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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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
incorporation or organization) Identification No.)
400 Birmingham Hwy.
Chattanooga, TN 37419
(423) 821-1212
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive office)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date (October 28, 2002).
Class A Common Stock, $.01 par value: 12,024,733 shares
Class B Common Stock, $.01 par value: 2,350,000 shares
Page 1
PART I
FINANCIAL INFORMATION
Page Number
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 2001 and September 30,
2002 (Unaudited) 3
Condensed Consolidated Statements of Operations for the three months and nine months
ended September 30, 2001 and 2002 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2001 and 2002 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
PART II
OTHER INFORMATION
Page Number
Item 1. Legal Proceedings 21
Items 2, 3, 4, and 5. Not applicable 21
Item 6. Exhibits and Reports on Form 8-K 21
Page 2
ITEM 1. FINANCIAL STATEMENTS
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
December 31, 2001 September 30, 2002
(unaudited)
----------------------- -----------------------
ASSETS
Current assets:
Cash and cash equivalents $ 383 $ 1,132
Accounts receivable, net of allowance of $1,623 in 2001 and
$1,800 in 2002 62,540 65,076
Drivers' advances and other receivables 4,002 5,453
Inventory and supplies 3,471 3,126
Prepaid expenses 11,824 9,241
Deferred income taxes 6,630 5,953
Income taxes receivable 4,729 4,729
----------------------- -----------------------
Total current assets 93,579 94,710
Property and equipment, at cost 369,069 384,434
Less accumulated depreciation and amortization 137,533 156,989
----------------------- -----------------------
Net property and equipment 231,536 227,445
Other 24,667 22,538
----------------------- -----------------------
Total assets $ 349,782 $ 344,693
======================= =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt 20,150 -
Securitization facility 48,130 50,130
Accounts payable 7,241 7,334
Accrued expenses 17,871 19,732
Insurance and claims accrual 11,854 18,340
----------------------- -----------------------
Total current liabilities 105,246 95,536
Long-term debt, less current maturities 29,000 23,000
Deferred income taxes 53,634 53,634
----------------------- -----------------------
Total liabilities 187,880 172,170
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; no shares
issued and outstanding - -
Class A common stock, $.01 par value; 20,000,000 shares authorized;
12,680,483 and 12,996,233 shares issued and 11,708,983 and
12,024,733 shares outstanding as of 2001 and 2002, respectively 127 130
Class B common stock, $.01 par value; 5,000,000 shares authorized;
2,350,000 shares issued and outstanding as of 2001 and 2002 24 24
Additional paid-in-capital 79,832 84,422
Other comprehensive (loss) income (748) 355
Treasury stock, at cost; 971,500 shares as of 2001 and 2002 (7,935) (7,935)
Retained earnings 90,602 95,527
----------------------- -----------------------
Total stockholders' equity 161,902 172,523
----------------------- -----------------------
Total liabilities and stockholders' equity $ 349,782 $ 344,693
======================= =======================
The accompanying notes are an integral part of these consolidated financial statements.
Page 3
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2002
(In thousands except per share data)
Three months ended September Nine months ended September
30, 30,
(unaudited) (unaudited)
--------------------------------- ------------------------------
2001 2002 2001 2002
Freight revenue $ 138,057 $ 135,275 $ 411,069 $ 403,135
Fuel and accessorial surcharges 7,209 5,948 21,990 14,619
--------------------------------- ------------------------------
Total revenue $ 145,266 $ 141,223 $ 433,059 $ 417,754
Operating expenses:
Salaries, wages, and related expenses 59,674 55,315 185,490 169,647
Fuel expense 26,153 24,077 80,192 70,223
Operations and maintenance 10,369 10,697 29,063 29,824
Revenue equipment rentals and purchased
transportation 16,696 14,711 50,935 44,368
Operating taxes and licenses 3,619 3,165 10,994 10,357
Insurance and claims 7,991 7,840 19,309 22,844
Communications and utilities 1,995 1,567 5,645 5,103
General supplies and expenses 3,357 3,579 10,355 10,727
Depreciation, amortization and impairment
charge, including gains (losses) on disposition
of equipment (1) 10,465 11,492 30,410 37,466
--------------------------------- ------------------------------
Total operating expenses 140,319 132,443 422,393 400,559
--------------------------------- ------------------------------
Operating income 4,947 8,780 10,666 17,195
Other (income) expenses:
Interest expense 1,756 868 6,441 2,802
Interest income (44) (18) (252) (52)
Other 1,010 738 990 949
--------------------------------- ------------------------------
Other (income) expenses, net 2,722 1,588 7,179 3,699
--------------------------------- ------------------------------
Income before income taxes 2,225 7,192 3,487 13,496
Income tax expense 1,380 3,581 1,859 7,682
--------------------------------- ------------------------------
Income before extraordinary loss on early
extinguishment of debt 845 3,611 1,628 5,814
Extraordinary loss on early extinguishment of debt,
net of income tax benefit - - - 890
--------------------------------- ------------------------------
Net income $ 845 $ 3,611 $ 1,628 $ 4,924
================================= ==============================
Net income per share:
Income before extraordinary loss on early
extinguishment of debt $ 0.06 $ 0.25 $ 0.12 $ 0.41
Extraordinary loss, net of income tax benefit - - - (0.06)
--------------------------------- ------------------------------
Total basic earnings per share: $ 0.06 $ 0.25 $ 0.12 $ 0.35
================================= ==============================
Income before extraordinary loss on early
extinguishment of debt $ 0.06 $ 0.25 $ 0.11 $ 0.40
Extraordinary loss, net of income tax benefit - - - (0.06)
--------------------------------- ------------------------------
Total diluted earnings per share: $ 0.06 $ 0.25 $ 0.11 $ 0.34
================================= ==============================
Weighted average shares outstanding 14,009 14,317 13,975 14,171
Adjusted weighted average shares and assumed
conversions outstanding 14,233 14,704 14,230 14,465
(1) Includes a $3.3 million pre-tax impairment charge in the first quarter of 2002, which is reflected in the nine
month period ended September 30, 2002.
