
1996, including four in the past three years. In September 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. In August
2000, the Company purchased certain trucking assets of Con-Way Truckload
Services, Inc. ("CTS"), an $80 million annual truckload carrier headquartered in
Fort Worth, Texas.
At December 31, 2001, 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; Southern
Refrigerated Transport, Inc. ("SRT"), an Arkansas corporation; Tony Smith
Trucking, Inc., an Arkansas corporation; Harold Ives Trucking Co., an Arkansas
corporation; CVTI Receivables Corp. ("CRC"), a Nevada corporation, and Terminal
Truck Broker, Inc., an Arkansas corporation.
This report contains forward-looking statements. Additional written or oral
forward-looking statements may be made by the Company from time to time in
filings with the Securities and Exchange Commission or otherwise. The words
"believes," "expects," "anticipates," "estimates," and "projects," and similar
expressions identify forward-looking statements, which speak only as of the date
the statement was made. Such forward-looking statements are within the meaning
of that term in Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements are inherently subject to risks and uncertainties, some of which
cannot be predicted or quantified. Future events and actual results could differ
materially from those set forth in, contemplated by, or underlying the
forward-looking statements. Statements in this report, including the Notes to
the Consolidated Financial Statements and "Management's Discussion and Analysis
of Financial Condition and Results of Operations," describe factors, among
others, that could contribute to or cause such differences. Additional factors
that could cause actual results to differ materially from those expressed in
such forward-looking statements are set forth in "Business" in this report. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
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 2001, the transportation industry was the largest industry Covenant served.
In the aggregate, subsidiaries of CNF, Inc. accounted for approximately 13% and
11% of Covenant's 2001 and 2000 revenue, respectively. No single customer or
group accounted for 10% or more of the Company's revenue in 1999.
3
The Company operates throughout the United States and in parts of Canada and
Mexico, with substantially all of its revenue generated from within the United
States. Less than one percent of the Company's revenues were generated from
Canada and Mexico in each of the last three fiscal years. All of the Company's
assets are domiciled in the United States.
Covenant conducts its operations from its headquarters in Chattanooga,
Tennessee. The former Harold Ives Trucking operation has been centralized in
Chattanooga as well. SRT's operations center remains in Ashdown, Arkansas.
Fleet managers at each operation 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, performance, and other factors that affect
operating efficiency. All of the Company's 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 and Internet-based data communication. These services allow
customers and the Company to communicate electronically, permitting real-time
information flow, reductions or eliminations in paperwork, and fewer clerical
personnel, as customers can receive updates as to cargo position, delivery
times, and other information. The Company also allows customers to communicate
electronically in order to obtain information regarding 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 automated 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.
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, 2001, teams operated approximately 35% of the
Company's tractors. The single driver fleets operate fewer miles per tractor and
experience more empty miles but these factors are expected to be offset by
higher revenue per loaded mile and the reduced employee expense of only one
driver.
Covenant is not a party to a collective bargaining agreement and its employees
are not represented by a union. At December 31, 2001, the Company employed
approximately 5,021 drivers and approximately 1,094 nondriver personnel.
Management believes that the Company has a good relationship with its personnel.
4
Revenue Equipment
Management believes that operating high quality, efficient equipment is an
important part of providing excellent service to customers. The Company's
historical policy has been to operate its tractors while under warranty to
minimize repair and maintenance cost and reduce service interruptions caused by
breakdowns. In conjunction with the extension of its trade cycle on tractors
from three to four years, the Company purchased extended warranties on major
components. The Company also orders most of its equipment with uniform
specifications to reduce its parts inventory and facilitate maintenance.
The Company's fleet of 3,700 tractors had an average age of 25.6 months at
December 31, 2001, 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.
For the past several quarters, the nationwide inventory of used tractors has far
exceeded demand. As a result, the market value of used tractors has fallen
significantly below the carrying values recorded on the Company's financial
statements. In 2001, the Company had extended the trade cycle on its tractors
from three years to four years, which delayed any significant disposals into
2002 and later years. The market for used tractors has not significantly
improved. As a result, the Company recorded a $15.4 million impairment charge
related to approximately 1,770 model year 1998 through 2000 tractors in use in
2001. The Company will recognize additional expense on 325 model year 2000
tractors in the first quarter of 2002. The Company has negotiated a purchase and
trade agreement with Freightliner Corporation covering the sale of the year 1998
through 2000 tractors and the purchase of an equal number of replacement units.
The Company's approximately 1,400 model year 2001 tractors, which are expected
to be sold or traded in 2003 and 2004, are not affected by the charge.
At December 31, 2001, the Company's fleet of 7,702 trailers had an average age
of 44.1 months. Approximately 88% of the Company's trailers were 53-feet long by
102-inch wide, dry vans. The Company also operated approximately 964 53-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 premium services such
as team, refrigerated and dedicated contract 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 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 to customers 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 employees 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.
5
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. 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.
During 2001 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 decreased the
Company's profitability. Although the Company historically has been able to pass
through a substantial part of 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, out-of-route miles, or fuel used while the tractor is idling. At December
31, 2001, the Company had purchase commitments for approximately 55 million
gallons in each of 2002 and 2003.
ITEM 2. PROPERTIES
The Company's headquarters and main terminal are located on approximately 180
acres of property in Chattanooga, Tennessee, that include an office building of
approximately 182,000 square feet, the Company's approximately 65,000
square-foot principal maintenance facility, a body shop of approximately 16,600
square feet, and a truck wash. Covenant maintains sixteen terminals located on
its major traffic lanes in the following cities, with the facilities noted:
Driver
Terminal Locations Maintenance Recruitment Sales Ownership
------------------ ----------- ----------- ----- ---------
Chattanooga, Tennessee x x x Owned
Oklahoma City, Oklahoma x Owned
French Camp, California Leased
Fontana, California x Leased
Long Beach, California Owned
Dalton, Georgia x x Owned
Pomona, California x Owned
Hutchins, Texas x Owned
El Paso, Texas Leased
Laredo, Texas Leased
Delanco, New Jersey Leased
Indianapolis, Indiana Leased
Ashdown, Arkansas x x x Owned
Little Rock, Arkansas x Owned
Dayton, Ohio Leased
Greensboro, North Carolina Leased
6
The terminals provide 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.
ITEM 3. LEGAL PROCEEDINGS AND INSURANCE
The Company from time to time is a party to litigation arising in the ordinary
course of its business, most of which involves claims for personal injury and
property damage incurred in the transportation of freight. In 2001, the Company
maintained insurance covering losses in excess of a $250,000 deductible from
cargo loss, physical damage claims, personal injury and property damage. The
Company maintains a workers' compensation plan for its employees. Each of the
primary insurance policies has a stop-loss 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.
In the first quarter of 2002, the Company increased its deductibles to a
combined $500,000 per occurrence, with each occurrence including the aggregate
of liability, cargo, and physical damage coverage. In addition, the Company
increased its workers' compensation deductible to $500,000 per occurrence.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ended December 31, 2001, no matters were
submitted to a vote of security holders.
7
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 is traded on the Nasdaq 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, 2000 to December 31, 2001.
Period High Low
Calendar Year 2000
1st Quarter $ 18.250 $ 10.250
2nd Quarter $ 15.875 $ 7.563
3rd Quarter $ 11.000 $ 7.688
4th Quarter $ 12.125 $ 8.000
Calendar Year 2001
1st Quarter $ 16.313 $ 10.250
2nd Quarter $ 17.560 $ 11.130
3rd Quarter $ 15.500 $ 9.100
4th Quarter $ 16.700 $ 9.310
As of March 25, 2002, the Company had approximately 48 stockholders of record of
its Class A Common Stock. However, the Company estimates that it has
approximately 2,200 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 and reduce the
Company's indebtedness rather than to pay dividends. The payment of cash
dividends is currently limited by agreements relating to the Company's $120
million line of credit. 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.
8
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
(In thousands, except per share and operating data amounts)
Years Ended December 31,
1997 1998 1999 2000 2001
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Statement of Operations Data:
Operating revenue (1) $ 297,861 $ 370,546 $ 472,741 $ 552,429 $ 547,028
Operating expenses:
Salaries, wages, and related expenses 131,522 164,589 202,420 239,988 239,411
Fuel expense (2) 53,166 56,384 71,733 78,828 84,405
Operations and maintenance 20,802 23,842 29,112 34,817 37,779
Revenue equipment rentals and
purchased transportation 8,492 24,250 49,260 76,131 65,069
Operating taxes and licenses 8,922 10,334 11,777 14,940 14,358
Insurance and claims 9,007 11,936 14,096 18,907 27,838
Communications and utilities 3,533 4,328 5,682 7,189 7,439
General supplies and expenses 7,812 8,994 10,380 13,970 14,468
Depreciation and amortization, including
gains (losses) on disposition of
equipment and impairment of assets (3) 26,482 30,192 35,591 38,879 56,324
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Total operating expenses 269,738 334,849 430,051 523,649 547,091
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Operating income (loss) 28,123 35,697 42,690 28,780 (63)
Other (income) expense:
Interest expense 6,519 6,252 5,993 9,894 7,855
Interest income (246) (328) (480) (520) (328)
Other - - - (368) 799
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Total other (income) expense 6,273 5,924 5,513 9,006 8,326
----------------------------------------------------------------------------
Income (loss) before income taxes 21,850 29,773 37,177 19,774 (8,389)
Income tax expense (benefit) 8,148 11,490 14,900 7,899 (1,727)
----------------------------------------------------------------------------
Net income (loss) $ 13,702 $ 18,283 $ 22,277 $ 11,875 $ (6,662)
============================================================================
(1) Excludes fuel surcharges.
(2) Net of fuel surcharges of $2.4 million, -0-, $2.4 million, $25.3 million,
and $19.5 million in 1997, 1998, 1999, 2000 and 2001, respectively.
(3) Includes a $15.4 million pre-tax impairment charge in 2001.
Basic earnings per share $ 1.03 $ 1.27 $ 1.49 $ 0.82 $ (0.48)
Diluted earnings per share 1.03 1.27 1.48 0.82 (0.48)
Weighted average common shares
outstanding 13,360 14,393 14,912 14,404 13,987
Adjusted weighted average common
shares and assumed conversions 13,360 14,440 15,028 14,533 13,987
outstanding
9
Years Ended December 31,
Selected Balance Sheet Data 1997 1998 1999 2000 2001
-----------------------------------------------------------------------------
Net property and equipment $ 161,621 $ 200,537 $ 269,034 $ 256,049 $ 231,536
Total assets 215,256 272,959 383,974 390,513 349,782
Long-term debt, less current maturities 80,812 84,331 140,497 74,295 24,000
Stockholders' equity $ 95,597 $ 141,522 $ 163,852 $ 167,822 $ 161,902
Selected Operating Data:
Pre-tax margin 7.3% 8.0% 7.9% 3.6% (1.5%)
Average revenue per loaded mile $ 1.12 $ 1.18 $ 1.20 $ 1.23 $ 1.21
Average revenue per total mile $ 1.07 $ 1.10 $ 1.11 $ 1.13 $ 1.12
Average revenue per tractor per week $ 3,059 $ 3,045 $ 3,078 $ 2,790 $ 2,737
Average miles per tractor per year 149,117 144,000 144,601 128,754 127,714
Weighted average tractors for year (1) 1,866 2,333 2,929 3,759 3,791
Total tractors at end of period (1) 2,136 2,608 3,521 3,829 3,700
Total trailers at end of period (2) 3,948 4,526 6,199 7,571 7,702
(1) Includes monthly rental tractors.
