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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED).
For the transition period from to
Commission file number 0-24960
COVENANT TRANSPORT, INC.
(Exact name of registrant as specified in its charter)
Nevada 88-0320154
- ------------------------------------- ------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
400 Birmingham Highway
Chattanooga, Tennessee 37419
- ------------------------------------- ------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 423/821-1212
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: $0.01 Par Value
Class A Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $78.1 million as of March 20, 2001 (based upon the
$13.25 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 26, 2001, the registrant had 11,600,166 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 2001 annual meeting of
stockholders that will be filed no later than April 29, 2001.
1
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 6 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 7 herein
Item 6 Selected Financial Data Page 8 herein
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of
Operations Page 9 herein
Item 7A Quantitative and Qualitative Disclosures
About Market Risk Page 17 herein
Item 8 Financial Statements and Supplementary
Data Page 18 herein
Item 9 Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure Page 18 herein
Part III
--------
Item 10 Directors and Executive Officers of the
Registrant Page 2-3 of Proxy Statement
Item 11 Executive Compensation Pages 5-8 of Proxy Statement
Item 12 Security Ownership of Certain Beneficial
Owners and Management Pages 9-10 of Proxy Statement
Item 13 Certain Relationships and Related
Transactions Page 4 of Proxy Statement
Part IV
-------
Item 14 Exhibits, Financial Statement Schedules,
and Reports on Form 8-K Page 19 herein
____________________________________
This report contains "forward-looking statements." These statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those anticipated. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - 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 service for customers
throughout the United States. Covenant was founded by David and Jacqueline
Parker in 1985 with 25 tractors and 50 trailers. In fifteen years of operating,
the Company's fleet has grown to 3,829 tractors and 7,571 trailers, and in 2000
revenue grew to $552.4 million. In recent years, the Company has grown both
internally and through acquisitions. The Company has completed nine acquisitions
since 1996, including six in the past three years. In August 1998, Covenant
purchased certain assets of Gouge Trucking, Inc. ("Gouge"), for approximately
$1.0 million. In October 1998, Covenant acquired all of the outstanding stock of
Southern Refrigerated Transport, Inc., a $23 million annual revenue truckload
carrier (referred to as "SRT"), located in southwest Arkansas. In 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 Forth Worth, Texas.
At December 31, 2000, 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., 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
"believe," "expect," "anticipate," and "project," 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. 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.
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.
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 2000, the transportation industry was the largest industry Covenant served.
In the aggregate, subsidiaries of CNF, Inc. accounted for approximately 11% of
Covenant's 2000 revenue. No single customer accounted for 10% or more of the
Company's revenue in the two fiscal years prior to 2000.
3
Covenant conducts its operations from its headquarters in Chattanooga,
Tennessee. The former Bud Meyer and Harold Ives Trucking operations have been
centralized in Chattanooga as well. SRT's operations center remains in Ashdown,
Arkansas.
Fleet managers at each operations center plan load coverage according to
customer information requirements and relay pick-up, delivery, routing, and
fueling instructions to the Company's drivers. The fleet managers attempt to
route most of the Company's trucks over selected operating lanes. The resulting
lane density assists the Company in balancing traffic between eastbound and
westbound movements, reducing empty miles, and improving the reliability of
delivery schedules.
Covenant utilizes proven technology, including the Qualcomm OmnitracsTM and
SensortracsTM systems, to increase operating efficiency and improve customer
service and fleet management. The Omnitracs system is a satellite based tracking
and communications system that permits direct communication between drivers and
fleet managers. The Omnitracs system also updates the tractor's position every
30 minutes to permit shippers and the Company to locate freight and accurately
estimate pick-up and delivery times. The Company uses the Sensortracs system to
monitor engine idling time, speed, and performance, and other factors that
affect operating efficiency. All of the Company's tractors have been equipped
with the Qualcomm systems since 1995 and the Company has added Qualcomm systems,
if necessary, to the tractors obtained in its acquisitions.
As an additional service to customers, the Company offers electronic data
interchange ("EDI"), which allows customers and the Company to communicate
electronically, permitting real-time information flow, reductions or
eliminations in paperwork, and fewer clerical personnel. With EDI customers can
receive updates as to cargo position, delivery times, and other information.
Additionally, the Company offers load tracking via the Internet. 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 automatic programs to signal when a driver is scheduled
to be routed toward home, and fleet managers are assigned specific tractor
units, regardless of geographic region, to foster positive relationships between
the drivers and their principal contact with the Company. In addition, Covenant
has offered per-mile wage increases to Company drivers in each year since 1996,
and continues to aggressively seek rate increases from customers in part to fund
higher driver pay.
Covenant differentiates its primary dry van business from many shorter-haul
truckload carriers by its use of driver teams. Driver teams permit the Company
to provide expedited service over its long average length of haul, because
driver teams are able to handle longer routes and drive more miles while
remaining within Department of Transportation ("DOT") safety rules. Management
believes that these teams contribute to greater equipment utilization than most
carriers with predominately single drivers. The use of teams, however, increases
personnel costs as a percentage of revenue and the number of drivers the Company
must recruit. At December 31, 2000, teams operated approximately 40% of the
Company's tractors. The tractors of SRT and Harold Ives are operated primarily
by single drivers. The single driver fleets operate fewer miles per tractor and
experience more empty miles but these higher expenses are being offset by higher
revenue per loaded mile because of reduced employee expense and the benefits of
increased density on Company lanes.
Covenant is not a party to a collective bargaining agreement and its employees
are not represented by a union. At December 31, 2000, the Company employed
approximately 5,750 drivers and approximately 1,097 nondriver personnel.
Management believes that the Company has a good relationship with its personnel.
Revenue Equipment
Management believes that operating high quality, efficient equipment is an
important part of providing excellent service to customers. The Company's policy
is to operate its tractors while under warranty to minimize repair and
4
maintenance cost and reduce service interruptions caused by breakdowns. The
Company also orders most of its equipment with uniform specifications to reduce
its parts inventory and facilitate maintenance.
The Company's fleet of 3,829 tractors had an average age of 17.7 months at
December 31, 2000, 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.
During 2000, the trucking industry experienced a substantial decline in the
value of used tractors. Covenant believes that it reduced its exposure to the
used tractor market in 2001 by negotiating a large trade package on 1998
equipment and extending its trade cycle on remaining revenue equipment. During
2000, the Company decided to begin trading equipment based on mileage. The
result is that management believes that basically no equipment will be traded in
2001.
At December 31, 2000, the Company's fleet of 7,571 trailers had an average age
of 41.3 months. Approximately 85% of the Company's trailers were 53-feet long by
102-inch wide, dry vans. The Company also operated approximately 1,146 53-foot
and approximately 17 48-foot temperature-controlled trailers.
Competition
The United States trucking industry is highly competitive and includes thousands
of for-hire motor carriers, none of which dominates the market. Service and
price are the principal means of competition in the trucking industry. The
Company targets primarily the market segment that demands just-in-time and other
premium services. Management believes that this segment generally offers higher
freight rates than the segment that is less dependent upon timely service and
that the Company's size and use of driver teams are important in competing in
this segment. The 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 employee and independent contractor drivers
also must comply with the safety and fitness regulations promulgated by the DOT,
including those relating to drug and alcohol testing and hours of service. The
DOT has rated the Company "satisfactory," which is the highest safety and
fitness rating.
The DOT presently is considering proposals to amend the hours-in-service
requirements applicable to truck drivers. Any change which reduces the potential
or practical amount of time that drivers can spend driving could adversely
affect the Company. We are unable to predict the nature of any changes that may
be adopted. The DOT also is considering requirements that trucks be equipped
with certain equipment that the DOT believes would result in safer operations.
The cost of the equipment, if required, could adversely affect the Company's
profitability if shippers are unwilling to pay higher rates to fund the purchase
of such equipment.
The Company's operations are subject to various federal, state, and local
environmental laws and regulations, implemented principally by the Federal
Environmental Protection Agency and similar state regulatory agencies, governing
the management of hazardous wastes, other discharge of pollutants into the air
and surface and underground waters, and the disposal of certain substances. If
the Company should be involved in a spill or other accident involving hazardous
substances, if any such substances were found on the Company's property, or if
the Company were found to be in violation of applicable laws and regulations,
the Company could be responsible for clean-up costs, property damage, and fines
or other penalties, any one of which could have a materially adverse effect on
the Company. The Company does not utilize any on-site underground fuel storage
tanks at any of its locations. Management believes that its operations are in
material compliance with current laws and regulations.