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 4
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2002
(In thousands)
Nine months ended September 30,
(unaudited)
--------------------------------------------
2001 2002
Cash flows from operating activities:
Net income $ 1,628 $ 4,924
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on accounts receivables 185 672
Extraordinary loss on early extinguishment of debt, net of tax - 890
Depreciation, amortization and impairment of assets (1) 29,517 35,805
Provision for losses on guaranteed residuals - 324
Deferred income tax expense 310 676
Equity in earnings of affiliate 1,016 -
Income tax benefit from exercise of stock options - 746
Loss on disposition of property and equipment 15 1,661
Changes in operating assets and liabilities:
Receivables and advances 7,049 (2,999)
Prepaid expenses 2,745 2,583
Tire and parts inventory (565) 345
Accounts payable and accrued expenses 9,604 10,090
------------------ -----------------
Net cash flows provided by operating activities 51,504 55,717
Cash flows from investing activities:
Acquisition of property and equipment (53,955) (40,244)
Acquisition of business (564) -
Proceeds from disposition of property and equipment 17,086 6,867
------------------ -----------------
Net cash flows used in investing activities (37,433) (33,377)
Cash flows from financing activities:
Checks in excess of bank balances 1,325 -
Deferred costs (94) -
Exercise of stock options 883 3,847
Proceeds from issuance of long-term debt 49,000 54,000
Repayments of long-term debt (66,418) (79,438)
------------------ -----------------
Net cash flows used in financing activities (15,304) (21,591)
------------------ -----------------
Net change in cash and cash equivalents (1,233) 749
Cash and cash equivalents at beginning of period 2,287 383
------------------ -----------------
Cash and cash equivalents at end of period $ 1,054 $ 1,132
================== =================
(1) Includes a $3.3 million pre-tax impairment charge in 2002.
The accompanying notes are an integral part of these consolidated financial statements.
Page 5
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The condensed consolidated financial statements include the accounts of
Covenant Transport, Inc., a Nevada holding company, and its wholly-owned
subsidiaries ("Covenant" or the "Company"). All significant intercompany
balances and transactions have been eliminated in consolidation.
The financial statements have been prepared, without audit, in accordance
with accounting principles generally accepted in the United States of
America, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, the accompanying
financial statements include all adjustments which are necessary for a fair
presentation of the results for the interim periods presented, such
adjustments being of a normal recurring nature. Certain information and
footnote disclosures have been condensed or omitted pursuant to such rules
and regulations. The December 31, 2001 Condensed Consolidated Balance Sheet
was derived from the audited balance sheet of the Company for the year then
ended. It is suggested that these condensed consolidated financial
statements and notes thereto be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Form 10-K
for the year ended December 31, 2001. Results of operations in interim
periods are not necessarily indicative of results to be expected for a full
year. Certain prior period financial statement balances have been
reclassified to conform with the current period's classification.
In the past, the Company has reported revenue net of fuel surcharges and
accessorial revenue and has netted amounts against the related expense
items. Effective January 1, 2002, the Company is now including those items
in revenue in its Statement of Operations. The prior period Statement of
Operations has been conformed with the reclassification.