(2) Excludes monthly rental trailers.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The condensed consolidated financial statements include the accounts of Covenant
Transport, Inc., a Nevada holding company, and its wholly-owned subsidiaries
("Covenant" or the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
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. Statements that
constitute forward-looking statements are usually identified by words such as
"anticipates," "believes," "estimates," "projects," "expects," or similar
expressions. These statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Such statements are based
upon the current beliefs and expectations of the Company's management and are
subject to significant risks and uncertainties. Actual results may differ from
those set forth in the forward-looking statements. The following factors, among
others, could cause actual results to differ materially from those in
forward-looking statements: excess capacity in the trucking industry; surplus
inventories; recessionary economic cycles and downturns in customers' business
cycles; increases or rapid fluctuations in fuel prices, interest rates, fuel
taxes, tolls, and license and registration fees; increases in the prices paid
for new revenue equipment; the resale value of the Company's used equipment;
increases in compensation for and difficulty in attracting and retaining
qualified drivers and owner-operators; increases in insurance premiums and
deductible amounts relating to accident, cargo, workers' compensation, health,
and other claims; seasonal factors such as harsh weather conditions that
increase operating costs; competition from trucking, rail, and intermodal
competitors; regulatory requirements that increase costs or decrease efficiency;
and the ability to identify acceptable acquisition candidates, consummate
acquisitions, and integrate acquired operations. 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 under "Factors that May Affect Future Results" herein.
During the three-year period ended December 31, 2001, the Company increased its
revenue at a compounded annual growth rate of 13.9%, as revenue increased from
$370.5 million in 1998 to $547.0 million in 2001. The growth in revenue resulted
from internal expansion of the fleet and customer base as well as from
acquisitions. The acquired operations generated approximately $185 million in
combined revenue in the years prior to their acquisition. The revenue from new
customers and acquired operations helped offset the loss of revenue from certain
existing customers whose freight volumes were affected by the economy or who
sought lower priced service. Due to a weak freight environment in much of 2000
and all of 2001, the Company has elected to constrain the size of the Company
fleet until fleet production and profitability improve. The main constraints on
internal growth are the ability to recruit and retain a sufficient number of
qualified drivers and, in times of slower economic growth, to add profitable
freight.
The Company's acquisitions of ATW, Harold Ives, and CTS have resulted in changes
in several operating statistics and expense categories. These operations use
predominately single-driver tractors, as opposed to the primarily team-driver
tractor fleet historically operated by Covenant's long-haul operation. In
addition, Covenant reduced the number of teams in its historical operation
during 2001 as the economic recession resulted in decreased demand for expedited
service. The single driver fleets operate fewer miles per tractor and experience
more empty miles. The additional expenses and lower productive miles are
expected to be 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 continue to shift in future
periods with the mix of single, team, and temperature-controlled operations.
The Company continues to obtain revenue equipment through its owner-operator
fleet and finance equipment under operating leases. Over the past year, it has
become more difficult to retain owner-operators due to the challenging operating
conditions. The Company's owner-operator fleet decreased to an average of 360 in
2001 compared to an
11
average of 509 in 2000 and an average of 285 in 1999. Owner-operators provide a
tractor and a driver and are responsible for all operating expenses in exchange
for a fixed payment per mile. The Company does not have the capital outlay of
purchasing the tractor. The Company's use of operating leases has continued to
grow. As of December 31, 2001, the Company had financed approximately 963
tractors and 2,564 trailers under operating leases as compared to 1,090 tractors
and 1,541 trailers under operating leases as of December 31, 2000 and 717
tractors and 450 trailers financed under operating leases as of December 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 pre-tax margin and net margin rather than
operating ratio.
The Company's tractor leases generally run for a term of three years. With the
extension of the tractor's trade cycle to approximately four years, the Company
has been purchasing the leased tractors at the expiration of the lease term. To
date the purchases have been financed through the Company's line of credit. As
the tractors are purchased, the accounting switches to the accounting for owned
equipment. Trailer leases generally run for a term of seven years with the first
leases expiring in 2005. The Company has not determined whether it anticipates
purchasing trailers at the end of these leases.
Effective July 1, 2000, the Company combined its logistics business with the
logistics businesses of five other transportation companies into a company
called Transplace, Inc. ("TPC"). TPC operates an Internet-based global
transportation logistics service and is developing programs for the cooperative
purchasing of products, supplies, and services. In the transaction, Covenant
contributed its logistics customer list, logistics business software and
software licenses, certain intellectual property, intangible assets totaling
approximately $5.1 million, and $5.0 million in cash for the initial funding of
the venture. In exchange, Covenant received 12.4% ownership in TPC. Upon
completion of the transaction, Covenant ceased operating its own transportation
logistics and brokerage business, which consisted primarily of the Terminal
Truck Broker, Inc. business acquired in November 1999. The contributed operation
generated approximately $5.0 million in net brokerage revenue (gross revenue
less purchased transportation expense) received on an annualized basis.
Initially, the Company accounted for its 12.4% investment in TPC using the
equity method of accounting. During the third quarter of 2001, TPC changed its
filing status to a C corporation and as a result, management determined it
appropriate to account for its investment using the cost method of accounting.
12
The following table sets forth the percentage relationship of certain items to
revenue for each of the three years-ended December 31:
1999 2000 2001
-----------------------------------------
Operating revenue 100.0% 100.0% 100.0%
Operating expenses:
Salaries, wages, and related expenses 42.8 43.4 43.8
Fuel expense 15.2 14.3 15.4
Operations and maintenance 6.2 6.3 6.9
Revenue equipment rentals and purchased
Transportation 10.4 13.8 11.9
Operating taxes and licenses 2.5 2.7 2.6
Insurance and claims 3.0 3.4 5.1
Communications and utilities 1.2 1.3 1.4
General supplies and expenses 2.2 2.5 2.6
Depreciation and amortization, including gains
(losses) on disposition of equipment and
impairment of assets(1) 7.5 7.0 10.3
-----------------------------------------
Total operating expenses 91.0 94.8 100.0
-----------------------------------------
Operating income (loss) 9.0 5.2 0.0
Other (income) expense, net 1.2 1.6 1.5
-----------------------------------------
Income before income taxes 7.9 3.6 (1.5)
Income tax expense (benefit) 3.2 1.4 (0.3)
-----------------------------------------
Net income (loss) 4.7% 2.1% (1.2%)
=========================================
(1) Includes a $15.4 million pre-tax impairment charge in 2001.
COMPARISON OF YEAR ENDED DECEMBER 31, 2001 TO YEAR ENDED DECEMBER 31, 2000
Revenue decreased $5.4 million (1.0%), to $547.0 million in 2001, from $552.4
million in 2000. The Company's growth was affected by a 1.9% decrease in revenue
per tractor per week to $2,737 in 2001 from $2,790 in 2000. The revenue per
tractor per week decrease was primarily generated by a 0.8% lower utilization of
equipment and a 1.3% lower rate per total mile due to a less robust freight
environment. Weighted average tractors increased 0.9% to 3,791 in 2001 from
3,759 in 2000. Due to a weak freight environment, the Company has elected to
constrain the size of its tractor fleet until profitability improves.
Salaries, wages, and related expenses decreased $0.6 million (0.2%), to $239.4
million in 2001, from $240.0 million in 2000. As a percentage of revenue,
salaries, wages, and related expenses increased to 43.8% in 2001, from 43.4% in
2000. Even though the percentage of total miles driven by company trucks
increased (89.8% in 2001 vs. 86.1% in 2000), wages for over the road drivers as
a percentage of revenue decreased to 30.1% in 2001 from 30.6% in 2000, partially
due to the Company implementing cost reduction strategies including a per diem
pay program for its drivers during August 2001. The Company's payroll expense
for employees other than over the road drivers increased to 6.7% of revenue in
2001 from 6.2% of revenue in 2000 due to growth in headcount and local drivers
in the dedicated fleet. Health insurance, employer paid taxes, and workers'
compensation increased to 6.6% of revenue in 2001, from 6.4% in 2000. The
increase as a percentage of revenue was primarily the result of increased group
health insurance claims in 2001 as compared to 2000.
Fuel expense increased $5.6 million (7.1%), to $84.4 million in 2001, from $78.8
million in 2000. As a percentage of revenue, fuel expense increased to 15.4% in
2001 from 14.3% in 2000. This increase was due to the increased usage of company
trucks (due to the decrease in the Company's utilization of owner-operators, who
pay for their own fuel purchases), lower quantities and less efficient pricing
of fuel contracted using purchase commitments, and slightly lower fuel economy.
These increases were partially offset by fuel surcharges, which amounted to
$.043 per loaded mile or approximately $19.5 million in 2001 compared to $.057
per loaded mile or approximately $25.3
13
million in 2000. Fuel costs may be affected in the future by lower fuel mileage
if government mandated emissions standards effective October 1, 2002, are
implemented as scheduled.
Operations and maintenance, consisting primarily of vehicle maintenance, repairs
and driver recruitment expenses, increased $3.0 million (8.5%), to $37.8 million
in 2001, from $34.8 million in 2000. As a percentage of revenue, operations and
maintenance increased to 6.9% in 2001, from 6.3% in 2000. The Company extended
the trade cycle on its tractor fleet from three years to four years, which
resulted in an increase in the number of required repairs.
Revenue equipment rentals and purchased transportation decreased $11.1 million
(14.5%), to $65.1 million in 2001, from $76.1 million in 2000. As a percentage
of revenue, revenue equipment rentals and purchased transportation decreased to
11.9% in 2001 from 13.8% in 2000. The decrease was primarily the result of a
smaller fleet of owner-operators during 2001 (an average of 360 in 2001 compared
to an average of 509 in 2000). Over the past year, it has become more difficult
to retain owner-operators due to the challenging operating conditions. The
smaller fleet resulted in lower payments to owner operators (8.0% of revenue in
2001 compared to 10.7% of revenue in 2000). Owner-operators are independent
contractors, 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 decrease from
lower owner operator expense was partially offset by the Company entering into
additional operating leases. As of December 31, 2001, the Company had financed
approximately 963 tractors and 2,564 trailers under operating leases as compared
to 1,090 tractors and 1,541 trailers under operating leases as of December 31,
2000. The equipment leases will increase this expense category in the future,
while reducing depreciation and interest expense.
Operating taxes and licenses decreased $0.6 million (3.9%), to $14.4 million in
2001, from $14.9 million in 2000. As a percentage of revenue, operating taxes
and licenses remained essentially constant at 2.6% in 2001 as compared to 2.7%
in 2000.
Insurance and claims, consisting primarily of premiums and deductible amounts
for liability, physical damage, and cargo damage insurance and claims, increased
$8.9 million (47.2%), to $27.8 million in 2001 from $18.9 million in 2000. As a
percentage of revenue, insurance increased to 5.1% in 2001 from 3.4% in 2000.
The increase is a result of an industry-wide increase in insurance rates, which
the Company addressed by adopting an insurance program with significantly higher
deductible exposure that is partially offset by lower premium rates. The
deductible amount increased from $5,000 in 2000 to $250,000 in 2001. In 2002,
the Company increased its deductible to $500,000. The Company's insurance
program for liability, physical damage, and cargo damage involves self-insurance
with varying risk retention levels. Claims in excess of these risk retention
levels are covered by insurance in amounts which management considers adequate.
The Company accrues the estimated cost of the uninsured portion of pending
claims. These accruals are based on management's evaluation of the nature and
severity of the claim and estimates of future claims development based on
historical trends. Insurance and claims expense will vary based on the frequency
and severity of claims, the premium expense and the lack of self insured
retention.
Communications and utilities increased $0.3 million (3.5%), to $7.4 million in
2001, from $7.2 million in 2000. As a percentage of revenue, communications and
utilities remained essentially constant at 1.4% in 2001 as compared to 1.3% in
2000.
General supplies and expenses, consisting primarily of headquarters and other
terminal facilities expenses, increased $0.5 million (3.6%), to $14.5 million in
2001, from $14.0 million in 2000. As a percentage of revenue, general supplies
and expenses remained essentially constant at 2.6% in 2001 and 2.5% in 2000.
Depreciation and amortization, including gains (losses) on disposition of
equipment and impairment of assets, consisting primarily of depreciation of
revenue equipment, increased $17.4 million (44.9%), to $56.3 million in 2001
from $38.9 million in 2000. As a percentage of revenue, depreciation and
amortization increased to 10.3% in 2001 from 7.0% in 2000. The increase is
primarily the result of a $15.4 million pre-tax impairment charge related to
approximately 1,770 model year 1998 through 2000 tractors in use. The Company
will recognize an additional impairment charge on 325 tractors in the first
quarter of 2002. See "Impairment of Tractor Values and Future
14
Expense" below for additional information. The Company's approximately 1,400
model year 2001 tractors are not affected by the charge. The Company has
increased the annual depreciation expense on the 2001 model year tractors to
approximate the Company's recent experience with disposition values.