5
Fuel Availability and Cost
The Company actively manages its fuel costs by routing the Company's drivers
through fuel centers with which the Company has negotiated volume discounts.
Average fuel prices continued to rise in 2000. During 2000 the cost of fuel was
in the range at which the Company received fuel surcharges. Even with the fuel
surcharges, the high price of fuel hurt the Company's profitability. Although
the Company historically has been able to pass through 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, 2000, approximately 3% of
the Company's projected 2001 purchases of fuel were subject to purchase
contracts.
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 (including the recent addition referenced
below), the Company's approximately 65,000 square-foot principal maintenance
facility, a body shop of approximately 16,600 square feet, and a truck wash. The
Company initiated work on an approximately 100,000 square foot addition to the
office building during the fourth quarter of 1999, which has been completed..
Covenant maintains eighteen 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 Leased
--------------------------------- ---------------- --------------- ----------- --------------------
Lake City, Minnesota Owned
--------------------------------- ---------------- --------------- ----------- --------------------
Oklahoma City, Oklahoma x Owned
--------------------------------- ---------------- --------------- ----------- --------------------
French Camp, 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 x Leased
--------------------------------- ---------------- --------------- ----------- --------------------
Indianapolis, Indiana x Leased
--------------------------------- ---------------- --------------- ----------- --------------------
Ashdown, Arkansas x x x Owned
--------------------------------- ---------------- --------------- ----------- --------------------
Little Rock, Arkansas x x Owned
--------------------------------- ---------------- --------------- ----------- --------------------
Stuttgart, Arkansas Leased
--------------------------------- ---------------- --------------- ----------- --------------------
Dayton, Ohio x Leased
--------------------------------- ---------------- --------------- ----------- --------------------
Charlotte, North Carolina x Leased
--------------------------------- ---------------- --------------- ----------- --------------------
Greensboro, North Carolina x Leased
--------------------------------- ---------------- --------------- ----------- --------------------
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, substantially all of which involves claims for personal
injury and property damage incurred in the transportation of freight. In 2000,
the Company maintained insurance covering losses in excess of a $5,000
deductible from cargo loss, losses in excess of a $2,500 deductible for physical
damage claims, and losses in excess of a $5,000 deductible from personal injury
and property damage. The Company maintains a workers' compensation plan for its
employees. Each of the primary insurance policies has a limit of $1.0 million
per occurrence, and the Company carries excess liability coverage, which
management believes is adequate. The Company is not aware of any claims or
threatened claims that might materially adversely affect its operations or
financial position.
6
In the first quarter of 2001, the Company increased its deductibles to a
combined $250,000 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 $250,000 per occurrence.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ended December 31, 2000, no matters were
submitted to a vote of security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
The Company's Class A Common Stock has been traded on the National Market under
the symbol "CVTI." The following table sets forth for the calendar periods
indicated the range of high and low sales price for the Company's Class A Common
Stock as reported by Nasdaq from January 1, 1998 to December 31, 1999.
Period High Low
------ ---- ---
Calendar Year 1999
1st Quarter $20.625 $12.375
2nd Quarter $16.000 $11.125
3rd Quarter $18.938 $15.250
4th Quarter $18.250 $13.375
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
As of March 26, 2001, the Company had approximately 47 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 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, $25 million in senior
notes due October 2005, and the operating lease covering the Company's
headquarters and terminal facility. Future payments of cash dividends will
depend upon the financial condition, results of operations, and capital
commitments of the Company, restrictions under then-existing agreements, and
other factors deemed relevant by the Board of Directors.
7
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
(In thousands except per share and operating data amounts)
Years Ended December 31,
-----------------------------------------------------------------------------
1996 1997 1998 1999 2000
-----------------------------------------------------------------------------
Statement of Operations Data:
Revenue $ 236,267 $ 297,861 $ 370,546 $ 472,741 $ 552,429
Operating expenses:
Salaries, wages, and related expenses 108,818 131,522 164,589 202,420 239,988
Fuel, oil, and road expenses 55,340 64,910 68,292 84,465 93,581
Revenue equipment rentals and
purchased transportation 605 8,492 24,250 49,260 76,131
Repairs 4,293 5,885 8,366 10,078 13,312
Operating taxes and licenses 6,065 7,514 9,393 10,988 14,169
Insurance 6,115 8,656 10,370 12,458 15,765
Communications and utilities 3,152 3,533 4,328 5,682 7,189
General supplies and expenses 9,673 12,744 15,069 19,109 24,635
Depreciation and amortization 22,139 26,482 30,192 35,591 38,879
-----------------------------------------------------------------------------
Total operating expenses 216,200 269,738 334,849 430,051 523,649
-----------------------------------------------------------------------------
Operating income 20,067 28,123 35,697 42,690 28,780
Interest expense 5,987 6,273 5,924 5,513 9,006
-----------------------------------------------------------------------------
Income before income taxes 14,080 21,850 29,773 37,177 19,774
Income tax expense 5,102 8,148 11,490 14,900 7,899
-----------------------------------------------------------------------------
Net income $ 8,978 $ 13,702 $ 18,283 $ 22,277 $ 11,875
=============================================================================
Basic earnings per share $ 0.67 $ 1.03 $ 1.27 $ 1.49 $ 0.82
Diluted earnings per share 0.67 1.03 1.27 1.48 0.82
Weighted average common shares
Outstanding 13,350 13,360 14,393 14,912 14,404
Adjusted weighted average common
shares and assumed conversions 13,353 13,360 14,440 15,028 14,533
outstanding
Balance Sheet Data:
Net property and equipment $ 144,384 $ 161,621 $ 200,537 $ 269,034 $ 256,049
Total assets 187,148 215,256 272,959 383,974 390,513
Long-term debt, less current maturities 83,110 80,812 84,331 140,497 79,295
Stockholders' equity $ 81,730 $ 95,597 $ 141,522 $ 163,852 $ 167,822
Selected Operating Data:
Pretax margin 6.0% 7.3% 8.0% 7.9% 3.6%
Average revenue per loaded mile $ 1.09 $ 1.12 $ 1.18 $ 1.20 $ 1.23
Average revenue per total mile $ 1.04 $ 1.07 $ 1.10 $ 1.11 $ 1.13
Average miles per tractor per year 150,778 149,117 144,000 144,601 128,754
Average revenue per tractor per week $ 2,994 $ 3,059 $ 3,045 $ 3,078 $ 2,790
Weighted average tractors for year (1) 1,509 1,866 2,333 2,929 3,759
Total tractors at end of period (1) 1,629 2,136 2,608 3,521 3,829
Total trailers at end of period (1) 3,048 3,948 4,526 6,199 7,571
(1) Includes monthly rental tractors and excludes monthly rental trailers.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
During the three-year period ended December 31, 2000, the Company increased its
revenue at a compounded annual growth rate of 22.9%, as revenue increased from
$297.9 million in 1997 to $552.4 million in 2000. A significant increase in
fleet size to meet customer demand as well as an increase in the freight rates
contributed to revenue growth over this period.
In addition to internal growth, the Company completed six acquisitions during
the three-year period ended December 31, 2000. The acquired operations generated
approximately $200 million in combined revenue. The Company intends to continue
to grow both internally and through acquisitions. 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 SRT, 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 operated by Covenant's long-haul operation. The single
driver fleets operate fewer miles per tractor and experience more empty miles.
The additional expenses and lower productive miles are offset by generally
higher revenue per loaded mile and the reduced employee expense of compensating
only one driver. In addition, the Company's refrigerated services must bear
additional expenses of fuel for refrigeration units, pallets, and depreciation
and interest expense of more expensive trailers associated with temperature
controlled service. The Company's operating statistics and expenses are expected
to continue to shift in future periods with the mix of single, team, and
temperature-controlled operations.