Note 2. Basic and Diluted Net Income per Share
The following table sets forth for the periods indicated the calculation of
net income per share included in the Company's Condensed Consolidated
Statements of Income:
Three months ended Nine months ended
September 30, September 30,
2001 2002 2001 2002
(in thousands except per share data)
Numerator:
Income before extraordinary loss on early
extinguishment of debt $ 845 $ 3,611 $ 1,628 $ 5,814
Extraordinary loss, net of income tax benefit - - - 890
---------- ---------- ---------- ----------
Net income $ 845 $ 3,611 $ 1,628 $ 4,924
Denominator:
Denominator for basic earnings
per share - weighted-average shares 14,009 14,317 13,975 14,171
Effect of dilutive securities:
Employee stock options 224 387 255 294
---------- ---------- ---------- ----------
Denominator for diluted earnings per share -
adjusted weighted-average shares and assumed
conversions 14,233 14,704 14,230 14,465
========== ========== ========== ==========
Net income per share:
Income before extraordinary loss on early
extinguishment of debt $ 0.06 $ 0.25 $ 0.12 $ 0.41
Extraordinary loss, net of income tax effect - - - (0.06)
---------- ---------- ---------- ----------
Total basic earnings per share: $ 0.06 $ 0.25 $ 0.12 $ 0.35
========== ========== ========== ==========
Income before extraordinary loss on early
extinguishment of debt $ 0.06 $ 0.25 $ 0.11 $ 0.40
Extraordinary loss, net of income tax effect - - - (0.06)
---------- ---------- ---------- ----------
Total diluted net income per share: $ 0.06 $ 0.25 $ 0.11 $ 0.34
========== ========== ========== ==========
Page 6
Note 3. Income Taxes
Income tax expense varies from the amount computed by applying the federal
corporate income tax rate of 35% to income before income taxes primarily
due to state income taxes, net of federal income tax effect, and the effect
of the per diem pay structure for drivers.
Note 4. Investment in Transplace
Effective July 1, 2000, the Company combined its logistics business with
the logistics businesses of five other transportation companies into a
company called Transplace, Inc. ("TPC"). TPC operates a global
transportation logistics service and is developing programs for the
cooperative purchasing of products, supplies, and services. In the
transaction, Covenant contributed its logistics customer list, logistics
business software and software licenses, certain intellectual property,
intangible assets totaling approximately $5.1 million, and $5.0 million in
cash for the initial funding of the venture. In exchange, Covenant received
12.4% ownership in TPC. Upon completion of the transaction, Covenant ceased
operating its own transportation logistics and brokerage business, which
consisted primarily of the Terminal Truck Broker, Inc. business acquired in
November 1999. The contributed operation generated approximately $5.0
million in net brokerage revenue (gross revenue less purchased
transportation expense) received on an annualized basis. Initially, the
Company accounted for its 12.4% investment in TPC using the equity method
of accounting. During the third quarter of 2001, TPC changed its filing
status to a C corporation and as a result, management determined it was
appropriate to account for its investment using the cost method of
accounting.
Note 5. Goodwill and Other Intangible Assets
Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets, which requires the Company to evaluate goodwill
and other intangible assets with indefinite useful lives for impairment on
an annual basis, with any resulting impairment recorded as a cumulative
effect of a change in accounting principle. Goodwill that was acquired in
purchase business combinations completed before July 1, 2001, is no longer
amortized after January 1, 2002. Furthermore, any goodwill that is acquired
in a purchase business combination completed after June 30, 2001, will not
be amortized. During the second quarter of 2002, the Company completed its
evaluation of its goodwill for impairment and determined that there was no
impairment. At September 30, 2002, the Company has $11.0 million of
goodwill. Had goodwill not been amortized in previous years, the Company's
net income and net income per share would have been as follows for the
three and nine months ended September 30, 2001:
Three months ended Nine months ended
September 30, 2001 September 30, 2001
----------------------- ----------------------
(in thousands except per share data)
Net income as reported $ 845 $1,628
Add back goodwill amortization 62 186
----------------------- ----------------------
Adjusted net income $ 907 $1,814
======================= ======================
Basic earnings per share:
As reported $0.06 $0.12
Goodwill amortization - 0.01
----------------------- ----------------------
As adjusted $0.06 $0.13
======================= ======================
Diluted earnings per share
As reported $0.06 $0.11
Goodwill amortization - 0.02
----------------------- ----------------------
As adjusted $0.06 $0.13
======================= ======================
Note 6. Derivative Instruments and Other Comprehensive Income
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended by
SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities
- Deferral of the Effective Date of SFAS Statement No. 133, an amendment of
SFAS Statement No. 133, and SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of SFAS Statement
No. 133. SFAS No. 133 requires that all derivative instruments be recorded
on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or in other
comprehensive income, depending on whether a derivative is designated as
part of a hedging relationship and, if it is, depending on the type of
hedging relationship.