Depreciation and amortization expense is net of any gain or loss on the sale of
tractors and trailers. Loss on the sale of tractors and trailers was
approximately $217,000 in 2001 compared to a gain of $1.0 million in 2000
period. Amortization expense relates to deferred debt costs incurred and
covenants not to compete from five acquisitions, as well as goodwill from eight
acquisitions. Goodwill amortization will cease beginning January 1, 2002, in
accordance with SFAS 142 and the Company will evaluate goodwill and certain
intangibles for impairment, annually prospectively beginning January 2002.
Other expense, net, decreased $0.7 million (7.6%), to $8.3 million in 2001, from
$9.0 million in 2000. As a percentage of revenue, other expense remained
essentially constant at 1.5% in the 2001 period from 1.6% in the 2000 period.
Included in the other expense category is interest expense, interest income, and
a $0.7 million pre-tax non-cash adjustment related to the accounting for
interest rate derivatives under SFAS 133. Excluding the non-cash adjustment,
other expense decreased $1.4 million (15.6%), to $7.6 million in the 2001 period
from $9.0 million in the 2000 period. The decrease was the result of lower debt
balances and interest rates.
As a result of the foregoing, the Company's pre-tax margin decreased to (1.5%)
in 2001 compared with 3.6% in 2000.
The Company's income tax benefit for 2001 was $1.7 million or 20.6% of loss
before income taxes. The Company's income tax expense for 2000 was $7.9 million
or 39.9% of earnings before income taxes. In 2001, the effective tax rate is
different from the expected combined tax rate due to permanent differences
related to a per diem pay structure implemented during the third quarter of
2001. Due to the nondeductible effect of per diem, the Company's tax rate will
fluctuate in future periods as earnings fluctuate.
As a result of the factors described above, net earnings decreased $18.5 million
(156.1%), to $6.6 million loss in 2001 (1.2% of revenue), from $11.9 million
income in 2000 (2.1% of revenue). Prior to the $15.4 million pre-tax charge for
impairment, net income and earnings per share for 2001 would have been $2.9
million and $0.21, respectively.
COMPARISON OF YEAR ENDED DECEMBER 31, 2000 TO YEAR ENDED DECEMBER 31, 1999
Revenue increased $79.7 million (16.9%), to $552.4 million in 2000, from $472.7
million in 1999. The revenue increase was primarily generated by a 28.3%
increase in weighted average tractors, to 3,759 in 2000, from 2,929 in 1999, as
the Company expanded externally through the acquisitions of the stock of Harold
Ives Trucking Co. and the asset acquisitions from ATW and CTS. The Company's
average revenue per loaded mile increased to approximately $1.23 in 2000, from
$1.20 in 1999. The increase was attributable primarily to per-mile rate
increases negotiated by the Company. Revenue per total mile increased to
approximately $1.13 in 2000, from $1.11 in 1999. The Company's growth was
affected by a 9.4% decrease in revenue per tractor per week to $2,790 in 2000
from $3,078 in 1999. Revenue per tractor per week was reduced because of fewer
miles per tractor due to a less robust freight environment than in 1999 and the
acquisition of Harold Ives Trucking Co. and CTS, which operated single-driver
tractors that generate fewer miles than team-driven tractors.
Salaries, wages, and related expenses increased $37.6 million (18.6%), to $240.0
million in 2000, from $202.4 million in 1999. As a percentage of revenue,
salaries, wages, and related expenses increased to 43.4% in 2000, from 42.8% in
1999. Driver wages as a percentage of revenue remained essentially constant at
30.6% in 2000, and 30.7% in 1999. The Company increased driver wages in October
1999 and in April 2000. These increases were offset as the Company utilized more
owner-operators and had a larger percentage of single-driver tractors from the
operations of SRT, Harold Ives, and CTS, which only have one driver per tractor
to be compensated. Non-driving employee payroll expense remained essentially
constant at 6.2% of revenue in the 2000 period and 6.1% of revenue in the 1999
period. Health insurance, employer paid taxes, and workers' compensation
increased to 6.4% of revenue in 2000, from 5.8% in 1999. The increase as a
percentage of revenue was primarily the result of increased group health
insurance claims in 2000 as compared to 1999.
15
Fuel expenses increased $7.1 million (9.9%), to $78.8 million in 2000, from
$71.7 million in 1999. As a percentage of revenue, fuel expenses decreased to
14.3% in 2000 from 15.2% in 1999. During 2000, average fuel costs for the year
increased approximately $0.34 per gallon versus 1999. The increase in 2000 was
offset by fuel surcharges, which are included as a reduction in fuel cost, fuel
hedges in the form of fixed price purchase commitments, and by the increased
usage of owner-operators who pay for their own fuel purchases. Fuel surcharges
amounted to nearly $.052 per total mile or approximately $25.3 million during
2000 compared with less than one cent per total mile or approximately $2.4
million during 1999. The Company's percentage of fuel purchases that are hedged
was approximately 18.5% in 1999 and approximately 17.3% for the year 2000.
Revenue equipment rentals and purchased transportation increased $26.9 million
(54.5%), to $76.1 million in 2000, from $49.3 million in 1999. As a percentage
of revenue, revenue equipment rentals and purchased transportation increased to
13.8% in 2000 from 10.4% in 1999. During 1997, the Company began using
owner-operators, 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 509 in 2000, compared to 285 in 1999, a 78.6% increase. The Company also
entered into additional operating leases. As of December 31, 2000, the Company
had financed approximately 1,090 tractors and 1,541 trailers under operating
leases as compared to 717 tractors and 450 trailers under operating leases as of
December 31, 1999. The equipment leases will increase this expense category in
the future, while reducing depreciation and interest expenses.
Operations and maintenance increased $5.7 million (19.6%), to $34.8 million in
2000, from $29.1 million in 1999. As a percentage of revenue, operations and
maintenance remained essentially constant at 6.3% in 2000, and 6.2% in 1999.
Operating taxes and licenses increased $3.2 million (26.9%), to $14.9 million in
2000, from $11.8 million in 1999. As a percentage of revenue, operating taxes
and licenses increased to 2.7% in 2000, from 2.5% in 1999, partially due to
increased fleet size and additional property taxes related to facilities.
Insurance and claims, consisting primarily of premiums for liability, physical
damage, and cargo damage insurance, and claims, increased $4.8 million (34.1%),
to $18.9 million in 2000, from $14.1 million in 1999. As a percentage of
revenue, insurance and claims increased to 3.4% in 2000, from 3.0% in 1999. The
increase was primarily related to the Company experiencing an increase in the
cost of one of its insurance lines in July 2000, an increase in the number of
tractors and trailers damaged in accidents, and the payment of a claim to one of
its customers that the insurance company had denied in the amount of
approximately $500,000. The Company has other insurance lines that will be due
for renewal in the first quarter of 2001. Management expects that an increase in
insurance premiums and deductibles will cause this expense category to be higher
in future periods.
Communications and utilities increased $1.5 million (26.5%), to $7.2 million in
2000, from $5.7 million in 1999. As a percentage of revenue, communications and
utilities remained essentially constant at 1.3% in 2000 as compared to 1.2% in
1999.
General supplies and expenses, consisting primarily of headquarters and other
terminal expenses, increased $3.6 million (34.6%), to $14.0 million in 2000,
from $10.4 million in 1999. As a percentage of revenue, general supplies and
expenses increased to 2.5% in 2000 from 2.2% in 1999. The 2000 increase was
primarily the result of expenses incurred from the acquisitions related to ATW,
Harold Ives, and CTS, as well as the addition of a driving school located in
Arkansas.
Depreciation and amortization, consisting primarily of depreciation of revenue
equipment, increased $3.3 million (9.2%), to $38.9 million in 2000, from $35.6
million in 1999. As a percentage of revenue, depreciation and amortization
decreased to 7.0% in 2000, from 7.5% in 1999, because the Company utilized more
owner-operators, leased more revenue equipment through operating leases, and
extended the depreciable life of the Company's trailers from seven years to
eight years to conform with the Company's actual experience of equipment life.
These factors offset lower revenue per tractor. Amortization expense relates to
deferred debt costs incurred and covenants not to
16
compete from five acquisitions, as well as goodwill from eight 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 approximately
$1.0 million in 2000 and $67,000 in 1999. It is difficult to predict the gain
(loss) on the sale of equipment because the market value of used equipment
varies from year to year. The unpredictability of gains (losses) could impact
depreciation and amortization as a percentage of revenue. In the fourth quarter
of 2000, the Company began reserving against tractor values, which will affect
this line item in future periods.
Interest expense increased $3.5 million (63.4%), to $9.0 million in 2000, from
$5.5 million in 1999. As a percentage of revenue, interest expense increased to
1.6% in 2000, from 1.2% in 1999, as the result of higher debt balances related
to the acquisitions and the stock repurchase program as well as higher interest
rates. The increase was partially offset by utilizing more owner-operators and
leasing more revenue equipment.
As a result of the foregoing, the Company's pre-tax margin decreased to 3.6% in
2000 compared with 7.9% in 1999.
The Company's effective tax rate remained essentially constant at 39.9% in 2000,
and 40.1% in 1999
As a result of the factors described above, net income decreased $10.4 million
(46.7%), to $11.9 million in 2000 (2.1% of revenue), from $22.3 million in 1999
(4.7% of revenue).
LIQUIDITY AND CAPITAL RESOURCES
Historically the Company's growth has required significant capital investments.
The Company historically has financed its expansion 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 December 31, 2001, were funds provided by operations, proceeds
under the Securitization Facility (as defined below), borrowings under its
primary credit agreement, which had maximum available borrowing of $120.0
million at December 31, 2001 (the "Credit Agreement") and operating leases of
revenue equipment. The Company believes its sources of liquidity are adequate to
meet its current and projected needs.
Net cash provided by operating activities was $73.8 million in 2001, $48.7
million in 2000 and $44.5 million in 1999. The 51.6% increase in cash flows from
operations in 2001 was primarily due to improved billing and collection of
accounts receivable, increases in the insurance claims accrual, and a large
increase in depreciation and amortization, associated with the $15.4 million
pre-tax impairment charge. The Company's number of days sales in accounts
receivable decreased to 41 days in 2001 from 43 days in 2000.
Net cash used in investing activities was $31.3 million in 2001, $33.3 million
in 2000 and $80.8 million in 1999. In 2001, approximately $15 million was
related to the financing of the Company's headquarters facility, which was
previously financed through an operating lease that expired in March 2001. The
Company financed the facility using proceeds from the Credit Agreement. Capital
expenditures in 2001 decreased because the Company did not expand its fleet and
lengthened its tractor trade cycle. Anticipated capital expenditures are
expected to increase again in 2002 as the Company has agreed to purchase and
trade approximately 1,000 tractors and 1,200 trailers. During the 2000 period,
investing activity was used to invest in TPC and to acquire the assets of CTS.
Approximately $7.7 million represented the purchase price for the assets and
business of CTS, of which approximately $2.6 million was allocated to goodwill.
During 2000 and 2001, capital expenditures were lower than previous years due to
the Company's planned slower fleet growth. The Company expects capital
expenditures, primarily for revenue equipment (net of trade-ins) to be
approximately $75.0 million in 2002, exclusive of acquisitions.
Net cash used in financing activities was $44.3 million in 2001, $14.1 million
in 2000 and in 1999 net cash provided by financing activities was $34.5 million.
During 2001, the Company reduced outstanding balance sheet debt by $45.5
million. At December 31, 2001, the Company had outstanding debt of $97.3
million, primarily consisting of $48.1 million in the Securitization Facility,
$26.0 million drawn under the Credit Agreement, $20.0 million in 10-year senior
notes, a $3.0 million interest bearing note to the former primary stockholder of
SRT, and $150,000 in
17
notes related to non-compete agreements. Interest rates on this debt range from
2.0% to 7.4%. During the first quarter of 2002, the senior notes were paid in
full using borrowings from the Credit Agreement.
In 2000, the Company authorized a stock repurchase plan for up to 1.5 million
shares to be purchased in the open market or through negotiated transactions. In
2000, a total of 971,500 shares had been purchased with an average price of
$8.17. During 2001, the Company did not purchase any additional shares through
the repurchase plan. The stock repurchase program has no expiration date.