In 1997, the Company initiated the use of owner-operators. The Company
contracted with an average of 134 owner-operators in 1998, 285 owner-operators
in 1999, and 509 owner-operators in 2000. Owner-operators provide a tractor and
a driver and bear all operating expenses in exchange for a fixed lease payment
per mile. In addition, the Company does not have the capital outlay of
purchasing the tractor. The Company also entered into operating leases. In 1998,
the Company had 500 tractors and 69 trailers financed under operating leases. In
1999, the Company had 717 tractors and 450 trailers financed under operating
leases. In 2000, the Company had 1,090 tractors and 1,541 trailers financed
under operating leases. The lease payments to owner-operators and the financing
of revenue equipment under operating leases appear as operating expenses under
revenue equipment rentals and purchased transportation. For leased equipment,
expenses associated with owned equipment, such as interest and depreciation, are
not incurred; and for owner-operator tractors, driver compensation, fuel,
communications, and other expenses are not incurred. Because obtaining equipment
from owner-operators and under operating leases effectively shifts financing
expenses from interest to "above the line" operating expenses, the Company
evaluates its efficiency using pretax margin and net margin rather than
operating ratio.
Effective July 1, 2000, the Company merged its logistics business with the
logistics business of five other transportation companies into Transplace.com,
L.L.C. ("Transplace.com"). Transplace.com 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, and $5.0 million in cash for
the initial funding of the venture. In exchange, Covenant received 13% ownership
in Transplace.com. 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. The Company recognized approximately $400,000 of pretax
earnings related to Transplace.com during 2000.
9
The following table sets forth the percentage relationship of certain items to
revenue for each of the three years-ended December 31:
1998 1999 2000
------------- ------------- -------------
Revenue 100.0% 100.0% 100.0%
Operating expenses:
Salaries, wages, and related expenses 44.4 42.8 43.4
Fuel, oil, and road expenses 18.4 17.9 16.9
Revenue equipment rentals and purchased
Transportation 6.5 10.4 13.8
Repairs 2.3 2.1 2.4
Operating taxes and licenses 2.5 2.3 2.6
Insurance 2.8 2.6 2.9
Communications and utilities 1.2 1.2 1.3
General supplies and expenses 4.1 4.0 4.5
Depreciation and amortization 8.1 7.5 7.0
------------- ------------- -------------
Total operating expenses 90.4 91.0 94.8
------------- ------------- -------------
Operating income 9.6 9.0 5.2
Interest expense 1.6 1.2 1.6
------------- ------------- -------------
Income before income taxes 8.0 7.9 3.6
Income tax expense 3.1 3.2 1.4
------------- ------------- -------------
Net income 4.9% 4.7% 2.1%
============= ============= =============
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 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.
Fuel, oil, and road expenses increased $9.1 million (10.8%), to $93.6 million in
2000, from $84.5 million in 1999. As a percentage of revenue, fuel, oil, and
road expenses decreased to 16.9% in 2000 from 17.9% 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 mile or
approximately $25.3 million during 2000 compared with less than one cent per
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.
10
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.
Repairs increased $3.2 million (32.1%), to $13.3 million in 2000, from $10.1
million in 1999. As a percentage of revenue, repairs increased to 2.4% in 2000,
from 2.1% in 1999. The increase was primarily the result of an increase in the
number of tractors and trailers damaged in accidents, an increase in the number
of tractors and trailers available for routine maintenance due to the slower
freight environment, and repair requirements associated with the trade-in of a
large number of tractors during the fourth quarter 2000.
Operating taxes and licenses increased $3.2 million (28.9%), to $14.2 million in
2000, from $11.0 million in 1999. As a percentage of revenue, operating taxes
and licenses increased to 2.6% in 2000, from 2.3% in 1999, partially due to
increased fleet size and additional property taxes related to facilities.
Insurance, consisting primarily of premiums for liability, physical damage, and
cargo damage insurance, and claims, increased $3.3 million (26.5%), to $15.8
million in 2000, from $12.5 million in 1999. As a percentage of revenue,
insurance increased to 2.9% in 2000, from 2.6% 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, 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 lease expense, and driver recruiting expenses, increased $5.5 million
(28.9%), to $24.6 million in 2000, from $19.1 million in 1999. As a percentage
of revenue, general supplies and expenses increased to 4.5% in 2000 from 4.0% 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 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. The predictability of any gain/(loss) on the sale
of equipment is difficult due to 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, the investment in Transplace.com, 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.
11
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. The Company implemented certain tax planning stategies during
2000 and expects to incur an effective tax rate of approximately 38% in 2001.
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).
COMPARISON OF YEAR ENDED DECEMBER 31, 1999 TO YEAR ENDED DECEMBER 31, 1998
Revenue increased $102.2 million (27.6%), to $472.7 million in 1999 from $370.5
million in 1998. The revenue increase was primarily generated by a 25.5%
increase in weighted average tractors, to 2,929 in 1999, from 2,333 in 1998, as
the Company expanded internally to serve new customers and higher volumes from
existing customers, as well as externally through the acquisitions of Gouge in
August 1998, SRT in October 1998, ATW in September 1999, and Harold Ives in
November 1999. The Company's average revenue per loaded mile increased to
approximately $1.20 in 1999, from $1.18 in 1998. The increase was attributable
primarily to per-mile rate increases negotiated by the Company. The increase in
average revenue per loaded mile more than offset an increase in the empty miles
percentage. Revenue per total mile increased to approximately $1.11 in 1999,
from $1.10 in 1998.
Salaries, wages, and related expenses increased $37.8 million (23.0%), to $202.4
million in 1999, from $164.6 million in 1998. As a percentage of revenue,
salaries, wages, and related expenses decreased to 42.8% in 1999, from 44.4% in
1998. Driver wages as a percentage of revenue decreased to 30.7% in 1999, from
32.3% in 1998, because the Company utilized more owner-operators and a larger
percentage of single-driver tractors from the operations of SRT, and Harold
Ives, which only have one driver to be compensated. A driver wage increase that
went into effect in October 1999, and an additional increase planned for early
2000 are expected to increase driver wages as a percentage of revenue in future
periods. The Company experienced an increase in non-driving employee payroll
expense to 6.1% of revenue in the 1999 period from 5.5% of revenue in the 1998
period due to the start up of Covenant Transport Logistics and the acquisitions
of SRT and Harold Ives. Health insurance, employer paid taxes, and workers'
compensation decreased to 5.8% of revenue in 1999, from 6.3% in 1998. The
decrease as a percentage of revenue was primarily the result of improved group
health insurance rates in 1999 as compared to the 1998 rates.
Fuel, oil, and road expenses increased $16.2 million (23.7%), to $84.5 million
in 1999, from $68.3 million in 1998. As a percentage of revenue, fuel, oil, and
road expenses decreased to 17.9% in 1999 from 18.4% in 1998. During 1999,
average fuel costs for the year increased approximately $0.10 per gallon versus
1998. The increase in 1999 was more than offset by fuel surcharges, fuel hedges,
and by the increased usage of owner-operators who pay for their own fuel
purchases. However, fuel prices rose sharply during the fourth quarter of 1999
and remain elevated at levels much higher than the average in 1998 or 1999.
Thus, fuel, oil, and road expenses are anticipated to increase as a percentage
of revenue in 2000. Fuel surcharges amounted to nearly $.006 per mile or
approximately $2.4 million during 1999. Fuel surcharges were not triggered
during 1998. The Company's percentage of fuel purchases that are hedged was
approximately 18.5% in 1999 and is approximately 12% for the year 2000.
Revenue equipment rentals and purchased transportation increased $25.0 million
(103.1%), to $49.3 million in 1999, from $24.3 million in 1998. As a percentage
of revenue, revenue equipment rentals and purchased transportation increased to
10.4% in 1999 from 6.5% in 1998. During 1997, the Company began using
owner-operators of revenue equipment, who provide a tractor and driver and cover
all of their operating expenses in exchange for a fixed payment per mile.
Accordingly, expenses such as driver salaries, fuel, repairs, depreciation, and
interest normally associated with Company-owned equipment are consolidated in
revenue equipment rentals and purchased transportation when owner-operators are
utilized. The Company increased the fleet size of owner-operators to an average
of 285 in 1999, compared to 134 in 1998, an increase of 112.7%. The Company also
entered into additional operating leases. During 1999, an average of
approximately 497 tractors were leased compared to an average of approximately
220 leased tractors during 1998. The equipment leases will increase this expense
category in the future, while reducing depreciation and interest. The Company
also formed a logistics division in the fourth quarter of 1998 that is being
reflected in this expense category as well.