Page 7
The Company adopted SFAS No. 133 effective January 1, 2001, but had no
instruments in place on that date. During the first quarter of 2001, the
Company entered into two $10 million notional amount cancelable interest
rate swap agreements to manage the risk of variability in cash flows
associated with floating-rate debt. Due to the counter-parties' imbedded
options to cancel, these derivatives did not qualify, and are not
designated as hedging instruments under SFAS No. 133. Consequently, these
derivatives are marked to fair value through earnings, in other expense in
the accompanying statement of operations. At September 30, 2002, the fair
value of these interest rate swap agreements was a liability of $1.7
million.
The Company uses purchase commitments through suppliers to reduce a portion
of its cash flow exposure to fuel price fluctuations. At September 30,
2002, the notional amount for fixed price normal purchase commitments for
2002, 2003 and 2004 is approximately 9.3 million gallons in the remainder
of 2002, approximately 37.5 million gallons in 2003 and approximately 3.6
million gallons in 2004. In addition, during the third quarter of 2001, the
Company entered into two heating oil commodity swap contracts to hedge its
cash flow exposure to diesel fuel price fluctuations on floating rate
diesel fuel purchase commitments. These contracts are considered highly
effective in offsetting changes in anticipated future cash flows and have
been designated as cash flow hedges under SFAS No. 133. Each calls for 3.0
million gallons of fuel purchases at a fixed price of $0.695 and $0.629 per
gallon before fuel taxes, respectively, through December 31, 2002. These
fuel hedge contracts were effective for the quarter and nine months ended
September 30, 2002. At September 30, 2002, the cumulative fair value of
these heating oil contracts was an asset of $0.6 million, which was
recorded in accrued expenses with the offset to other comprehensive income,
net of taxes.
All changes in the fuel derivatives' fair values were determined to be
effective for measurement and recognition purposes. The entire amount of
gains and losses is expected to be recognized in earnings within the next
three months.
The derivative activity as reported in the Company's financial statements
for the nine months ended September 30, 2002, was (in thousands):
Net derivative liability at December 31, 2001 $ (1,932)
Changes in statements of operations:
Loss on derivative instruments that do not qualify as
hedging instruments:
Beginning liability balance (726)
Loss in value (925)
-----------
Ending derivative liability balance $ (1,651)
===========
Changes in other comprehensive income (loss) relating to fuel
hedge contracts that qualify as cash flow hedges:
Beginning other comprehensive income (loss) (748)
Gain in value 1,780
Change in deferred taxes relating to other
comprehensive income (677)
-----------
Ending other comprehensive income 355
-----------
Deferred taxes 218
-----------
Ending derivative asset balance, gross 573
===========
Net derivative liability at September 30, 2002 $ (1,078)
===========
The following is a summary of comprehensive income for the nine months
ended September 30, 2001 and 2002.
(in thousands) 2001 2002
---------- ----------
Net income $ 1,628 $ 4,924
Other comprehensive income -
Unrealized gain on cash flow hedging
derivatives, net of taxes (99) 1,103
---------- -----------
Comprehensive income $ 1,529 $ 6,027
=========== ==========
Page 8
Note 7. Impairment of Equipment and Change in Estimated Useful Lives
During 2001, the market value of used tractors was significantly below both
historical levels and the carrying values on the Company's financial
statements. The Company extended the trade cycle of its tractors from three
years to four years during 2001, which delayed any significant disposals
into 2002 and later years. The market for used tractors did not improve by
the time the Company negotiated a tractor purchase and trade package with
Freightliner Corporation for calendar years 2002 and 2003 covering the sale
of model year 1998 through 2000 tractors and the purchase of an equal
number of replacement units. The significant difference between the
carrying values and the sale prices of the used tractors combined with the
Company's less profitable results during 2001 caused the Company to test
for asset impairment under applicable accounting rules. In the test, the
Company measured the expected undiscounted future cash flows to be
generated by the tractors over the remaining useful lives and the disposal
value at the end of the useful life against the carrying values. The test
indicated impairment, and during the fourth quarter of 2001 and the first
quarter of 2002, the Company recognized pre-tax charges of approximately
$15.4 million and $3.3 million, respectively, to reflect an impairment in
tractor values. The charges related to the Company's approximately 2,100
model year 1998 through 2000 in-use tractors. The Company incurred a loss
of approximately $324,000 on guaranteed residuals for leased tractors in
the first quarter of 2002, which was recorded in revenue equipment rentals
and purchased transportation in the accompanying statement of operations.
The Company accrued this loss from January 1, 2002, to the date the
tractors were purchased off lease in February 2002.