During the third quarter of 2000, the Company combined its logistics business
with the logistics businesses of five other transportation companies into TPC.
In the transaction, Covenant contributed its logistics customer list, logistics
business software and software licenses, certain intellectual property, and $5.0
million in cash for the initial funding of the venture. In exchange, Covenant
received 12.4% ownership in TPC.
In December 2000, the Company entered into the Credit Agreement with a group of
banks, which matures December 2003. 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 0.75% and 1.25% based on cash flow coverage. At December 31, 2001, the
margin was 1.25%. The Credit Agreement is guaranteed by the Company and all of
the Company's subsidiaries except CVTI Receivables Corp.
The Credit Agreement has a maximum borrowing limit of $120.0 million. Borrowings
related to revenue equipment are limited to the lesser of 90% of net book value
of revenue equipment or $120.0 million. Letters of credit are limited to an
aggregate commitment of $20.0 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 0.15% and 0.25% per annum based on cash flow
coverage, is due on the daily unused portion of the Credit Agreement. As of
December 31, 2001, the Company had borrowings under the Credit Agreement in the
amount of $26.0 million with a weighted average interest rate of 3.2%.
In December 2000, the Company entered into a $62 million revolving accounts
receivable securitization facility (the "Securitization Facility"). On a
revolving basis, the Company sells its interests in its accounts receivable to
CVTI Receivables Corp. ("CRC"), a wholly-owned bankruptcy-remote special purpose
subsidiary incorporated in Nevada. CRC sells a percentage ownership in such
receivables to an unrelated financial entity. The Company can receive up to $62
million of proceeds, subject to eligible receivables and will pay a service fee
recorded as interest expense, based on commercial paper interest rates plus an
applicable margin of 0.41% per annum and a commitment fee of 0.10% per annum on
the daily unused portion of the Facility. As discussed in the financial
statement footnotes, the net proceeds under the Securitization Facility are
required to be shown as a current liability because the term, subject to annual
renewals, is 364 days. As of December 2001, there were $48.1 million in proceeds
received.
The Company's headquarters facility was originally financed under a "build to
suit" operating lease. This operating lease expired March 2001, and the Company
financed the approximately $14.4 million balance under the Credit Agreement. The
Company has completed the construction of an approximately 100,000 square foot
addition to the office building and has completed improvements on an additional
58 acres of land. The cost of these activities in 2001 was approximately $15
million, which was also financed under the Credit Agreement.
In October 1995, the Company issued $25 million in ten-year senior notes to an
insurance company. The notes were amended in 2000 and the remaining $20 million
balance was paid off in March 2002.
The Credit Agreement and Securitization Facility contain certain restrictions
and covenants relating to, among other things, dividends, tangible net worth,
cash flow, acquisitions and dispositions, and total indebtedness and are
cross-defaulted. The Company is in compliance with the Credit Agreement and
Securitization Facility after receiving a waiver under the Securitization
Facility relating to the Chapter 11 filing by Kmart Corporation.
18
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
decisions based upon estimates, assumptions, and factors it considers as
relevant to the circumstances. Such decisions include the selection of
applicable accounting principles and the use of judgment in their application,
the results of which impact reported amounts and disclosures. Changes in future
economic conditions or other business circumstances may affect the outcomes of
management's estimates and assumptions. Accordingly, actual results could differ
from those anticipated. A summary of the significant accounting policies
followed in preparation of the financial statements is contained in Note 1 of
the financial statements attached hereto. Other footnotes describe various
elements of the financial statements and the assumptions on which specific
amounts were determined.
The Company's critical accounting policies include the following:
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 functioned
as a broker in 1999 and 2000 and for fuel surcharges in 1999, 2000, and 2001, of
$2.4 million, $25.3 million, and $19.5 million, respectively.
Property and Equipment - Depreciation is calculated using the straight-line
method over the estimated useful lives of the assets. Historically, revenue
equipment had been depreciated over five to seven years with salvage values
ranging from 25% to 33 1/3%. During 2000, the Company extended its estimate for
the useful life of its dry van trailers from seven to eight years and increased
the salvage value to approximately 48% of cost. The Company based its decision
on recent experience and expected future utilization. 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 value
less costs to sell. The Company evaluates the carrying value of long-lived
assets held for use for impairment losses by analyzing the operating performance
and future cash flows for those assets, whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. The Company adjusts the carrying value of the underlying assets if
the sum of expected undiscounted cash flows is less than the carrying value.
Impairment can be impacted by management's projection of future cash flows, the
level of cash flows and salvage values, the methods of estimation used for
determining fair values and the impact of guaranteed residuals.
Insurance and Other Claims - The Company's insurance program for liability,
workers compensation, group medical, property damage, cargo loss and damage, and
other sources involves self insurance with high risk retention levels. In 2001,
the Company adopted an insurance program with significantly higher deductibles.
The deductible amount was increased from an aggregate $12,500 to $250,000 in
2001. The Company plans to increase the deductible to $500,000 in 2002. Losses
in excess of these risk retention levels are covered by insurance in amounts
which management considers adequate. The Company accrues the estimated cost of
the uninsured portion of pending claims. These accruals are based on
management's evaluation of the nature and severity of the claim and estimates of
future claims development based on historical trends. Insurance and claims
expense will vary based on the frequency and severity of claims, the premium
expense and the lack of self insured retention.
Derivative Instruments and Hedging Activities - The Company engages in
activities that expose it to market risks, including the effects in changes in
interest rates and fuel prices. Financial exposures are managed as an integral
part of the Company's risk management program, which seeks to reduce potentially
adverse effects that the volatility of the interest rate and fuel markets may
have on operating results. Hedging activities could defer the recognition of
losses to future periods. All derivatives are recognized on the balance sheet at
their fair values. The Company also formally assesses, both at the hedge's
inception and on an ongoing basis, whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes in fair values
or cash flows of hedged items. When it is determined that a derivative is not
highly effective as a hedge or that it has ceased to be a highly effective
hedge, the Company discontinues hedge accounting prospectively.
19
When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair-value hedge, the Company
continues to carry the derivative on the balance sheet at its fair value, and no
longer adjusts the hedged asset or liability for changes in fair value. The
adjustment of the carrying amount of the hedged asset or liability is accounted
for in the same manner as other components of the carrying amount of that asset
or liability. When hedge accounting is discontinued because the hedged item no
longer meets the definition of a firm commitment, the Company continues to carry
the derivative on the balance sheet at its fair value, removes any asset or
liability that was recorded pursuant to recognition of the firm commitment from
the balance sheet and recognizes any gain or loss in earnings. When hedge
accounting is discontinued because it is probable that a forecasted transaction
will not occur, the Company continues to carry the derivative on the balance
sheet at its fair value, and gains and losses that were accumulated in other
comprehensive income are recognized immediately in earnings. In all other
situations in which hedge accounting is discontinued, the Company continues to
carry the derivative at its fair value on the balance sheet, and recognizes any
changes in its fair value in earnings.
The Company does not regularly engage in speculative transactions, nor does it
regularly hold or issue financial instruments for trading purposes.
Lease Accounting - The Company leases a significant portion of its tractor and
trailer fleet using operating leases. Substantially all of the leases have
residual value guarantees under which the Company must insure that the lessor
receives a negotiated amount for the equipment at the expiration of the lease.
In accordance with SFAS No. 13, Accounting for Leases, the rental expense under
these leases is reflected as an operating expense under "revenue equipment
rentals and purchased transportation." Operating leases are carried off balance
sheet in accordance with SFAS No. 13.
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.
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 throughout most of 2001.
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. For the reasons stated, first quarter net income historically
has been lower than net income in each of the other three quarters of the year.
The Company's equipment utilization typically improves substantially between May
and October of each year because of the 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.
20
The table below sets forth quarterly information reflecting the Company's
equipment utilization (miles per tractor per period) during 1999, 2000, and
2001. The Company believes that equipment utilization more accurately
demonstrates the seasonality of its business than changes in revenue, which are
affected by the timing of deliveries of new revenue equipment. Results of any
one or more quarters are not necessarily indicative of annual results or
continuing trends.
Equipment Utilization Table
(Miles Per Tractor Per Period)
First Quarter Second Quarter Third Quarter Fourth Quarter
-----------------------------------------------------------------------
1999 33,739 37,011 37,585 36,132
2000 31,095 31,869 32,948 32,784
2001 30,860 32,073 32,496 32,286
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
continued at high levels until the third quarter of 2001. It has fluctuated
significantly since that time. Fuel is one of the Company's largest operating
expenses, and high fuel prices have a negative impact on the Company's
profitability. Significant fluctuations can make collection of fuel surcharges
more difficult. Continued high fuel prices and fluctuations may affect the
Company's future results. In addition, the Company's volume purchase commitments
during 2002 and 2003 obligate the Company to purchase approximately 55 million
gallons in each year, for a total of 110 million gallons of fuel. Rising prices
of fuel will negatively impact the Company's profitability to the extent of
purchase commitments, less the effects of fixed price arrangements and financial
hedges.
Resale of Used Revenue Equipment - Prior to 2000, the Company historically
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, low resale values
continued into 2001 and led to the impairment charge described herein. The
prices of used trailers also are depressed. If the prices for used equipment
remain depressed, the Company could find it necessary to dispose of its
equipment at lower prices, increase its depreciation expense, and/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 historically has been, and
continues to be, 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 is forced
to compete solely on the basis of rates.
21
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. The EPA has
promulgated air emission standards that are expected to increase the cost of
tractor engines and reduce fuel mileage. The Department of Labor has proposed
and may act upon ergonomics regulations that could affect operating costs and
efficiency. 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.
Insurance and claims - In 2001 and again in early 2002, the Company adopted an
insurance program with significantly higher deductibles. An increase in the
number or severity of accidents, stolen equipment, or other loss events over
those anticipated could have a materially adverse effect on the Company's
profitability.
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.
New Accounting Pronouncements - In June 2001, the FASB issued SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS No. 142 will require
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of SFAS No. 142. The provisions of each statement which
apply to goodwill and intangible assets acquired prior to June 30, 2001 were
adopted by the Company on January 1, 2002. The impact of the application of the
provisions of this statement on the Company's financial position or results of
operations upon adoption are not expected to have a material impact, however the
Company anticipates the standard will result in reducing the amortization of
goodwill. As of December 31, 2001, the Company has approximately $11.0 million
of unamortized goodwill resulting in approximately $307,000 of annualized
amortization expense.
The Company was required to adopt the provisions of SFAS No. 141 effective June
30, 2001, and SFAS No. 142 effective January 1, 2002. Furthermore, any goodwill
that was acquired in a purchase business combination completed after June 30,
2001 will not be amortized. Goodwill acquired in business combinations completed
before July 1, 2001 is no longer being amortized after December 31, 2001.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS 143 provides new guidance on the recognition and measurement
of an asset retirement obligation and its associated asset retirement cost. It
also provides accounting guidance for legal obligations associated with the
retirement of tangible long-lived assets. SFAS 143 is effective for the
Company's fiscal year beginning in 2003 and is not expected to materially impact
the Company's consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 provides new guidance on the recognition
of impairment losses on long-lived assets to be held and used or to be disposed
of and also broadens the definition of what constitutes discontinued operations
and how the results of discontinued operations are to be measured and presented.
SFAS 144 is effective for the Company's fiscal year beginning in 2002 and is not
expected to materially change the methods used by the Company to measure
impairment losses on long-lived assets.
IMPAIRMENT OF TRACTOR VALUES AND FUTURE EXPENSE
For the past several quarters, the nationwide inventory of used tractors has far
exceeded demand. As a result, the market value of used tractors has fallen
significantly below both historical levels and the carrying values on the
Company's financial statements. The Company had extended the trade cycle of its
tractors from three years to four years during 2001, which delayed any
significant disposals into 2002 and later years. The market for used tractors
did not improve during the remaining portion of the year.