Repairs increased $1.7 million (20.5%), to $10.1 million in 1999, from $8.4
million in 1998. As a percentage of revenue, repairs decreased to 2.1% in 1999,
from 2.3% in 1998. As a percentage of revenue, repairs decreased due to
12
the increased number of owner-operators who are responsible for their own
repairs, which more than offset additional repairs associated with a slight
increase in fleet age.
Operating taxes and licenses increased $1.6 million (17.0%), to $11.0 million in
1999, from $9.4 million in 1998. As a percentage of revenue, operating taxes and
licenses decreased to 2.3% in 1999, from 2.5% in 1998, due to increased revenue
per tractor more efficiently spreading this largely fixed cost.
Insurance, consisting primarily of premiums for liability, physical damage, and
cargo damage insurance, and claims, increased $2.1 million (20.1%), to $12.5
million in 1999, from $10.4 million in 1998. As a percentage of revenue,
insurance decreased to 2.6% in 1999, from 2.8% in 1998, as the Company continued
to reduce premiums per million dollars of revenue. Insurance costs are expected
to rise nationwide in 2000, and the Company may be subject to increased costs in
this area.
General supplies and expenses, consisting primarily of headquarters and other
terminal lease expense, driver recruiting expenses, and communications,
increased $5.4 million (27.8%), to $24.8 million in 1999, from $19.4 million in
1998. As a percentage of revenue, general supplies and expenses remained
essentially constant at 5.2% in the 1999 and the 1998 periods.
Depreciation and amortization, consisting primarily of depreciation of revenue
equipment, increased $5.4 million (17.9%), to $35.6 million in 1999, from $30.2
million in 1998. As a percentage of revenue, depreciation and amortization
decreased to 7.5% in 1999, from 8.1% in 1998, because the Company utilized more
owner operators, leased more revenue equipment, and realized an increase in
revenue per tractor per week, which more efficiently spread this fixed cost over
a larger revenue base. Amortization expense relates to deferred debt costs
incurred and covenants not to compete from two 1995, one 1998, and two 1999
business acquisitions, as well as goodwill from two 1997, two 1998, and three
1999 acquisitions. Depreciation and amortization expense is net of any gain or
loss on the sale of tractors and trailers. Gain on sale of tractors and trailers
was approximately $1.9 million in 1998, and $67,000 in 1999. The market for used
tractors deteriorated late in 1999, and into 2000. If the prices for used
equipment remain depressed, the Company may recognize less gain or a loss on the
sale of its tractors and trailers, which would impact depreciation and
amortization as a percentage of revenue.
Interest expense decreased $0.4 million (6.9%), to $5.5 million in 1999, from
$5.9 million in 1998. As a percentage of revenue, interest expense decreased to
1.2% in 1999, from 1.6% in 1998, as the result of utilizing more owner-operators
and leasing more revenue equipment.
As a result of the foregoing, the Company's pretax margin remained essentially
constant at 7.9% in 1999, compared with 8.0% in 1998.
The Company's effective tax rate was 40.1% in 1999, and 38.6% in 1998, due to
the Company paying taxes to a greater number of states.
As a result of the factors described above, net income increased $4.0 million
(21.9%), to $22.3 million in 1999 (4.7% of revenue), from $18.3 million in 1998
(4.9% of revenue).
LIQUIDITY AND CAPITAL RESOURCES
The continued growth of the Company's business has required significant
investments in new revenue equipment and upgraded and expanded facilities. The
Company historically has financed its expansion requirements with borrowings
under a line of credit, cash flows from operations, long-term operating leases,
and a small portion with borrowings under installment notes payable to
commercial lending institutions and equipment manufacturers. The Company's
primary sources of liquidity at December 31, 2000, were funds provided by
operations, proceeds under the Securitization Facility (as defined below), and
borrowings under its primary credit agreement, which had maximum available
borrowing of $120.0 million at December 31, 2000 (the "Credit Agreement"). The
Company believes its sources of liquidity are adequate to meet its current and
projected needs.
The Company's current liabilities increased significantly as a result of the
receipt of $62.0 million of proceeds from the Securitization Facility. This
increase was partially offset by a decrease on the line of credit facility,
which is classified as a long-term liability. As discussed in the financial
statement footnotes, the net proceeds under the
13
Securitization Facility are required to be shown as a current liability because
the term, subject to annual renewals, is 364 days.
The Company's primary sources of cash flow from operations in 2000 were net
income increased by depreciation and amortization and deferred income taxes. The
most significant uses of cash provided by operations were to fund prepaid
expenses (primarily increased insurance deposits and license plates for revenue
equipment) and to finance increases in receivables and advances associated with
growth in the business. The Company's number of days sales in accounts
receivable decreased from 45 days in 1999, to 43 days in 2000. Net cash provided
by operating activities was $48.7 million in 2000, and $44.5 million in 1999.
Net cash used in investing activities was $41.2 million in 2000 and $80.8
million in 1999. Such amounts were used primarily to acquire additional revenue
equipment and expand facilities as the Company expanded its operations. During
2000, the decrease in cash used in investing activities was primarily due to the
Company acquiring a greater percentage of its revenue equipment through
operating leases which do not require a capital outlay for purchasing the
equipment. In addition, during the 2000 period, investing activity was used to
repurchase company stock, to invest in Transplace.com, 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. The Company expects capital expenditures, primarily for revenue
equipment (net of trade-ins) to be approximately $25 million in 2001, exclusive
of acquisitions.
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. As of December 2000, a total of 971,500 had been purchased
with an average price of $8.17. The stock repurchase program has no expiration
date.
During the third quarter of 2000, the Company merged its logistics business with
the logistics business of five other transportation companies into
Transplace.com. 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 13% ownership in Transplace.com.
Net cash used in financing activities was $6.2 million in the 2000 period, and
financing activities in the 1999 period provided approximately $34.5 million.
The primary source of cash for 2000 was provided by borrowings under the Credit
Agreement and Securitization Facility. The decrease in 2000 was primarily due to
the Company entering into operating leases. At December 31, 2000, the Company
had outstanding debt of $142.8 million, primarily consisting of $62.0 million in
the Securitization Facility, $49.0 million drawn under the Credit Agreement,
$25.0 million in 10-year senior notes, $3.5 million in term equipment financing,
a $3.0 million interest bearing note to the former primary stockholder of SRT,
and $350,000 in notes related to non-compete agreements. Interest rates on this
debt range from 6.5% to 9.0%.
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, 2000, the
margin was 1.00%. 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 $10.0 million. The Credit Agreement includes a "security
agreement" such that the Credit Agreement may be collateralized by virtually all
assets of the Company if a covenant violation occurs. A commitment fee, that is
adjusted quarterly between 0.15% and 0.25% per annum based on cash flow
coverage, is due on the daily unused portion of the Credit Agreement.
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,
14
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. The Securitization Facility is subject to annual renewal. As of
December 2000, there were $62 million in proceeds received.
In December 2000, the Company amended and restated its $25 million note purchase
agreement with an insurance company. The notes bear interest at 7.39%, payable
semi-annually, and mature on October 1, 2005. Principal payments are due in five
equal annual installments beginning in 2001. Proceeds of the notes were used to
reduce borrowings under the Credit Agreement.
The Company's headquarters facility was completed in December 31, 1996. The cost
of the approximately 75 acres and construction of the headquarters and shop
buildings was approximately $15 million. The Company financed the land and
improvements under a "build to suit" operating lease. This operating lease
expires March 2001, and the Company anticipates refinancing the facility 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 2000 was $13.3 million, which was also financed under the Credit
Agreement.
The Credit Agreement, Securitization Facility, senior notes, and the
headquarters and terminal lease agreement contain certain restrictions and
covenants relating to, among other things, dividends, tangible net worth, cash
flow, acquisitions and dispositions, and total indebtedness. All of these
instruments are cross-defaulted. The Company was in compliance with the
agreements at December 31, 2000.
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 2000. 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.