The approximately 1,400 model year 2001 tractors were not affected by the
impairment charges. The Company has evaluated the 2001 model year tractors
for impairment and determined that such units were not impaired. These
units are not expected to be disposed of for 24 to 36 months following
December 31, 2001. The Company adjusted the depreciation rate of these
model year 2001 tractors to approximate its recent experience with
disposition values and expectation for future disposition values. The
Company also increased the lease expense on its leased units since it
expects to purchase the leased tractors at the end of the three-year leases
and operate them for the last year of its four-year trade cycle. Although
management believes the additional depreciation and lease expense will
bring the carrying values of the model year 2001 tractors in line with
future disposition values, the Company does not have trade-in agreements
covering those tractors. These assumptions represent management's best
estimate and actual values could differ by the time those tractors are
scheduled for trade. Management estimates the impact of the change in the
estimated useful lives and depreciation on the 2001 model year tractors to
be approximately $1.5 million pre-tax or $.06 per share annually.
Note 8. Long-term Debt and Securitization Facility
Long-term debt consisted of the following at December 31, 2001, and
September 30, 2002:
December 31, September 30,
2001 2002
---------------------------------------
(in thousands)
Borrowings under $120 million credit agreement $ 26,000 $ 20,000
10-year senior notes 20,000 -
Notes to unrelated individuals for non-compete
agreements 150 -
Note payable to former SRT shareholder, bearing
interest at 6.5% with interest payable quarterly 3,000 3,000
Total long-term debt 49,150 23,000
Less current maturities 20,150 -
Long-term debt, less current maturities $ 29,000 $ 23,000
In December 2000, the Company entered into a credit agreement (the "Credit
Agreement") with a group of banks with maximum borrowings of $120 million,
which matures December 13, 2003. The Credit Agreement provides a revolving
credit facility with borrowings limited to the lesser of 90% of the net
book value of eligible revenue equipment or $120 million. Letters of credit
are limited to an aggregate commitment of $20 million. The Credit Agreement
is collateralized by an agreement which includes pledged stock of the
Company's subsidiaries, inter-company notes, and licensing agreements. A
commitment fee is charged on the daily unused portion of the facility and
is adjusted quarterly between 0.15% and 0.25% per annum based on the
consolidated leverage ratio. At September 30, 2002, the fee was 0.20% per
annum. The Credit Agreement is guaranteed by all of the Company's
subsidiaries except CVTI Receivables Corporation ("CRC"). 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. As of September 30, 2002, the Company had borrowings
under the Credit Agreement in the amount of $20.0 million with a weighted
average interest rate of 2.8% and outstanding letters of credit of
approximately $19.2 million. The Company had borrowing availability of
$80.8 million under the Credit Agreement.
Page 9
On March 15, 2002, the Company retired its $20 million in senior notes due
October 2005 with an insurance company with borrowings from the Credit
Agreement. The term agreement required payments of interest semi-annually
in arrears with principal payments due in five equal annual installments
beginning October 1, 2001. Interest accrued at 7.39% per annum. The Company
incurred a $0.9 million after-tax extraordinary loss ($1.4 million pre-tax)
to reflect the early extinguishment of this debt in the first quarter of
2002.
At September 30, 2002 and December 31, 2001, the Company had outstanding
letters of credit of approximately $19.2 and $12.6 million, respectively.
Maturities of long term debt at September 30, 2002 were as follows (in
thousands):
2002 $ -
2003 20,000
2004 3,000
In December 2000, the Company entered into a $62 million revolving accounts
receivable securitization facility (the "Securitization Facility"). On a
revolving basis, the Company sells its interests in its accounts receivable
to CRC, a wholly-owned bankruptcy-remote special purpose subsidiary. CRC
sells a percentage ownership in such receivables to an unrelated financial
entity. The transaction does not meet the criteria for sale treatment under
SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities and is reflected as a secured borrowing
in the financial statements.
The Company can receive up to $62 million of proceeds, subject to eligible
receivables and will pay a service fee recorded as interest expense, as
defined in the agreement. The Company will pay commercial paper interest
rates plus an applicable margin on the proceeds received. The
Securitization Facility includes certain significant events that could
cause amounts to be immediately due and payable. The proceeds received are
reflected as a current liability on the consolidated financial statements
because the committed term, subject to annual renewals, is 364 days. As of
September 30, 2002 and December 31, 2001, the Company had received $50.1
million and $48.1 million, respectively, in proceeds, with a weighted
average interest rate of approximately 1.8%.
The Credit Agreement and Securitization Facility contain certain
restrictions and covenants relating to, among other things, dividends,
tangible net worth, cash flow, acquisitions and dispositions, and total
indebtedness and are cross-defaulted. As of September 30, 2002, the Company
was in compliance with the Credit Agreement and Securitization Facility.