22
The Company negotiated a tractor purchase and trade package with Freightliner
Corporation for calendar years 2002 and 2003 covering the sale of model year
1998 through 2000 tractors and the purchase of an equal number of replacement
units. The significant difference between the carrying values and the sale
prices of the used tractors combined with the Company's less profitable results
during 2001 caused the Company to test for asset impairment under applicable
accounting rules. In the test, the Company measured the expected undiscounted
future cash flows to be generated by the tractors over the remaining useful
lives and the disposal value at the end of the useful life against the carrying
values. The test indicated impairment, and during the fourth quarter of 2001,
the Company recognized an approximately $15.4 million pre-tax charge to reflect
an impairment in tractor values. The charge related to approximately 1,770 of
the Company's approximately 2,100 model year 1998 through 2000 in-use tractors.
The Company expects to purchase approximately 325 tractors during the first
quarter of 2002. The Company has evaluated those tractors for impairment using
the same method and anticipates recording an approximate $3.3 million pre-tax
impairment charge in the first quarter of 2002.
The approximately 1,400 model year 2001 tractors are not affected by either
impairment charge. The Company evaluated the 2001 model year tractors for
impairment and determined that such units were not impaired at the time of the
analysis. These units are not expected to be disposed of for 24 to 36 months
following December 31, 2001. The Company has adjusted the depreciation rate of
the model year 2001 tractors to approximate its recent experience with
disposition values. This is expected to increase depreciation expense by
approximately one half cent per mile before tax annually. Although management
believes the additional depreciation will bring the carrying values of the model
year 2001 tractors in line with future disposition values, the Company does not
have trade-in agreements covering those tractors. These assumptions represent
management's best estimate and actual values could differ by the time those
tractors are scheduled for trade.
Because of the adverse change from historical purchase prices and residual
values, the annual expense per tractor on model year 2003 and 2004 tractors is
expected to be higher than the annual expense on the model year 1999 and 2000
units being replaced. Management expects the increase in depreciation expense to
be approximately one-half cent per mile pre-tax during the first year and grow
to approximately one cent per mile pre-tax as all of these new units are
delivered. By the time the model year 2001 tractors are traded and entire fleet
is converted, management expects the total increase in expense to be
approximately one and one-half cent pre-tax per mile. If the tractors are leased
instead of purchased, the references to increased depreciation would be
reflected as additional lease expense.
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 long-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 2001, diesel fuel expenses
represented 15.4% of the Company's total operating expenses and 15.4% of total
revenue. The Company uses purchase commitments through suppliers to reduce a
portion of its exposure to fuel price fluctuations. At December 31, 2001, the
national average price of diesel fuel as provided by the U.S. Department of
Energy was $1.17 per gallon. At December 31, 2001, the notional amount for
purchase commitments during 2002 and 2003 was approximately 55 million gallons
in each year. At December 31, 2001, the price of the notional 55 million gallons
would have produced approximately $2.0 million of additional fuel expense if the
price of fuel remained the same as of December 31, 2001. At December 31, 2001, a
ten percent increase in the price of fuel would produce approximately $4.4
million of income to offset increased fuel expense. At December 31, 2001, a ten
percent
23
decrease in the price of fuel would produce approximately $6.5 million of
additional fuel expense. In addition, during the third quarter the Company
entered into two heating oil commodity swap contracts to hedge its exposure to
diesel fuel price fluctuations. These contracts, being highly effective at
achieving offsetting cash flows, have been designated as cash flow hedges of
forecasted diesel fuel purchases, and each calls for 6 million gallons of fuel
purchases at a fixed price of $0.695 and $0.629 per gallon, respectively,
through December 31, 2002. At December 31, 2001 the cumulative fair value of
these heating oil contracts was a liability of $1.2 million, which was recorded
in accrued expenses with the offset to other comprehensive loss. The Company
does not trade in derivatives with the objective of earning financial gains on
price fluctuations, on a speculative basis, nor does it trade in these
instruments when there are no underlying related exposures.
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 1.25%. During
the first quarter of 2001, the Company entered into two $10 million notional
amount interest rate swap agreements to manage the risk of variability in cash
flows associated with floating-rate debt. At December 31, 2001, the Company had
drawn $26 million under the Credit Agreement. Approximately $6 million was
subject to variable rates and the remaining $20 million was subject to interest
rate swaps that fixed the interest rates at 5.16% and 4.75% plus the applicable
margin per annum. The swaps expire January 2006 and March 2006. These
derivatives are not designated as hedging instruments under SFAS No. 133 and
consequently are marked to fair value through earnings, in other expense in the
accompanying statement of operations. At December 31, 2001, the fair value of
these interest rate swap agreements was a liability of $0.7 million. Assuming
the December 31, 2001 variable rate borrowings, each one-percentage point
increase or decrease in LIBOR would affect the Company's pre-tax interest
expense by $60,000 on an annualized basis, excluding the portion of variable
rate debt covered by cancelable interest rate swaps, and the effect of changes
in fair values resulting from those swaps.
The Company does not trade in derivatives with the objective of earning
financial gains on price fluctuations, on a speculative basis, nor does it trade
in these instruments when there are no underlying related exposures.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's audited consolidated balance sheets, statements of operations,
cash flows, stockholders' equity and comprehensive loss, and notes related
thereto, are contained at Pages 29 to 48 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the third quarter of 2001, the Company solicited and received formal
proposals for accounting and tax services from several accounting firms.
Effective September 12, 2001 the Company (a) engaged KPMG LLP as independent
accountants and (b) dismissed PricewaterhouseCoopers LLP ("PWC LLP") as
independent accountants. The decision to change accountants was approved by the
Company's Board of Directors.
The reports of PWC LLP for the past two fiscal years contained no adverse
opinion, disclaimer of opinion, or opinion that was qualified or modified as to
uncertainty, audit scope, or accounting principles.
During the Company's two most recent fiscal years and subsequent interim periods
preceding the effective date of the change in accountants there were no:
1. disagreements between the Company and PWC LLP on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to
the satisfaction of PWC LLP, would have caused them to make reference
to the subject matter of the disagreements in their reports.
2. reportable events involving PWC LLP that would have required
disclosure under Item 304(a)(1)(v) of Regulation S-K.
3. consultations between the Company and KPMG LLP regarding any of the
matters or events set forth in Item 304(a)(2)(i) and (ii) of
Regulation S-K.
25
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 11 of the Registrant's Proxy Statement for the
2002 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; provided, that the "Audit Committee Report for 2001"
and the Stock Performance Graph contained in the Proxy Statement are not
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information respecting executive compensation set forth under the caption
"Executive Compensation" on Pages 5 to 7 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 8 to 9 of the Proxy Statement is
incorporated herein by reference.
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:
Independent Auditors' Report - KPMG LLP......................................29
Report of Independent Accountants - PricewaterhouseCoopers LLP...............30
Consolidated Balance Sheets..................................................31
Consolidated Statements of Operations........................................32
Consolidated Statements of Stockholders' Equity and Comprehensive Loss.......33
Consolidated Statements of Cash Flows........................................34
Notes to Consolidated Financial Statements...................................35
2. Financial Statement Schedules.
Financial statement schedules are not required because all required information
is included in the financial statements.
3. Exhibits.
26
See list under Item 14(c) below, with management compensatory plans and
arrangements being listed under Exhibits 10.1, 10.2, 10.3, and 10.9.
(b) Reports on Form 8-K during the fourth quarter ended December 31, 2001.
There were no reports on Form 8-K filed during the fourth quarter ended December
31, 2001.
(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) 401(k) Plan filed as Exhibit 10.10.
10.2 (2) Outside Director Stock Option Plan, filed as Exhibit A.
10.3 (3) Amendment No. 1 to the Outside Director Stock Option Plan, filed as Exhibit
10.11.
10.4 (4) Amended and Restated Note Purchase Agreement dated December 13, 2000,
among Covenant Asset Management, Inc., Covenant Transport, Inc., and CIG &
Co., filed as Exhibit 10.8.
10.5 (4) Credit Agreement by and among Covenant Asset Management, Inc., Covenant
Transport, Inc., Bank of America, N.A., and Lenders, dated December 13, 2000,
filed as Exhibit 10.9.
10.6 (4) Loan Agreement dated December 12, 2000, among CVTI Receivables Corp.,
and Covenant Transport, Inc., Three Pillars Funding Corporation, and Suntrust
Equitable Securities Corporation, filed as Exhibit 10.10.
10.7 (4) Receivables Purchase Agreement dated as of December 12, 2000, among CVTI
Receivables Corp., Covenant Transport, Inc., and Southern Refrigerated
Transport, Inc., filed as Exhibit 10.11.
10.8 (5) Clarification of Intent and Amendment No. 1 to Loan Agreement dated
March 7, 2001, filed as Exhibit 10.12.
10.9 (6) Incentive Stock Plan, Amended and Restated as of May 17, 2001, filed as
Appendix B.
16 (7) Letter of PricewaterhouseCoopers LLP regarding change in certifying
accountant.
21 (4) List of Subsidiaries.
23.1 # Independent Auditors' Consent - KPMG LLP.
23.2 # Independent Auditors' Consent - PricewaterhouseCoopers LLP.
-------------------------------------------------------------------------------
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) Schedule 14A, filed April 13, 2000.
3) Form 10-Q for the quarter ended September 30, 2000.
4) Form 10-K for the year ended December 31, 2000.
5) Form 10-Q for the quarter ended March 31, 2001.
6) Schedule 14A, filed April 5, 2001.
7) Form 8-K/A filed September 26, 2001.
# Filed herewith.
27
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: March 27, 2002 By: /s/ Joey B. Hogan
----------------- -------------------------
Joey B. Hogan
Senior Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Position Date
/s/ David R. Parker Chairman of the Board, President, and Chief
David R. Parker Executive Officer (principal executive officer) March 27, 2002
/s/ Joey B. Hogan Senior Vice President and Chief Financial Officer
Joey B. Hogan (principal financial and accounting officer) March 27, 2002
/s/ R. H. Lovin, Jr.
R. H. Lovin, Jr. Director March 27, 2002
/s/ Michael W. Miller
Michael W. Miller Director March 27, 2002
/s/ William T. Alt
William T. Alt Director March 27, 2002
/s/ Robert E. Bosworth
Robert E. Bosworth Director March 27, 2002
/s/ Hugh O. Maclellan, Jr.
Hugh O. Maclellan, Jr. Director March 27, 2002
/s/ Mark A. Scudder
Mark A. Scudder Director March 27, 2002
28
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Covenant Transport, Inc.
We have audited the accompanying consolidated balance sheet of Covenant
Transport, Inc. and subsidiaries as of December 31, 2001, and the related
consolidated statements of operations, stockholders' equity and comprehensive
loss, and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Covenant
Transport, Inc. and subsidiaries as of December 31, 2001, and the results of
their operations and their cash flows for the year then ended, in conformity
with the accounting principles generally accepted in the United States of
America.
/s/ KPMG LLP
Atlanta, Georgia
March 15, 2002
29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Covenant Transport, Inc.
In our opinion, the consolidated balance sheet as of December 31, 2000 and the
related consolidated statements of operations, stockholders' equity and of cash
flows for each of the two years in the period ended December 31, 2000 present
fairly, in all material respects, the financial position, results of operations
and cash flows of Covenant Transport, Inc. and its subsidiaries at December 31,
2000 and for each of the two years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America. 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 of
America, 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 our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Knoxville, Tennessee
February 2, 2001
30
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 2001
(In thousands, except share data)
2000 2001
------------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,287 $ 383
Accounts receivable, net of allowance of $1,263 in 2000 and
$1,623 in 2001 72,482 62,540
Drivers advances and other receivables 11,393 4,002
Inventory and supplies 2,949 3,471
Prepaid expenses 13,914 11,824
Deferred income taxes 2,590 6,630
Income taxes receivable 3,651 4,729
------------------- -----------------
Total current assets 109,266 93,579
Property and equipment, at cost 356,630 369,069
Less accumulated depreciation and amortization 100,581 137,533
------------------- -----------------
Net property and equipment 256,049 231,536
Other assets 25,198 24,667
------------------- -----------------
Total assets $390,513 $349,782
=================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt 6,505 20,150
Securitization facility 62,000 48,130
Accounts payable 6,988 7,241
Accrued expenses 15,919 17,871
Insurance and claims accrual 1,257 11,854
------------------- -----------------
Total current liabilities 92,669 105,246
Long-term debt, less current maturities 74,295 29,000
Deferred income taxes 55,727 53,634
------------------- -----------------
Total liabilities 222,691 187,880
Commitments and contingent liabilities
Stockholders' equity:
Class A common stock, $.01 par value; 20,000,000 shares
authorized; 12,566,850 and 12,680,483 shares issued and 11,595,350 and
11,708,983 outstanding as of 2000 and 2001, respectively 126 127
Class B common stock, $.01 par value; 5,000,000 shares authorized;
2,350,000 shares issued and outstanding as of 2000 and 2001 24 24
Additional paid-in-capital 78,343 79,832
Other comprehensive loss - (748)
Treasury Stock at cost; 971,500 shares as of December 31, 2000 and 2001 (7,935) (7,935)
Retained earnings 97,264 90,602
------------------- -----------------
Total stockholders' equity 167,822 161,902
------------------- -----------------
Total liabilities and stockholders' equity $390,513 $349,782
=================== =================
See accompanying notes to consolidated financial statements.