15
The table below sets forth quarterly information reflecting the Company's
equipment utilization (miles per tractor per period) during 1998, 1999, and
2000. 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
---------------- ------------------- ---------------- -----------------
1998 34,828 35,796 36,455 36,813
1999 33,739 37,011 37,585 36,132
2000 31,095 31,869 32,948 32,784
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 throughout 2000. Fuel is one of the Company's largest
operating expense, and high fuel prices have a negative impact on the Company's
profitability. Continued high fuel prices may affect the Company's future
results.
Resale of Used Revenue Equipment - The Company historically has recognized a
gain on the sale of its revenue equipment. The market for used tractors
experienced a sharp drop in late 1999 and into 2000. If the prices for used
equipment remain depressed, the Company could find it necessary to dispose of
its equipment at lower prices or retain some of its equipment longer, with a
resulting increase in operating expenses.
Recruitment, Retention, and Compensation of Qualified Drivers - Competition for
drivers is intense in the trucking industry. There has been since 1999, and 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 cannot
obtain higher rates than competitors that offer a lower level of service.
Regulation - The trucking industry is subject to various governmental
regulations. The DOT is considering a proposal that may limit the
hours-in-service during which a driver may operate a tractor and a proposal that
would require installing certain safety equipment on tractors. Although the
Company is unable to predict the nature of any changes in regulations, the cost
of any changes, if implemented, may adversely affect the profitability of the
Company.
Insurance and claims - In 2001 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.
16
New Accounting Pronouncements - In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities. The statement established
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded on the balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. The Company may engage in hedging activities using futures, forward
contracts, options, and swaps to hedge the impact of market fluctuations on
energy commodity prices and interest rates. The Company will be required to
adopt the standard in 2001 and has determined there will not be any material
adverse impact on its results of operations or financial position resulting from
the adoption of SFAS No. 133.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to market risks from changes in (i) certain commodity
prices and (ii) certain interest rates on its debt.
COMMODITY PRICE RISK
Prices and availability of all petroleum products are subject to political,
economic, and market factors that are generally outside the Company's control.
Because the Company's operations are dependent upon diesel fuel, significant
increases in diesel fuel costs could materially and adversely affect the
Company's results of operations and financial condition. Historically, the
Company has been able to recover a portion of short-term fuel price increases
from customers in the form of fuel surcharges. The price and availability of
diesel fuel can be unpredictable as well as the extent to which fuel surcharges
could be collected to offset such increases. For 2000, diesel fuel expenses
represented 15.1% of the Company's total operating expenses and 14.3% of total
revenue. The Company uses purchase commitments through suppliers to reduce a
portion of its exposure to fuel price fluctuations. At December 31, 2000, the
national average price of diesel fuel as provided by the U.S. Department of
Energy was $1.522 per gallon. At December 31, 2000, the notional amount for
purchase commitments during 2001 was 2.3 million gallons. At December 31, 2000,
the price of the notional 2.3 million gallons would have produced approximately
$400,000 of income to offset increased fuel prices if the price of fuel remained
the same as of December 31, 2000. At December 31, 2000, a ten percent change in
the price of fuel would increase or decrease the gain on fuel purchase
commitments by $300,000. The Company does not enter into contracts with the
objective of earning financial gains on price fluctuations, 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%. At
December 31, 2000, the Company had drawn $49 million under the Credit Agreement,
which is subject to variable rates. Considering all debt outstanding, each
one-percentage point increase or decrease in LIBOR would affect the Company's
pretax interest expense by $490,000 on an annualized basis.
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's audited consolidated balance sheets, statements of income, cash
flows, stockholders' equity, and notes related thereto, are contained at Pages
21 to 35 of this report. The supplementary quarterly financial data follows:
Quarterly Financial Data:
(In thousands except per share amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter
2000 2000 2000 2000
--------------- --------------- --------------- --------------
Revenue $ 126,481 $139,398 $141,667 $144,883
Operating income 5,687 7,265 7,435 8,392
Income before taxes 3,384 4,829 5,131 6,430
Income taxes 1,351 1,929 2,053 2,565
Net income 2,033 2,900 3,078 3,865
Net income per share $ 0.14 $ 0.20 $ 0.22 $ 0.28
First Second Third Fourth
Quarter Quarter Quarter Quarter
1999 1999 1999 1999
--------------- --------------- --------------- --------------
Revenue $ 97,764 $ 113,211 $120,104 $141,662
Operating income 6,731 11,112 12,468 12,379
Income before taxes 5,430 9,887 11,188 10,672
Income taxes 2,181 3,955 4,486 4,278
Net income 3,249 5,932 6,702 6,394
Net income per share $ 0.22 $ 0.40 $ 0.45 $ 0.43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No reports on Form 8-K have been filed within the twenty-four months prior to
December 31, 2000, involving a change of accountants or disagreements on
accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information respecting executive officers and directors set forth under the
captions "Election of Directors - Information Concerning Directors and Executive
Officers" and "Compliance with Section 16(a) of the Securities Exchange Act of
1934" on Pages 2 to 3 and Page 12 of the Registrant's Proxy Statement for the
2001 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 2000"
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 8 of the Proxy Statement is incorporated
herein by reference; provided, that the "Compensation Committee Report on
Executive Compensation" contained in the Proxy Statement is not incorporated by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information respecting security ownership of certain beneficial owners and
management set forth under the caption "Security Ownership of Principal
Stockholders and Management" on Pages 9 to 10 of the Proxy Statement is
incorporated herein by reference.
18
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information respecting certain relationships and transactions of management
set forth under the captions "Compensation Committee Interlocks and Insider
Participation" and "Certain and Relationships and Related Transactions" on Page
4 of the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
The Company's audited consolidated financial statements are set forth at the
following pages of this report:
Report of Independent Accountants.............................................22
Consolidated Balance Sheets...................................................23
Consolidated Statements of Income.............................................24
Consolidated Statements of Stockholders' Equity...............................25
Consolidated Statements of Cash Flows.........................................26
Notes to Consolidated Financial Statements....................................27
2. Financial Statement Schedules.
Financial statement schedules are not required because all required information
is included in the financial statements.
3. Exhibits.
See list under Item 14(c) below, with management compensatory plans and
arrangements being listed under Exhibits 10.1, 10.2, 10.3, 10.5, 10.6, and 10.7.
(b) Reports on Form 8-K during the fourth quarter ended December 31, 2000.
There were no reports on Form 8-K filed during the fourth quarter ended December
31, 2000.
(c) Exhibits
Exhibit
Number Reference Description
3.1 (1) Restated Articles of Incorporation.
3.2 (1) Amended By-Laws dated September 27, 1994.
4.1 (1) Restated Articles of Incorporation.
4.2 (1) Amended By-Laws dated September 27, 1994.
10.1 (1) Incentive Stock Plan filed as Exhibit 10.9.
10.2 (1) 401(k) Plan filed as Exhibit 10.10.
10.3 (2) Amendment No. 2 to the Incentive Stock Plan,
filed as Exhibit 10.10.
10.4 (3) Stock Purchase Agreement made and entered
into as of November 15, 1999, by and among
Covenant Transport, Inc., a Tennessee
corporation; Harold Ives; Marilu Ives, Tommy
Ives, Garry Ives, Larry Ives, Sharon Ann
Dickson, and the Tommy Denver Ives
Irrevocable Trust; Harold Ives Trucking Co.;
and Terminal Truck Broker, Inc.
10.5 (4) Outside Director Stock Option Plan, filed as
Exhibit A.
10.6 (5) Amendment No. 3 to the Incentive Stock Plan
filed as Exhibit 10.10.
10.7 (5) Amendment No. 1 to the Outside Director
Stock Option Plan filed as Exhibit 10.11.
10.8 (6) Amended and Restated Note Purchase Agreement
dated December 13, 2000,
19
among Covenant Asset Management, Inc.,
Covenant Transport, Inc., and CIG & Co.
10.9 (6) Credit Agreement by and among Covenant
Asset Management, Inc., Covenant
Transport, Inc., Bank of America, N.A., and
Lenders, dated December 13, 2000.
10.10 (6) Loan Agreement dated December 12, 2000,
among CVTI Receivables Corp., and
Covenant Transport, Inc., Three Pillars
Funding Corporation, and Suntrust
Equitable Securities Corporation.
10.11 (6) Receivables Purchase Agreement dated as
of December 12, 2000, among CVTI
Receivables Corp., Covenant Transport,
Inc., and Southern Refrigerated
Transport, Inc.