Note 9. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
Accounting for Asset Retirement Obligations. SFAS No. 143 provides new
guidance on the recognition and measurement of an asset retirement
obligation and its associated asset retirement cost. It also provides
accounting guidance for legal obligations associated with the retirement of
tangible long-lived assets. SFAS No. 143 is effective for the Company's
fiscal year beginning in 2003 and the Company is still evaluating the
impact on the Company's consolidated financial statements.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS
No. 144 provides new guidance on the recognition of impairment losses on
long-lived assets to be held and used or to be disposed of and also
broadens the definition of what constitutes discontinued operations and how
the results of discontinued operations are to be measured and presented.
SFAS No. 144 is effective for the Company's fiscal year beginning in 2002
and is not expected to materially change the methods used by the Company to
measure impairment losses on long-lived assets.
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections. SFAS No. 145 rescinds SFAS No.
4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment
of that statement, SFAS No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. This statement also rescinds SFAS No. 44,
Accounting for Intangible Assets of Motor Carriers. This statement amends
SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that
are similar to sale-leaseback transactions. In addition, this statement
amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability
under changed conditions. SFAS No. 145 is generally effective for the
Company's fiscal year beginning in 2003 with earlier application
encouraged. The Company has evaluated the impact that this standard will
have on its consolidated financial statements and it will impact
presentation of the loss from early extinguishment of debt.
Page 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The condensed consolidated financial statements include the accounts of Covenant
Transport, Inc., a Nevada holding company, and its wholly-owned subsidiaries
("Covenant" or the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
Except for the historical information contained herein, the discussion in this
quarterly report contains forward-looking statements that involve risk,
assumptions, and uncertainties that are difficult to predict. Statements that
constitute forward-looking statements are usually identified by words such as
"anticipates," "believes," "estimates," "projects," "expects," or similar
expressions. These statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Such statements are based
upon the current beliefs and expectations of the Company's management and are
subject to significant risks and uncertainties. Actual results may differ from
those set forth in the forward-looking statements. The following factors, among
others, could cause actual results to differ materially from those in
forward-looking statements: excess capacity in the trucking industry; decreased
demand for the Company's services or loss of one or more major customers;
surplus inventories; recessionary economic cycles and downturns in customers'
business cycles; strikes or work stoppages; increases or rapid fluctuations in
fuel prices, interest rates, fuel taxes, tolls, and license and registration
fees; increases in the prices paid for new revenue equipment; the resale value
of the Company's used equipment and the price of new equipment; increases in
compensation for and difficulty in attracting and retaining qualified drivers
and owner-operators; increases in insurance premiums or deductible amounts or
claims relating to accident, cargo, workers' compensation, health, and other
matters; seasonal factors such as harsh weather conditions that increase
operating costs; competition from trucking, rail, and intermodal competitors;
regulatory requirements that increase costs or decrease efficiency; and the
ability to identify acceptable acquisition candidates, consummate acquisitions,
and integrate acquired operations. Readers should review and consider the
various disclosures made by the Company in its press releases, stockholder
reports, and public filings, as well as the factors explained in greater detail
in the Company's annual report on Form 10-K.
The Company's freight revenue before fuel surcharges and accessorial revenue
decreased 1.9%, to $403.1 million in the nine months ended September 30, 2002,
from $411.1 million during the same period of 2001. The Company's revenue was
affected by a 3.8% decrease in weighted average number of tractors partially
offset by a 4.1% increase in revenue per tractor per week. The Company has
elected to constrain the size of its fleet until fleet production and
profitability improve.
The Company recognized an approximately $3.3 million pre-tax impairment charge
and an approximately $0.9 million after-tax extraordinary loss to reflect the
early extinguishment of debt in the first quarter of 2002. Excluding the
impairment charge and extraordinary loss, the Company's net income improved to
$7.8 million during the first nine months of 2002 compared to $1.6 million
during the 2001 period. Including the impairment charge and the extraordinary
loss, the Company's net income was $4.9 million for the nine months ended
September 30, 2002.
Covenant reduced the number of teams in its operations during 2001 and into 2002
to better match the demand for expedited long-haul service. The single driver
fleets generally operate fewer miles per tractor and experience a greater
percentage of non-revenue miles. The additional expenses and lower productive
miles are expected to be offset by generally higher revenue per loaded mile and
the reduced employee expense of compensating only one driver. The Company's
operating statistics and expenses are expected to continue to shift in future
periods with the mix of single and team operations.
The Company continues to obtain revenue equipment through its owner-operator
fleet and finance equipment under operating leases. Over the past two years, it
has become more difficult to retain owner-operators due to challenging operating
conditions. The Company's owner-operator fleet decreased to an average of 350 in
the first nine months of 2002 compared to an average of 371 in the 2001 period.