31
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001
(In thousands, except per share data)
1999 2000 2001
---------------- ---------------- ---------------
Revenue (excluding fuel surcharges) $472,741 $552,429 $547,028
Operating expenses:
Salaries, wages, and related expenses 202,420 239,988 239,411
Fuel expense, net of fuel surcharges (1) 71,733 78,828 84,405
Operations and maintenance 29,112 34,817 37,779
Revenue equipment rentals and purchased
transportation 49,260 76,131 65,069
Operating taxes and licenses 11,777 14,940 14,358
Insurance and claims 14,096 18,907 27,838
Communications and utilities 5,682 7,189 7,439
General supplies and expenses 10,380 13,970 14,468
Depreciation and amortization, including gains (losses) on
disposition of equipment and impairment of assets (2) 35,591 38,879 56,324
---------------- ---------------- ---------------
Total operating expenses 430,051 523,649 547,091
---------------- ---------------- ---------------
Operating income (loss) 42,690 28,780 (63)
Other (income) expenses:
Interest expense 5,993 9,894 7,855
Interest income (480) (520) (328)
Other - (368) 799
---------------- ---------------- ---------------
Other (income) expenses, net 5,513 9,006 8,326
---------------- ---------------- ---------------
Income (loss) before income taxes 37,177 19,774 (8,389)
Income tax expense (benefit) 14,900 7,899 (1,727)
---------------- ---------------- ---------------
Net income (loss) $ 22,277 $ 11,875 $ (6,662)
================ ================ ===============
Basic earnings (loss) per share: $1.49 $0.82 ($0.48)
Diluted earnings (loss) per share: $1.48 $0.82 ($0.48)
Weighted average shares outstanding 14,912 14,404 13,987
Adjusted weighted average shares and assumed conversions
Outstanding 15,028 14,533 13,987
(1) Fuel surcharges were $2.4 million in 1999, $25.3 million in 2000, and $19.5
million in 2001.
(2) Includes a $15.4 million pre-tax impairment charge in 2001.
See accompanying notes to consolidated financial statements.
32
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001
(In thousands)
Class A Class B Additional Other Total
Common Common Paid-In Treasury Comprehensive Retained Stockholders'
Stock Stock Capital Stock Loss Earnings Equity
--------------------------------------------------------------------------------------------------
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
Exercise of employee stock options -- -- 30 -- -- -- 30
Stock repurchase -- -- -- (7,935) -- -- (7,935)
Net income -- -- -- -- -- 11,875 11,875
--------------------------------------------------------------------------------------------------
Balances at December 31, 2000 $126 $ 24 $78,343 $ (7,935) -- $ 97,264 $ 167,822
Exercise of employee stock options 1 -- 1,270 -- -- -- 1,271
Income tax benefit arising from the
exercise of stock options -- -- 219 -- -- -- 219
Comprehensive loss:
Unrealized loss on cash flow
hedging derivatives, net of taxes -- -- -- -- (748) -- (748)
Net loss -- -- -- -- -- (6,662) (6,662)
--------------
Total comprehensive loss (7,410)
--------------------------------------------------------------------------------------------------
Balances at December 31, 2001 $127 $ 24 $79,832 $ (7,935) $(748) $90,602 $ 161,902
==================================================================================================
See accompanying notes to consolidated financial statements.
33
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001
(In thousands)
1999 2000 2001
-------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $22,277 $11,875 ($6,662)
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on receivables 131 535 722
Depreciation, amortization, and impairment of assets (1) 35,658 39,181 56,107
Equity in earnings of affiliate -- 376 140
Deferred income taxes 9,137 6,180 (5,674)
Loss/gain on disposition of property and equipment (67) (1,032) 217
Changes in operating assets and liabilities:
Receivables and advances (11,974) (3,965) 16,610
Prepaid expenses (3,321) (4,358) 2,090
Tire and parts inventory (750) 97 (522)
Accounts payable and accrued expenses (6,606) (228) 10,736
-------------------------------------------------------
Net cash provided by operating activities 44,485 48,661 73,764
Cash flows from investing activities:
Acquisition of property and equipment (101,653) (71,427) (55,466)
Proceeds from disposition of property and equipment 46,632 51,108 24,705
Acquisition of business (25,806) (7,658) (564)
Investment in TPC -- (5,307) --
-------------------------------------------------------
Net cash used in investing activities (80,827) (33,284) (31,325)
Cash flows from financing activities:
Exercise of stock options 52 30 1,271
Proceeds from issuance of debt 93,500 174,119 54,000
Repayments of long-term debt (62,503) (176,034) (99,519)
Repurchase of Company stock -- (7,935) --
Other (186) (717) (95)
Checks in excess of bank balance 3,599 (3,599) --
-------------------------------------------------------
Net cash provided by (used in) financing activities 34,462 (14,136) (44,343)
-------------------------------------------------------
Net change in cash and cash equivalents (1,880) 1,241 (1,904)
Cash and cash equivalents at beginning of period 2,926 1,046 2,287
-------------------------------------------------------
Cash and cash equivalents at end of period $1,046 $2,287 $383
=======================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $5,823 $10,410 $7,880
Income taxes $12,108 $2,645 $967
=======================================================
(1) Includes a $15.4 million pre-tax impairment charge in 2001.
See accompanying notes to consolidated financial statements.
34
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 2000 AND 2001
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,
refrigerated and dedicated contract services, to customers throughout the United
States. The Company operations comprise a single segment for financial reporting
purposes.
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"); Southern
Refrigerated Transport, Inc., an Arkansas corporation; Tony Smith Trucking,
Inc., an Arkansas corporation; (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; CIP, Inc., a
Nevada corporation; and CVTI Receivables Corp., ("CRC") 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 functioned
as a broker in 1999 and 2000 and for fuel surcharges in 1999, 2000, and 2001, of
$2.4 million, $25.3 million, and $19.5 million, respectively.
Cash and Cash Equivalents - The Company considers all highly liquid investments
with a maturity of three months or less to be cash equivalents.
Inventories and supplies- Inventories and supplies consist of parts, tires, fuel
and supplies. 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 (FIFO) method. Replacement tires are
expensed when placed in service.
Goodwill - In June 2001, the FASB issued SFAS No. 141, Business Combinations,
and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS No. 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. The provisions of each statement which apply to
goodwill and intangible assets acquired prior to June 30, 2001 were adopted by
the Company on January 1, 2002. The impact of the application of the provisions
of this statement on the Company's financial position or results of operations
upon adoption are not expected to have a material impact, however the Company
anticipates the standard will result in reducing the amortization of goodwill.
As of December 31, 2001, the Company has approximately $11.0 million of
unamortized goodwill resulting in approximately $307,000 of annualized
amortization expense.
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 has been amortized as described above.
Property and Equipment - Depreciation is calculated using the straight-line
method over the estimated useful lives of the assets. Historically, revenue
equipment had been depreciated over five to seven years with salvage values
ranging from 25% to 33 1/3%. During 2000, the Company extended its estimate for
the useful life of its dry van trailers from seven to eight years and increased
the salvage value to approximately 48% of cost. The Company based its decision
on recent experience and expected future utilization. Gains or losses on
disposal of revenue
35
equipment are included in depreciation in the statements of operations. In 2001,
the Company recognized a $15.4 million pre-tax impairment charge, related to
approximately 1,770 model year 1998 through 2000 tractors in use, which is
included in depreciation expense.
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 value
less costs to sell. The Company evaluates the carrying value of long-lived
assets held for use for impairment losses by analyzing the operating performance
and future cash flows for those assets, whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. The Company adjusts the carrying value of the underlying assets if
the sum of expected undiscounted cash flows is less than the carrying value.
Fair Value of Financial Instruments - The Company's financial instruments
consist primarily of cash, accounts receivable, accounts payable and long term
debt. The carrying amount of cash, accounts receivable and accounts payable
approximates their fair value because of the short term maturity of these
instruments. Interest rates that are currently available to the Company for
issuance of long term debt with similar terms and remaining maturities are used
to estimate the fair value of the Company's long term debt. The carrying amount
of the Company's long term debt at December 31, 2001 and 2000 was approximately
$97.3 million and $142.8 million, respectively including the accounts receivable
securitization borrowings and approximates the estimated fair value, due to the
variable interest rates on these instruments.
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 and
Class A only one vote per share. The terms of any future issuances of preferred
shares will be set by the Board of Directors.
Insurance and Other Claims - The Company's insurance program for liability,
workers compensation, group medical, property damage, cargo loss and damage, and
other sources involves self insurance with high risk retention levels. In 2001,
the Company adopted an insurance program with significantly higher deductibles.
The deductible amount was increased from an aggregate $12,500 to $250,000 in
2001. Losses in excess of these risk retention levels are covered by insurance
in amounts which management considers adequate. The Company accrues the
estimated cost of the uninsured portion of pending claims. These accruals are
based on management's evaluation of the nature and severity of the claim and
estimates of future claims development based on historical trends. Insurance and
claims expense will vary based on the frequency and severity of claims, the
premium expense and the lack of self insured retention.
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. Three of the Company's customers, which are autonomously managed
and operated are wholly owned subsidiaries of a public entity and when added
together amount to approximately 13% and 11% of revenue in 2001 and 2000,
respectively. No single customer or group accounted for 10% or more of the
Company's revenue in 1999.
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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.
Income Taxes - Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
36
Derivative Instruments and Hedging Activities - In June 1998 the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Certain
Hedging Activities." In June 2000 the FASB issued SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activity, an Amendment of
SFAS No. 133." SFAS No. 133 and SFAS No. 138 require that all derivative
instruments be recorded on the balance sheet at their respective fair values.
Derivatives that are not hedges must be adjusted to fair value through earnings.
If the derivative qualifies as a hedge, depending on the nature of the hedge,
changes in its fair value are either offset against the change in the fair value
of assets, liabilities, or firm commitments through earnings or recognized in
other comprehensive income until the hedged item is recognized in earnings. The
Company engages in activities that expose it to market risks, including the
effects in changes in interest rates and fuel prices. Financial exposures are
managed as an integral part of the Company's risk management program, which
seeks to reduce potentially adverse effects that the volatility of the interest
rate and fuel markets may have on operating results. The Company does not
regularly engage in speculative transactions, nor does it regularly hold or
issue financial instruments for trading purposes.
All derivatives are recognized on the balance sheet at their fair values. On the
date the derivative contract is entered into, the Company designates the
derivative a hedge of a forecasted transaction or of the variability of cash
flows to be received or paid related to a recognized asset or liability ("cash
flow" hedge). The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as cash-flow hedges to specific
assets and liabilities on the balance sheet or to specific firm commitments or
forecasted transactions.
The Company also formally assesses, both at the hedge's inception and on an
ongoing basis, whether the derivatives that are used in hedging transactions are
highly effective in offsetting changes in fair values or cash flows of hedged
items. When it is determined that a derivative is not highly effective as a
hedge or that it has ceased to be a highly effective hedge, the Company
discontinues hedge accounting prospectively.