21 (6) List of subsidiaries.
23 (6) Consent of PricewaterhouseCoopers LLP,
independent accountants.
- --------------------------------------------------------------------------------
References:
Previously filed as an exhibit to and incorporated by reference from:
(1) Form S-1, Registration No. 33-82978, effective October 28, 1994.
(2) Form 10-Q for the quarter ended June 30, 1999.
(3) Form 8-K for the event dated November 16, 1999.
(4) Schedule 14A, filed April 13, 2000.
(5) Form 10-Q for the quarter ended September 30, 2000.
(6) Filed herewith.
20
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 29, 2001 By: /s/ Joey B. Hogan
------------------------------ ----------------------------
Joey B. Hogan
Treasurer and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Position Date
/s/ David R. Parker Chairman of the Board, President,
David R. Parker and Chief Executive Officer
(principal executive officer) March 29, 2001
/s/ Joey B. Hogan Treasurer and Chief Financial
Joey B. Hogan Officer (principal financial
and accounting officer) March 29, 2001
/s/ R. H. Lovin, Jr.
R. H. Lovin, Jr. Director March 29, 2001
/s/ Michael W. Miller
Michael W. Miller Director March 29, 2001
/s/ William T. Alt
William T. Alt Director March 29, 2001
/s/ Robert E. Bosworth
Robert E. Bosworth Director March 29, 2001
/s/ Hugh O. Maclellan, Jr.
Hugh O. Maclellan, Jr. Director March 29, 2001
/s/ Mark A. Scudder
Mark A. Scudder Director March 29, 2001
21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Covenant Transport, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Covenant
Transport, Inc. and its subsidiaries at December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three 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
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 2000
(In thousands except share data)
1999 2000
------------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,046 $ 2,287
Accounts receivable, net of allowance of $1,040 in 1999 and
$1,263 in 2000 75,038 72,482
Drivers advances and other receivables 4,789 11,393
Tire and parts inventory 3,046 2,949
Prepaid expenses 9,567 13,914
Deferred income taxes 1,310 2,590
Income taxes receivable 4,506 3,651
------------------- -----------------
Total current assets 99,302 109,266
Property and equipment, at cost 349,672 356,630
Less accumulated depreciation and amortization 80,638 100,581
------------------- -----------------
Net property and equipment 269,034 256,049
Other assets 15,638 25,198
------------------- -----------------
Total assets $383,974 $390,513
=================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks written in excess of bank balance 3,599 -
Current maturities of long-term debt 4,218 6,505
Securitization facility - 62,000
Accounts payable 7,260 6,988
Accrued expenses 17,136 17,176
------------------- -----------------
Total current liabilities 32,213 92,669
Long-term debt, less current maturities 140,497 74,295
Deferred income taxes 47,412 55,727
------------------- -----------------
Total liabilities 220,122 222,691
Commitments and contingent liabilities
Stockholders' equity:
Class A common stock, $.01 par value; 20,000,000 shares authorized; 12,564,250
and 12,566,850 shares issued and 12,564,250 and
11,595,350 outstanding as of 1999 and 2000, respectively 126 126
Class B common stock, $.01 par value; 5,000,000 shares authorized;
2,350,000 shares issued and outstanding as of 1999 and 2000 24 24
Additional paid-in-capital 78,313 78,343
Treasury Stock at cost; 971,500 shares as of December 31, 2000 - (7,935)
Retained earnings 85,389 97,264
------------------- -----------------
Total stockholders' equity 163,852 167,822
------------------- -----------------
Total liabilities and stockholders' equity $383,974 $390,513
=================== =================
The accompanying notes are an integral part of these consolidated financial
statements.
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1999, AND 2000
(In thousands except per share data)
1998 1999 2000
---------------- ---------------- ---------------
Revenue $ 370,546 $472,741 $552,429
Operating expenses:
Salaries, wages, and related expenses 164,589 202,420 239,988
Fuel, oil, and road expenses 68,292 84,465 93,581
Revenue equipment rentals and purchased
transportation 24,250 49,260 76,131
Repairs 8,366 10,078 13,312
Operating taxes and licenses 9,393 10,988 14,169
Insurance 10,370 12,458 15,765
Communications and utilities 4,328 5,682 7,189
General supplies and expenses 15,069 19,109 24,635
Depreciation and amortization, including gain on
disposition of equipment 30,192 35,591 38,879
---------------- ---------------- ---------------
Total operating expenses 334,849 430,051 523,649
---------------- ---------------- ---------------
Operating income 35,697 42,690 28,780
Interest expense 5,924 5,513 9,006
---------------- ---------------- ---------------
Income before income taxes 29,773 37,177 19,774
Income tax expense 11,490 14,900 7,899
---------------- ---------------- ---------------
Net income $18,283 $ 22,277 $ 11,875
================ ================ ===============
Basic earnings per share: $1.27 $1.49 $0.82
Diluted earnings per share: $1.27 $1.48 $0.82
Weighted average shares outstanding 14,393 14,912 14,404
Adjusted weighted average shares and assumed conversions
outstanding 14,440 15,028 14,533
The accompanying notes are an integral part of these consolidated financial
statements.
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999, AND 2000
(In thousands)
Class A Class B Additional Total
Common Common Paid-In Treasury Retained Stockholders'
Stock Stock Capital Stock Earnings Equity
------------- ------------- --------------- ------------- ------------- -----------------
Balances at December 31, 1997 $ 110 $ 24 $50,634 $ -- $ 44,829 $ 95,597
Exercise of employee stock options -- -- 157 -- -- 157
Stock offering 16 -- 27,470 -- -- 27,486
Net income -- -- -- -- 18,283 18,283
------------- ------------- --------------- ------------- ------------- -----------------
Balances at December 31, 1998 126 24 78,261 -- 63,112 141,523
Exercise of employee stock options -- -- 52 -- -- 52
Net income -- -- -- -- 22,277 22,277
------------- ------------- --------------- ------------- ------------- -----------------
Balances at December 31, 1999 126 24 78,313 -- 85,389 163,852
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
============= ============= =============== ============= ============= =================
The accompanying notes are an integral part of these consolidated financial
statements.
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999, AND 2000
(In thousands)
1998 1999 2000
-------------------------------------------------------
Cash flows from operating activities:
Net income $18,283 $22,277 $11,875
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on receivables 456 131 535
Depreciation and amortization 32,075 35,658 39,181
Equity in earnings of affiliate - - 376
Deferred income tax expense 4,146 9,137 6,180
Gain on disposition of property and equipment (1,883) (67) (1,032)
Changes in operating assets and liabilities:
Receivables and advances (12,554) (11,974) (3,965)
Prepaid expenses (1,075) (3,321) (4,358)
Tire and parts inventory (617) (750) 97
Accounts payable and accrued expenses 1,072 (6,606) (228)
-------------------------------------------------------
Net cash provided by operating activities 39,903 44,485 48,661
Cash flows from investing activities:
Acquisition of property and equipment (80,303) (101,653) (71,427)
Proceeds from disposition of property and equipment 27,760 46,632 51,108
Acquisition of intangibles (220) -- --
Acquisition of business- SRT(A) (6,295) -- --
Acquisition of business- ATW -- (10,775) --
Acquisition of business- Harold Ives(B) -- (15,031) --
Acquisition of business- CTS (Footnote 3) -- -- (7,658)
Investment in Transplace.com (Footnote 2) -- -- (5,307)
Repurchase of Company stock -- -- (7,935)
-------------------------------------------------------
Net cash used in investing activities (59,058) (80,827) (41,219)
Cash flows from financing activities:
Proceeds from equity offering 27,486 -- --
Exercise of stock option 157 52 30
Proceeds from issuance of debt 84,000 93,500 174,119
Repayments of long-term debt (92,094) (62,503) (176,034)
Other (78) (186) (717)
Checks in excess of bank balance -- 3,599 (3,599)
-------------------------------------------------------
Net cash provided by/(used in) financing activities 19,471 34,462 (6,201)
-------------------------------------------------------
Net change in cash and cash equivalents 316 (1,880) 1,241
Cash and cash equivalents at beginning of period 2,610 2,926 1,046
-------------------------------------------------------
Cash and cash equivalents at end of period $2,926 $1,046 $2,287
=======================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $6,021 $5,823 $10,410
Income taxes
$5,675 $12,108 $2,645
=======================================================
(A) Acquisition of business presented net of acquired cash of $1.5 million
and a note payable to former shareholder of acquired company in the
amount of $3.0 million.