Owner-operators provide a tractor and a driver and are responsible for all
operating expenses in exchange for a fixed payment per mile. The Company does
not have the capital outlay of purchasing the tractor. The Company continues to
use operating leases as a method of financing its equipment. As of September 30,
2002, the Company had financed approximately 636 tractors and 2,631 trailers
under operating leases as compared to 995 tractors and 1,932 trailers under
operating leases as of September 30, 2001. The payments to owner-operators and
the financing of equipment under operating leases are recorded in revenue
equipment rentals and purchased transportation and as a result, expenses
associated with owned equipment, such as interest and depreciation, are not
incurred, and for owner-operator tractors, driver compensation, fuel, and other
expenses are not incurred. Because obtaining equipment from owner-operators and
under operating leases effectively shifts financing expenses from interest to
"above the line" operating expenses, the Company evaluates its efficiency using
net margin rather than operating income.
The Company's tractor leases generally run for a term of three years. With the
company's tractor trade cycle currently at approximately four years, the Company
has been purchasing the leased tractors at the expiration of the lease term,
although there is no commitment to purchase the tractors. To date the purchases
have been financed through the Company's line of credit. The tractors are then
accounted Page 11
for as owned equipment. Trailer leases generally run for a term of seven years
with the first leases expiring in 2005. The Company has not determined whether
it anticipates purchasing trailers at the end of these leases.
The following table sets forth the percentage relationship of certain items to
freight revenue:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- --------------------------------
2001 2002 2001 2002
---------------- ---------------- --------------- ---------------
Freight revenue (1) 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Salaries, wages, and related expenses (1) 42.2 39.5 44.2 40.8
Fuel expense (1) 15.0 15.2 15.4 15.4
Operations and maintenance (1) 7.2 7.5 6.8 7.0
Revenue equipment rentals and purchased
transportation 12.1 10.9 12.4 11.0
Operating taxes and licenses 2.6 2.3 2.6 2.6
Insurance and claims 5.8 5.8 4.7 5.7
Communications and utilities 1.4 1.2 1.4 1.3
General supplies and expenses 2.5 2.6 2.5 2.7
Depreciation and amortization (2) 7.6 8.5 7.4 9.3
---------------- ---------------- --------------- ---------------
Total operating expenses 96.4 93.5 97.4 95.8
---------------- ---------------- --------------- ---------------
Operating income 3.6 6.5 2.6 4.2
Other (income) expense, net 2.0 1.2 1.7 0.9
---------------- ---------------- --------------- ---------------
Income before income taxes 1.6 5.3 0.8 3.3
Income tax expense 1.0 2.6 0.5 1.9
---------------- ---------------- --------------- ---------------
Income before extraordinary loss on early
extinguishment of debt 0.6 2.7 0.4 1.4
Extraordinary loss on early extinguishment of
debt, net of income tax benefit - - - 0.2
---------------- ---------------- --------------- ---------------
Net income 0.6% 2.7% 0.4% 1.2%
================ ================ =============== ===============
(1) Freight revenue is total revenue less fuel surcharge and accessorial
revenue. In this table, fuel surcharge and accessorial revenue are shown
netted against the appropriate expense category. (Salaries, wages, and
related expenses, $1.4 million and $1.9 million in the three months ended
September 30, 2001, and 2002, respectively. Fuel expense, $5.4 million and
$3.5 million in the three months ended September 30, 2001, and 2002,
respectively. Operations and maintenance, $0.4 million and $0.6 million in
the three months ended September 30, 2001, and 2002, respectively.
Salaries, wages, and related expenses, $3.9 million and $5.1 million in the
nine months ended September 30, 2001, and 2002, respectively. Fuel expense,
$16.8 million and $8.0 million in the nine months ended September 30, 2001,
and 2002, respectively. Operations and maintenance, $1.2 million and $1.5
million in the nine months ended September 30, 2001, and 2002,
respectively.)
(2) Includes a $3.3 million pre-tax impairment charge or 1.2% of revenue in the
nine months ended September 30, 2002.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2002 TO THREE MONTHS ENDED
SEPTEMBER 30, 2001
Freight revenue (total revenue before fuel surcharge and accessorial revenue)
decreased $2.8 million (2.0%), to $135.3 million in the three months ended
September 30, 2002, from $138.1 million in the same period of 2001. The
Company's revenue was affected by a 2.6% decrease in weighted average number of
tractors partially offset by a 1.6% increase in revenue per tractor per week to
$2,819 in the 2002 period from $2,774 in the 2001 period. Weighted average
tractors decreased to 3,639 in the 2002 period from 3,738 in the 2001 period.
The Company has elected to constrain the size of its tractor fleet until fleet
production and profitability improve.