Changes in the fair value of a derivative that is highly effective and that is
designated and qualifies as a fair-value hedge, along with the loss or gain on
the hedged asset or liability or unrecognized firm commitment of the hedged item
that is attributable to the hedged risk are recorded in earnings. Changes in the
fair value of a derivative that is highly effective and that is designated and
qualifies as a cash-flow hedge are recorded in other comprehensive income, until
earnings are affected by the variability in cash flows or unrecognized firm
commitment of the designated hedged item.
The Company discontinues hedge accounting prospectively when it is determined
that the derivative is no longer effective in offsetting changes in the fair
value or cash flows of the hedged item, the derivative expires or is sold,
terminated, or exercised, the derivative is undesignated as a hedging
instrument, because it is unlikely that a forecasted transaction will occur, a
hedged firm commitment no longer meets the definition of a firm commitment, or
management determines that designation of the derivative as a hedging instrument
is no longer appropriate.
When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair-value hedge, the Company
continues to carry the derivative on the balance sheet at its fair value, and no
longer adjusts the hedged asset or liability for changes in fair value. The
adjustment of the carrying amount of the hedged asset or liability is accounted
for in the same manner as other components of the carrying amount of that asset
or liability. When hedge accounting is discontinued because the hedged item no
longer meets the definition of a firm commitment, the Company continues to carry
the derivative on the balance sheet at its fair value, removes any asset or
liability that was recorded pursuant to recognition of the firm commitment from
the balance sheet and recognizes any gain or loss in earnings. When hedge
accounting is discontinued because it is probable that a forecasted transaction
will not occur, the Company continues to carry the derivative on the balance
sheet at its fair value, and gains and losses that were accumulated in other
comprehensive income are recognized immediately in earnings. In all other
situations in which hedge accounting is discontinued, the Company continues to
carry the derivative at its fair value on the balance sheet, and recognizes any
changes in its fair value in earnings.
37
Effect of New Accounting Pronouncements - In June 2001, the FASB issued SFAS No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. SFAS No. 142 will
require that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS No. 142.
The Company was required to adopt the provisions of SFAS No. 141 effective June
30, 2001, and SFAS No. 142 effective January 1, 2002. Furthermore, any goodwill
that was acquired in a purchase business combination completed after June 30,
2001 will not be amortized. Goodwill acquired in business combinations completed
before July 1, 2001 is no longer being amortized after December 31, 2001.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS 143 provides new guidance on the recognition and measurement
of an asset retirement obligation and its associated asset retirement cost. It
also provides accounting guidance for legal obligations associated with the
retirement of tangible long-lived assets. SFAS 143 is effective for the
Company's fiscal year beginning in 2003 and is not expected to materially impact
the Company's consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 provides new guidance on the recognition
of impairment losses on long-lived assets to be held and used or to be disposed
of and also broadens the definition of what constitutes discontinued operations
and how the results of discontinued operations are to be measured and presented.
SFAS 144 is effective for the Company's fiscal year beginning in 2002 and is not
expected to materially change the methods used by the Company to measure
impairment losses on long-lived assets.
Earnings per Share ("EPS") - The Company applies the provisions of FASB SFAS No.
128, Earnings per Share, which requires companies to present basic EPS and
diluted EPS. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company.
Dilutive common stock options are included in the diluted EPS calculation using
the treasury stock method. Common stock options that were not included in the
diluted EPS computation for 2001 because the options' exercise price was greater
than the average market price of the common shares for the periods presented are
immaterial.
Reclassifications - Certain prior period financial statement balances have been
reclassified to conform to the current period's classification.
38
The following table sets forth for the periods indicated the calculation of net
earnings per share included in the Company's Consolidated Statement of
Operations:
(in thousands except per share data) 1999 2000 2001
---------------- ---------------- ----------------
Numerator:
Net earnings (losses) $22,277 $11,875 ($6,662)
================ ================ ================
Denominator:
Denominator for basic earnings
per share - weighted-average shares 14,912 14,404 13,987
Effect of dilutive securities:
Employee stock options 116 129 -
---------------- ---------------- ----------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions 15,028 14,533 13,987
================ ================ ================
Basic earnings per share $ 1.49 $ 0.82 $ (0.48)
================ ================ ================
Diluted earnings per share $ 1.48 $ 0.82 $ (0.48)
================ ================ ================
2. INVESTMENT IN TRANSPLACE
Effective July 1, 2000, the Company combined its logistics business with the
logistics businesses of five other transportation companies into a company
called Transplace, Inc. ("TPC"). TPC operates an Internet-based global
transportation logistics service and is developing programs for the cooperative
purchasing of products, supplies, and services. In the transaction, Covenant
contributed its logistics customer list, logistics business software and
software licenses, certain intellectual property, intangible assets totaling
approximately $5.1 million, and $5.0 million in cash for the initial funding of
the venture. In exchange, Covenant received 12.4% ownership in TPC. Upon
completion of the transaction, Covenant ceased operating its own transportation
logistics and brokerage business, which consisted primarily of the Terminal
Truck Broker, Inc. business acquired in November 1999. Initially, the Company
accounted for its 12.4% investment in TPC using the equity method of accounting.
During the third quarter of 2001, TPC changed its filing status to a C
corporation and as a result management determined it appropriate to account for
its investment using the cost method of accounting effective July 1, 2001.
3. ACQUISITIONS
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. 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 at the date of acquisition.
In August 2000, the Company purchased certain assets of Con-Way Truckload
Services, Inc. ("CTS") for approximately $7.7 million, which included
approximately $5.2 million for property and equipment. The acquisition has been
accounted for using the purchase method of accounting. In 2001, the Company made
a $564,000 earnout payment related to this acquisition.
39
4. PROPERTY AND EQUIPMENT
A summary of property and equipment, at cost, as of December 31, 2000 and 2001
is as follows:
(in thousands) 2000 2001
------------------------ ------------------------
Revenue equipment $301,451 $289,766
Communications equipment 15,668 15,959
Land and improvements 9,528 9,194
Buildings and leasehold improvements 7,387 39,569
Construction in progress 13,316 4,453
Other 9,280 10,128
------------------------ ------------------------
$356,630 $369,069
======================== ========================
Depreciation expense amounts were $35.1 million, $39.0 million and $55.1 million
in 1999, 2000, and 2001, respectively. The 2001 amount included a $15.4 million
pre-tax impairment charge ($9.6 million after taxes) related to approximately
1,770 model year 1998 through 2000 in use tractors. For the past several
quarters, the nationwide inventory of used tractors has far exceeded demand. As
a result, the market value of used tractors has fallen significantly below the
carrying values recorded on the Company's financial statements. The Company had
extended the trade cycle on its tractors from three years to four years, which
delayed any significant disposals into 2002 and later years. The market for used
tractors has not significantly improved since that time. The Company has
negotiated a purchase and trade agreement with Freightliner Corporation covering
the sale of the year 1998 through 2000 tractors and the purchase of an equal
number of replacement units. The significant difference in the carrying values
and the sales prices of the Company's tractors combined with the Company's less
profitable results during 2001 caused the Company to test for asset impairment
under SFAS No. 121, "Accounting for the Impairment of Long Lived Assets and of
Long Lived Assets to be disposed of." The test indicated impairment, and the
Company recorded the charge to bring the tractors covered by the trade agreement
to the estimated fair values. The Company's approximately 1,400 model year 2001
tractors are not affected by the charge. The Company will increase the
depreciation on the 2001 model year tractors to approximate the Company's recent
experience with disposition values. The Company purchased the Company's
headquarters facility in 2001 and depreciates the buildings over an estimated
useful life of thirty years.
5. OTHER ASSETS
A summary of other assets as of December 31, 2000 and 2001 is as follows:
(in thousands) 2000 2001
----------------- -----------------
Covenants not to compete $1,690 $1,690
Tradename 330 330
Goodwill 11,352 11,916
Less accumulated amortization of intangibles (1,743) (2,300)
----------------- -----------------
Net intangible assets 11,629 11,636
Investment in TPC 10,806 10,666
Other 2,763 2,365
----------------- -----------------
$25,198 $24,667
================= =================
40
6. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 2000 and 2001:
(in thousands) 2000 2001
------------------ ------------------
Borrowings under $120 million credit agreement 49,000 26,000
10-year senior notes 25,000 20,000
Notes to unrelated individuals for non-compete
Agreements 350 150
Equipment and vehicle obligations with commercial
lending institutions, with fixed interest rates ranging
from 6.7% to 9.0% at December 31, 2000 3,450 -
Note payable to former SRT shareholder, bearing
interest at 6.5% with interest payable quarterly 3,000 3,000
------------------ ------------------
80,800 49,150
Less current maturities 6,505 20,150
------------------ ------------------
$74,295 $29,000
================== ==================
In December 2000, the Company entered into a credit agreement (the "Credit
Agreement") with a group of banks with maximum borrowings of $120 million, which
matures December 13, 2003. The Credit Agreement provides a revolving credit
facility with borrowings limited to the lesser of 90% of the net book value of
eligible revenue equipment or $120 million. Letters of credit are limited to an
aggregate commitment of $20 million. The Credit Agreement is collateralized by
an agreement which includes pledged stock of the Company's subsidiaries,
inter-company notes, and licensing agreements. A commitment fee is charged on
the daily unused portion of the facility and is adjusted quarterly between 0.15%
and 0.25% per annum based on the consolidated leverage ratio. At December 31,
2001, the fee was 0.25% per annum. The Credit Agreement is guaranteed by all of
the Company's subsidiaries except CVTI Receivables Corp.
Borrowings under the Credit Agreement are based on the banks' base rate or LIBOR
and accrue interest based on the one, two, or three month LIBOR rates plus an
applicable margin that is adjusted quarterly between 0.75% and 1.25% based on a
ratio of total debt to trailing cash flow coverage. At December 31, 2001, the
margin was 1.25%, and the weighted average interest rate was 3.2%.
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 five equal
annual installments beginning October 1, 2001. Interest accrues at 7.39% per
annum. The notes were retired in March 2002.
At December 31, 2001, the Company has unused letters of credit of approximately
$12.6 million.
Maturities of long term debt at December 31, 2001 are as follows (in thousands):
2002 $ 20,150
2003 26,000
2004 3,000
The Credit Agreement and Securitization Facility contain certain restrictions
and covenants relating to, among other things, dividends, tangible net worth,
cash flow, acquisitions and dispositions, and total indebtedness and are
cross-defaulted. The Company is in compliance with the Credit Agreement and
Securitization Facility after receiving a waiver under the Securitization
Facility.
41
7. ACCOUNTS RECEIVABLE SECURITIZATION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
In December 2000, the Company entered into a $62 million revolving accounts
receivable securitization facility (the "Securitization Facility"). On a
revolving basis, the Company sells its interests in its accounts receivable to
CRC, a wholly-owned bankruptcy-remote special purpose subsidiary. CRC sells a
percentage ownership in such receivables to an unrelated financial entity. The
transaction does not meet the criteria for sale treatment under SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities and is reflected as a secured borrowing in the financial
statements.
The Company can receive up to $62 million of proceeds, subject to eligible
receivables and will pay a service fee recorded as interest expense, as defined
in the agreement. The Company will pay commercial paper interest rates plus an
applicable margin on the proceeds received. The Securitization Facility includes
certain significant events that could cause amounts to be immediately due and
payable in the event of certain ratios. The proceeds received are reflected as a
current liability on the consolidated financial statements because the committed
term, subject to annual renewals, is 364 days. As of December 31, 2001 and 2000,
the Company had received $48.1 million and $62 million respectively, in
proceeds, with a weighted average interest rate of 2.0% and 6.6%, respectively.
The activity in the schedule of allowance for doubtful accounts (in thousands)
is as follows:
Years ended December 31: Beginning Additional Write-offs and Ending
Balance provisions to other Balance
January 1, allowance deductions December 31,
-----------------------------------------------------------------------
2001 $1,263 $722 $362 $1,623
====== ==== ==== ======
2000 $1,040 $535 $312 $1,263
====== ==== ==== ======
1999 $1,065 $131 $156 $1,040
====== ==== ==== ======
8. 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):
2002 $ 20,137
2003 15,393
2004 7,944
2005 7,151
2006 6,789
Thereafter 11,103
The Company's operating leases of tractors and trailers contain residual value
guarantees under which the Company guarantees a certain minimum cash value
payment to the leasing company at the expiration of the lease. The Company
estimates that the present value of the residual guarantees is approximately
$44.9 million at December 31, 2001.