(B) Acquisition of business presented net of acquired cash of $3.9 million
and receivable from a former shareholder of acquired company of $3.5
million.
The accompanying notes are an integral part of these consolidated
financial statements.
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Covenant Transport, Inc. (the "Company") is a long-haul
truckload carrier that offers premium transportation services, such as team and
refrigerated services, to customers throughout the United States.
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company, a holding company incorporated in the state of Nevada
in 1994, and its wholly-owned operating subsidiaries, Covenant Transport, Inc.,
a Tennessee corporation; Harold Ives Trucking Co., an Arkansas corporation;
Terminal Truck Broker, Inc., an Arkansas corporation (Harold Ives Trucking Co.
and Terminal Truck Broker, Inc. referred together as "Harold Ives"); Southern
Refrigerated Transport, Inc., an Arkansas corporation; Tony Smith Trucking, Inc.
(Southern Refrigerated Transport, Inc. and Tony Smith Trucking, Inc. referred
together as "SRT"); Covenant.com, Inc., a Nevada corporation; Covenant Asset
Management, Inc., a Nevada corporation; 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 functions as
a broker and for fuel surcharges.
Cash and Cash Equivalents - The Company considers all highly liquid investments
with a maturity of three months or less to be cash equivalents.
Tires and Parts Inventory - Tires on new revenue equipment are capitalized as a
component of the related equipment cost when the vehicle is placed in service
and recovered through depreciation over the life of the vehicle. Replacement
tires and parts on hand at year end are recorded at the lower of cost or market
with cost determined using the first-in, first-out method. Replacement tires are
expensed when placed in service.
Intangible Assets - The Company periodically evaluates the net realizability of
the carrying amount of intangible assets. Non-compete agreements are amortized
over the life of the agreement, deferred loan costs are amortized over the life
of the loan and goodwill is amortized over periods ranging from 20 to 40 years.
Property and Equipment - Depreciation is calculated 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. In accordance with
industry practices, gains or losses on disposal of revenue equipment are
included in depreciation in the statements of income.
Impairment of Long-Lived Assets - The Company ensures that long-lived assets to
be disposed of are reported at the lower of the carrying value or the fair
market value less costs to sell. The Company evaluates the carrying value of
long-lived assets for impairment losses by analyzing the operating performance
and future cash flows for those assets. The Company adjusts the net book value
of the underlying assets if the sum of expected cash flows is less than book
value.
Capital Structure - The shares of Class A and B Common Stock are substantially
identical except that the Class B shares are entitled to two votes per share.
The terms of any future issuances of preferred shares will be set by the Board
of Directors.
Insurance and Other Claims - Losses resulting from claims for personal injury,
property damage, cargo loss and damage, and other sources are covered by
insurance, subject to deductibles. Losses resulting from uninsured claims are
recognized when such losses are known and estimable.
Concentrations of Credit Risk - The Company performs ongoing credit evaluations
of its customers and does not require collateral for its accounts receivable.
The Company maintains reserves which management believes are adequate to provide
for potential credit losses. The Company's customer base spans the continental
United States. Sales to one of the Company's customers accounted for
approximately 11% of revenue in 2000.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
New Accounting Pronouncements - In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities. The statement established
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded on the balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. The Company may engage in hedging activities using futures, forward
contracts, options, and swaps to hedge the impact of market fluctuations on
energy commodity prices and interest rates. The Company will be required to
adopt the standard in 2001 and has determined there will not be any material
adverse impact on its results of operations or financial position resulting from
the adoption of SFAS No. 133.
2. INVESTMENT IN TRANSPLACE.COM
Effective July 1, 2000, the Company merged its logistics business with five
other transportation companies into a company called Transplace.com ("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 13% ownership in TPC, which is being accounted for using the equity
method of accounting. 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 excess of the Company's share of TPC's net assets over its
cost basis is being amortized over twenty years using the straight-line method.
3. BUSINESS COMBINATIONS
In August 1998, the Company purchased certain assets of Gouge Trucking, Inc. for
approximately $1.0 million.
In October 1998, the Company purchased all of the outstanding stock of SRT. The
acquisition of SRT has been accounted for under the purchase method of
accounting. Accordingly, the operating results of SRT have been included in the
consolidated operating results since the date of acquisition. The purchase price
of $10.75 million, net of cash received of approximately $1.5 million and note
payable in the amount of $3.0 million to a former shareholder of SRT has been
allocated to the net assets acquired based on appraised fair values at the date
of acquisition.
In September 1999, the Company purchased certain assets of ATW, Inc. for $10.8
million, which included $9.3 million for property and equipment.
In November 1999, the Company purchased all of the outstanding stock of Harold
Ives. The acquisition of Harold Ives has been accounted for under the purchase
method of accounting and goodwill is being amortized over 30 years. Accordingly,
the operating results of Harold Ives have been included in the consolidated
operating results since the date of acquisition. The purchase price of $22.4
million, net of cash received of $3.9 million and a receivable from an officer
of Harold Ives to the acquired company of $3.5 million has been allocated to the
net assets acquired based on appraised fair values 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 and goodwill is being
amortized over 40 years.
4. PROPERTY AND EQUIPMENT
A summary of property and equipment, at cost, as of December 31, 1999 and 2000
is as follows:
(in thousands) 1999 2000
------------------------ ------------------------
Revenue equipment $313,200 $301,451
Communications equipment 12,624 15,668
Land and improvements 9,359 9,528
Buildings and leasehold improvements 6,708 7,387
Construction in progress 132 13,316
Other 7,649 9,280
------------------------ ------------------------
$349,672 $356,630
======================== ========================
Depreciation expense amounts were $31.4 million, $35.1 million and $39.0 million
in 1998, 1999, and 2000, respectively.
5. OTHER ASSETS
A summary of other assets as of December 31, 1999 and 2000 is as follows:
(in thousands) 1999 2000
----------------- -----------------
Covenants not to compete $2,600 $1,690
Tradename 1,000 330
Goodwill 11,081 11,352
Less accumulated amortization of intangibles (1,498) (2,415)
----------------- -----------------
Net intangible assets 13,183 10,957
Investment in TPC - 10,806
Other 2,455 3,435
----------------- -----------------
$15,638 $25,198
================= =================
6. ACCOUNTS RECEIVABLE SECURITIZATION
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 Financial
Accounting Standard No. 125 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 of the
committed term, subject to annual renewals, is 364 days. As of December 31,
2000, the Company had received $62 million in proceeds, with a weighted average
interest rate of 6.6%.
7. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1999 and 2000:
(in thousands) 1999 2000
----------------- --------------------
Borrowings under $130 million credit agreement $ 96,000 $ --
Borrowings under $120 million credit agreement -- 49,000
10-year senior notes 25,000 25,000
Notes to unrelated individuals for non-compete
agreements 550 350
Equipment and vehicle obligations with commercial
lending institutions, with fixed interest rates ranging
from 6.7% to 9.0% at December 31, 2000 20,165 3,450
Note payable to former SRT shareholder, bearing
interest at 6.5% with interest payable quarterly 3,000 3,000
----------------- --------------------
144,715 80,800
Less current maturities 4,218 6,505
----------------- --------------------
$140,497 $74,295
================= ====================
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 $10 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 unused portion of the facility and is adjusted quarterly between 0.15% and
0.25% per annum based on the consolidated leverage ratio is due on the daily
unused portion of the Credit Agreement. At December 31, 2000, the fee was 0.20%
per annum. The Credit Agreement is guaranteed by Covenant Transport, Inc., a
Nevada corporation, Covenant Transport, Inc., a Tennessee corporation, Southern
Refrigerated Transport, Inc., an Arkansas corporation, Tony Smith Trucking,
Inc., an Arkansas corporation, CIP, Inc. a Nevada corporation, Harold Ives
Trucking Co., an Arkansas corporation, Terminal Truck Brokers, Inc., an Arkansas
corporation, and Covenant.com, Inc., a Nevada corporation.
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 a
ratio of total debt to trailing cash flow coverage. At December 31, 2000, the
margin was 1.00%.