42
Rental expense is summarized as follows for each of the three years ended
December 31:
(in thousands) 1999 2000 2001
---------------- ---------------- ----------------
Revenue equipment rentals $12,102 $16,918 $19,819
Terminal rentals 1,407 1,684 1,055
Other equipment rentals 1,618 2,904 3,198
---------------- ---------------- ----------------
$15,127 $21,506 $24,072
================ ================ ================
During April 1996, the Company entered into an agreement to lease its
headquarters and terminal in Chattanooga under an operating lease. The lease
provided for rental payments to be variable based upon LIBOR interest rates for
five years. This operating lease expired March 2001 and the Company purchased
the building.
9. INCOME TAX
Income tax expense (benefit) for the years ended December 31, 1999, 2000, and
2001 is comprised of:
(in thousands) 1999 2000 2001
---------------- ---------------- ----------------
Federal, current $6,154 $1,370 $3,498
Federal, deferred 6,705 5,841 (5,355)
State, current 1,331 87 449
State, deferred 710 601 (319)
---------------- ---------------- ----------------
$14,900 $7,899 ($1,727)
================ ================ ================
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, 1999, 2000 and 2001 as follows:
(in thousands) 1999 2000 2001
---------------- ---------------- ----------------
Computed "expected" income tax expense $13,012 $6,921 ($2,936)
State income taxes, net of federal income tax
effect 1,487 593 85
Change in valuation allowance - - 392
Per diem allowances - - 1,346
Other, net 401 385 732
---------------- ---------------- ----------------
Actual income tax expense (benefit) $14,900 $7,899 ($1,727)
================ ================ ================
43
The temporary differences and the approximate tax effects that give rise to the
Company's net deferred tax liability at December 31, 2000 and 2001 are as
follows:
(in thousands) 2000 2001
------------------------ ------------------------
Deferred tax assets:
Accounts receivable $1,093 $613
Accrued expenses 256 5,143
Alternative minimum tax credits 948 -
Intangible assets 293 256
State net operating loss carryovers - 392
Investments - 160
Other comprehensive loss in equity - 458
------------------------ ------------------------
2,590 7,022
Less: valuation allowance - (392)
------------------------ ------------------------
Total gross deferred tax assets 2,590 6,630
------------------------ ------------------------
Deferred tax liability:
Property and equipment 54,953 48,501
Change in accounting methods 774 304
Prepaid salaries and wages - 643
Prepaid liabilities - 4,186
------------------------ ------------------------
Total deferred tax liabilities 55,727 53,634
Net deferred tax liability $ 53,137 $47,005
======================== ========================
Based upon the expected reversal of deferred tax liabilities, level of
historical and projected taxable income over periods in which the deferred tax
assets are deductible, the Company's management believes it is more likely than
not the Company will realize the benefits of the deductible differences at
December 31, 2001.
10. STOCK REPURCHASE PLAN
In June 2000, the Company authorized a stock repurchase plan for up to 1.0
million Company shares to be purchased in the open market or through negotiated
transactions. In July 2000, the Company authorized an additional 500,000 shares
to be repurchased. During the second quarter of 2000, 792,000 shares were
purchased at an average price of $8.14. During the third quarter of 2000,
179,500 shares were purchased at an average price of $8.27. During 2001, the
Company did not purchase any additional shares through the repurchase plan. As
of December 31, 2001 a total of 971,500 had been purchased with an average price
of $8.17. The stock repurchase program has no expiration date.
11. DEFERRED PROFIT SHARING EMPLOYEE BENEFIT PLAN
The Company has a deferred profit sharing and savings plan that covers
substantially all employees of the Company with at least six months of service.
Employees may contribute up to 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 $782,000, $1,043,000 and 1,080,000 in 1999,
2000, and 2001, respectively, to the profit sharing and savings plan.
44
12. STOCK OPTION PLANS
The Company has adopted option plans for employees and directors. Awards may be
in the form of incentive stock awards or other forms. The Company has reserved
1,594,700 shares of Class A Common Stock for distribution at the discretion of
the Board of Directors. In July 2000, the Board of Directors accelerated the
vesting schedule of certain stock options granted in the years 1998, 1999 and
2000 to vest ratably over 3 years and expire 10 years from the date of grant.
Certain options granted prior to 1998 vest ratably over 5 years and expire 10
years from the date of grant. The following table details the activity of the
incentive stock option plan:
Weighted Options
Average Exercisable at
Shares Exercise Price Year End
---------------------------------------------------------
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
Options granted in 2000 625,176 $8.87
Options exercised in 2000 (2,600) $11.45
Options canceled in 2000 (129,800) $12.39
-------------------
Under option at December 31, 2000 1,425,326 $11.99 613,026
Options granted in 2001 305,500 $16.71
Options exercised in 2001 (113,633) $11.19
Options canceled in 2001 (37,248) $10.54
-------------------
Under option at December 31, 2001 1,579,945 $12.99 856,486
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------------
Weighted- Weighted- Number Weighted-
Number Average Average Exercisable At Average
Range of Exercise Outstanding at Remaining Exercise Price 12/31/01 Exercise Price
Prices 12/31/01 Contractual Life
------------------------------------------------------------------------------------------------------------------
$10.00 to $12.99 684,173 96 $9.41 329,369 $10.38
$13.00 to $15.99 461,022 69 $14.59 395,700 $14.77
$16.00 to $20.00 434,750 91 $16.95 131,417 $17.09
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 1.7% to 6.0%; expected life
of 5 years; dividend rate of zero percent; and expected volatility of 42.6% for
1999, 48.5% for 2000 and 55.3% for 2001. Using these assumptions, the fair value
of the employee stock options granted in 1999, 2000 and 2001 is $900,000, $2.2
million, and $2.3 million 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, 1999, 2000
and 2001:
45
(in thousands except per share data) 1999 2000 2001
Net Income (loss):
As reported 22,277 11,875 (6,662)
Pro forma 21,565 10,213 (8,962)
Basic earnings (loss) per share:
As reported $1.49 $0.82 $(0.48)
Pro forma $1.45 $0.71 $(0.64)
Diluted earnings (loss) per share
As reported $1.48 $0.82 $(0.48)
Pro forma $1.43 $0.70 $(0.64)
13. RELATED PARTY TRANSACTIONS
Transactions involving related parties not otherwise disclosed herein are as
follows:
In December 1999, the Company purchased approximately 105 acres of land that is
adjacent to the corporate headquarters for approximately $890,000 from a
significant shareholder. In February 2000, the Company sold approximately 2.5
acres of land to this shareholder in the amount of $88,000 in the form of a
non-interest bearing promissory note with an 18-month term. The note was paid in
full in September 2001. The Company also chartered an airplane owned by this
shareholder in the amount of $42,633 during 1999. During 2000, the shareholder
chartered an airplane leased by the Company in the amount of $21,198. The
Company paid approximately $500,000 to the shareholder related to commissions on
the purchase of revenue equipment during 2000.
Tenn-Ga Truck Sales, Inc., a corporation wholly owned by a significant
shareholder, purchased used tractors and trailers from the Company for
approximately $2.8 million during 1999, $2.0 million during 2000 and $0.6
million during 2001. During 2000, the Company also leased revenue equipment from
Tenn-Ga Truck Sales for approximately $700,000.
In March 2000, a trucking company owned by a significant shareholder purchased
used trailers from the Company for approximately $1.4 million in exchange for an
interest-bearing promissory note, which was repaid in full in November 2000.
Subsequently, in June 2000, the Company elected to lease the trailers from the
trucking company in the amount of approximately $227,200. In November 2000, due
to an increased operational need arising from the CTS acquisition, the Company
elected to repurchase the trailers from the trucking company in the amount of
approximately $1.3 million.
In connection with the TPC investment, the Company made several cash advances to
fund the operations of TPC. The balance as of December 31, 2000 was
approximately $3.2 million, which included a $2.6 million, 8% interest-bearing
promissory note from TPC, which was paid in full in the month of February 2001.
The Company also provides transportation service for TPC. During 2001 and 2000,
gross revenue from TPC was $9.0 million and $1.9 million, respectively. The
accounts receivable balance as of December 31, 2001 was approximately $1.0
million.
14. DERIVATIVE INSTRUMENTS
In 1998, the FASB issued SFAS No. 133 ("SFAS 133"), Accounting for Derivative
Instruments and Hedging Activities, as amended by Statement of Financial
Accounting Standards No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS Statement No. 133, an
amendment of SFAS Statement No. 133, and Statement of Financial Accounting
Standards No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities, an amendment of SFAS Statement No. 133. SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value
46
of derivatives are recorded each period in current earnings or in other
comprehensive income, depending on whether a derivative is designated as part of
a hedging relationship and, if it is, depending on the type of hedging
relationship.
The Company adopted SFAS No. 133 effective January 1, 2001 but had no
instruments in place on that date. During the first quarter the Company entered
into two $10 million notional amount cancelable interest rate swap agreements to
manage the risk of variability in cash flows associated with floating-rate debt.
Due to the counter-parties' imbedded options to cancel, these derivatives did
not qualify, and are not designated as hedging instruments under SFAS No. 133.
Consequently, these derivatives are marked to fair value through earnings, in
other expense in the accompanying statement of operations. At December 31, 2001,
the fair value of these interest rate swap agreements was a liability of $0.7
million.
The Company uses purchase commitments through suppliers to reduce a portion of
its cash flow exposure to fuel price fluctuations. At December 31, 2001, the
notional amount for fixed price normal purchase commitments for 2002 and 2003 is
approximately 55 million gallons in each year. In addition, during the third
quarter the Company entered into two heating oil commodity swap contracts to
hedge its cash flow exposure to diesel fuel price fluctuations on floating rate
diesel fuel purchase commitments. These contracts are considered highly
effective in offsetting changes in anticipated future cash flows and have been
designated as cash flow hedges under SFAS No. 133. Each call for 6 million
gallons of fuel purchases at a fixed price of $0.695 and $0.629 per gallon,
respectively, through December 31, 2002. At December 31, 2001 the cumulative
fair value of these heating oil contracts was a liability of $1.2 million, which
was recorded in accrued expenses with the offset to other comprehensive loss,
net of taxes.
All changes in the derivatives' fair values were determined to be effective for
measurement and recognition purposes. The entire amount of gains and losses are
expected to be recognized in earnings within the next twelve months.
The derivative activity as reported in the Company's financial statements for
the year ended December 31, 2001 was (in thousands):
2001
--------
Net liability for derivatives at January 1, 2001 $ --
Changes in statements of operations:
Gain (loss) on derivative instruments:
Loss in value of derivative instruments that do not qualify as
hedging instruments (726)
Other comprehensive income (loss):
Loss on fuel hedge contracts that qualify as cash flow hedges (1,206)
Tax benefit (458)
----
Net other comprehensive loss (748)
-------
Net liability for derivatives at December 31, 2001 $ (1,932)
===
15. 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.
47
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.
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In thousands except per share amounts)
Quarters ended March 31, 2001 June 30, 2001 September 30, December 31,
2001 2001 (1)
------------------------------------------------------------------
Operating Revenue $ 131,329 $141,683 $138,057 $ 135,959
Operating income (loss) 2,652 3,067 4,947 (10,729)
Net earnings (loss) 229 554 845 (8,290)
Basic earnings (loss) per share $ 0.02 $ 0.04 $ 0.06 $ (0.59)
Diluted earnings (loss) per share $ 0.02 $ 0.04 $ 0.06 $ (0.59)
Quarters ended March 31, 2000 June 30, 2000 September 30, December 31,
2000 2000
------------------------------------------------------------------
Operating Revenue $ 126,481 $139,398 $141,667 $144,883
Operating income 5,687 7,265 7,435 8,392
Net earnings 2,033 2,900 3,078 3,865
Basic earnings per share $ 0.14 $ 0.20 $ 0.22 $ 0.28
Diluted earnings per share $ 0.14 $ 0.20 $ 0.22 $ 0.28
(1) Includes a $15.4 million pre-tax impairment charge in the quarter ended
December 31, 2001.
48