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 Credit Agreement and senior note agreement subject the Company to certain
restrictions and covenants related to, among others, dividends, tangible net
worth, cash flow, acquisitions and dispositions, and total indebtedness.
Maturities of long term debt at December 31, 2000 are as follows (in thousands):
2001 $ 6,505
2002 6,081
2003 54,831
2004 8,383
2005 5,000
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):
2001 $22,491
2002 17,554
2003 12,082
2004 4,049
2005 3,949
Rental expense is summarized as follows for each of the three years ended
December 31:
(in thousands) 1998 1999 2000
---------------- ---------------- ----------------
Revenue equipment rentals $ 5,640 $12,102 $16,918
Owner/operator 18,167 35,534 58,969
Terminal rentals 1,277 1,407 1,684
Other equipment rentals 1,290 1,618 2,904
---------------- ---------------- ----------------
$26,374 $ 50,661 $ 80,475
================ ================ ================
During April 1996, the Company entered into an agreement to lease its
headquarters and terminal in Chattanooga under an operating lease. The lease
provides for rental payments to be variable based upon LIBOR interest rates for
five years. This operating lease expires March 2001, with the Company
anticipating financing the lease under the Credit Agreement.
Covenant leased property in Chattanooga, Tennessee from the principal
stockholder of the Company. Effective July 1, 1997, the monthly rental was
approximately $15,000 per month. The Company also leased a property at Greer,
South Carolina for annual rent of $12,000 from the principal stockholder.
Effective June 1998, these two leases were terminated by the principal
stockholder without any penalties or additional payments coming due.
Included in terminal rentals are payments of $78,905 for the year ended December
31, 1998, to the principal stockholder of the Company.
9. INCOME TAX
Income tax expense for the years ended December 31, 1998, 1999, and 2000 is
comprised of:
(in thousands) 1998 1999 2000
---------------- ---------------- ----------------
Federal, current $5,076 $6,154 $1,370
Federal, deferred 4,196 6,705 5,841
State, current 1,773 1,331 87
State, deferred 445 710 601
---------------- ---------------- ----------------
$11,490 $14,900 $7,899
================ ================ ================
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, 1998, 1999 and 2000 as follows:
(in thousands) 1998 1999 2000
---------------- ---------------- ----------------
Computed "expected" income tax expense $10,420 $13,012 $6,921
Adjustments in income taxes resulting from:
State income taxes, net of federal income tax
Effect 945 1,487 593
Permanent differences and other, net 125 401 385
---------------- ---------------- ----------------
Actual income tax expense $11,490 $14,900 $7,899
================ ================ ================
The temporary differences and the approximate tax effects that give rise to the
Company's net deferred tax liability at December 31, 1999 and 2000 are as
follows:
(in thousands) 1999 2000
------------------------ ------------------------
Deferred tax assets:
Accounts receivable $ 372 $1,093
Accrued expenses 1,350 256
Alternative minimum tax credits 958 948
Intangible assets -- 293
------------------------ ------------------------
2,680 2,590
Deferred tax liability:
Property and equipment 47,098 54,953
Adjustments resulting from a change in
accounting methods for tax purposes 1,150 774
Unrealized gain on securities 28 --
Intangible assets 506 --
------------------------ ------------------------
48,782 55,727
------------------------ ------------------------
Net deferred tax liability $ 46,102 $ 53,137
======================== ========================
These amounts are presented in the accompanying consolidated balance sheets as
follows:
(in thousands) 1999 2000
------------------------ ------------------------
Current deferred tax asset $1,310 $2,590
Non current deferred tax asset 47,412 55,727
------------------------ ------------------------
Net deferred tax liability $ 46,102 $ 53,137
======================== ========================
10. RELATED PARTY TRANSACTIONS
Transactions involving related parties not otherwise disclosed herein are as
follows:
In June 1997, the Company obtained a promissory note in the amount of $480,000
from a significant shareholder. The principal and related interest at the rate
of 7% was paid in full in May 1998. In December 1999, the Company purchased
approximately 105 acres of land that is adjacent to the corporate headquarters
for approximately $890,000 from this 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 Company also chartered an airplane owned by this shareholder in the
amount of $262,940 during 1998 and $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 $768,000 during 1998, $2.8 million during 1999 and $2.0 million
during 2000. 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.
11. COMMITMENTS AND CONTINGENT LIABILITIES
The Company, in the normal course of business, is involved in certain legal
matters for which it carries liability insurance. It is management's belief that
the losses, if any, from these lawsuits will not have a materially adverse
impact on the financial condition, operations, or cash flows of the Company.
Financial risks which potentially subject the Company to concentrations of
credit risk consist of deposits in banks in excess of the Federal Deposit
Insurance Corporation limits. The Company's sales are generally made on account
without collateral. Repayment terms vary based on certain conditions. The
Company maintains reserves which management believes are adequate to provide for
potential credit
losses. The majority of the Company's customer base spans the United States. The
Company monitors these risks and believes the risk of incurring material losses
is remote.
The Company has entered into minimum purchase agreements for the purchase of
diesel fuel. The agreements provide for specified amounts of fuel at contracted
prices through 2002. At December 31, 2000, the approximate number of gallons of
fuel purchase commitments were as follows:
2001 2,250,000 gallons
2002 1,500,000 gallons
12. EARNINGS PER SHARE
The following table sets forth for the periods indicated the calculation of net
earnings per share included in the Company's Consolidated Statement of Income:
(in thousands except per share data) 1998 1999 2000
---------------- ---------------- ----------------
Numerator:
Net income $18,283 $22,277 $11,875
================ ================ ================
Denominator:
Denominator for basic earnings
per share - weighted-average shares 14,393 14,912 14,404
Effect of dilutive securities:
Employee stock options 47 116 129
---------------- ---------------- ----------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions 14,440 15,028 14,533
================ ================ ================
---------------- ---------------- ----------------
Basic earnings per share $ 1.27 $ 1.49 $ 0.82
================ ================ ================
---------------- ---------------- ----------------
Diluted earnings per share $ 1.27 $ 1.48 $ 0.82
================ ================ ================
13. 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, 792,000 shares were purchased at
an average price of $8.14. During the third quarter, 179,500 shares were
purchased at an average price of $8.27. As of December 31, 2000 a total of
971,500 had been purchased with an average price of $8.17. The stock repurchase
program has no expiration date.
14. 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 $873,000, $782,000 and $1,043,000 in 1998,
1999, and 2000, respectively, to the profit sharing and savings plan.
15. 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 Average Options
Exercise Price Exercisable at
Shares Year End
------------------ ------------------ -------------------
Under option at December 31, 1997 501,500 $15.87 143,800
Options granted in 1998 298,250 $12.21
Options exercised in 1998 (10,000) $15.68
Options canceled in 1998 (20,000) $14.80
------------------
Under option at December 31, 1998 769,750 $14.43 206,500
Options granted in 1999 202,750 $13.06
Options exercised in 1999 (4,000) $13.06
Options canceled in 1999 (35,950) $17.18
------------------
Under option at December 31, 1999 932,550 $14.14 354,150
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 Outstanding Options Exercisable
------------------------------------------------------- ----------------------------------
Weighted- Average Weighted- Number Weighted-
Number Remaining Average Exercisable At Average
Range of Exercise Outstanding at Contractual Life Exercise Price 12/31/00 Exercise Price
Prices 12/31/00
- ----------------------- ---------------- -------------------- ----------------- ---------------- -----------------
$10.00 to $12.99 793,550 108 $9.49 173,134 $11.83
$13.00 to $15.99 486,526 81 $14.50 313,643 $14.83
$16.00 to $20.00 145,250 58 $17.25 126,249 $17.04
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 4.8% to 6.0%; expected life
of 5 years; dividend rate of zero percent; and expected volatility of 42.0% for
1998, 42.6% for 1999 and 48.5% for 2000. Using these assumptions, the fair value
of the employee stock options granted in 1998, 1999 and 2000 is $1.2 million,
$900,000, and $2.2 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, 1998, 1999 and 2000:
(in thousands except per share data) 1998 1999 2000
Pro forma net income 17,736 21,565 10,213
Pro forma earnings per share:
Basic $1.23 $1.45 $0.71
Diluted 1.23 1.43 0.70