Salaries, wages, and related expenses, net of accessorial revenue of $1.9
million in the 2002 period and $1.4 million in the 2001 period, decreased $4.8
million (8.3%), to $53.4 million in the 2002 period, from $58.3 million in the
2001 period. As a percentage of freight revenue, salaries, wages, and related
expenses decreased to 39.5% in the 2002 period, from 42.2% in the 2001 period.
Wages for over the road drivers as a percentage of freight revenue decreased to
27.8% in the 2002 period from 30.0% in the 2001 period. The decrease was largely
attributable to the Company utilizing a larger percentage of single-driver
tractors, with only one driver per tractor to be compensated, implementing
changes in its pay structure and implementing a per diem pay program for its
drivers during August 2001. The Company's payroll expense for employees other
than over the road drivers increased to 7.3% of freight revenue in the 2002
Page 12
period from 6.9% of freight revenue in the 2001 period. Health insurance,
employer-paid taxes, workers' compensation, and other employee benefits
decreased to 5.8% in the 2002 period from 6.4% in the 2001 period, partially due
to paying lower taxes due to lower payroll amounts and improving claims
experience in the Company's health insurance plan.
Fuel expense, net of fuel surcharge revenue of $3.5 million in the 2002 period
and $5.4 million in the 2001 period, decreased $0.2 million (1.0%), to $20.6
million in the 2002 period, from $20.8 million in the 2001 period. As a
percentage of freight revenue, net fuel expense remained relatively constant at
15.2% in the 2002 period and 15.0% in the 2001 period. Fuel surcharges amounted
to $.033 per loaded mile in the 2002 period compared to $.048 per loaded mile in
the 2001 period. Fuel costs may be affected in the future by the Company's fuel
hedging and volume purchase commitments from time-to-time and the collectibility
of fuel surcharges, as well as by lower fuel mileage if government mandated
emissions standards effective October 1, 2002 result in less fuel efficient
engines.
Operations and maintenance consist primarily of vehicle maintenance, repairs and
driver recruitment expenses. Net of accessorial revenue of $0.6 million in the
2002 period and $0.4 million in the 2001 period, operations and maintenance
increased $0.2 million (2.0%), to $10.1 million in the 2002 period, from $10.0
million in the 2001 period. As a percentage of freight revenue, operations and
maintenance increased to 7.5% in the 2002 period, from 7.2% in the 2001 period.
The Company extended the trade cycle on its tractor fleet from three years to
four years, which resulted in an increase in the number of required repairs.
Revenue equipment rentals and purchased transportation decreased $2.0 million
(11.9%), to $14.7 million in the 2002 period, from $16.7 million in the 2001
period. As a percentage of freight revenue, revenue equipment rentals and
purchased transportation decreased to 10.9% in the 2002 period from 12.1% in the
2001 period. The decrease was the result of lower lease expense during the
quarter (3.1% of freight revenue in 2002 compared to 4.3% of freight revenue in
2001). As of September 30, 2002, the Company had financed approximately 636
tractors and 2,631 trailers under operating leases as compared to 995 tractors
and 1,932 trailers under operating leases as of September 30, 2001. The lease
expense per tractor will increase in future periods. See Note 7 to the Condensed
Consolidated Financial Statements. Owner-operator expense, which also is
included in this expense category, remained essentially constant at 7.8% of
freight revenue in the 2002 and 2001 periods. Owner-operators are independent
contractors, who provide a tractor and driver and cover all of their operating
expenses in exchange for a fixed payment per mile. Accordingly, expenses such as
driver salaries, fuel, repairs, depreciation, and interest normally associated
with Company-owned equipment are consolidated in revenue equipment rentals and
purchased transportation when owner-operators are utilized.
Operating taxes and licenses decreased $0.5 million (12.5%), to $3.2 million in
the 2002 period, from $3.6 million in the 2001 period. As a percentage of
freight revenue, operating taxes and licenses decreased to 2.3% in the 2002
period, from 2.6% in the 2001 period.
Insurance and claims, consisting primarily of premiums and deductible amounts
for liability, physical damage, and cargo damage insurance and claims, decreased
$0.2 million (1.9%), to $7.8 million in the 2002 period from $8.0 million in the
2001 period. As a percentage of freight revenue, insurance remained constant at
5.8% of freight revenue in the 2002 and 2001 periods. The Company addressed an
industry-wide increase in insurance rates by adopting an insurance program with
significantly higher deductible exposure that is partially offset by lower
premium rates. The deductible amount increased from $5,000 in 2000, to $250,000
in 2001, to $500,000 in March of 2002, to $1.0 million in November of 2002. On
July 15, 2002, the Company obtained binders for excess insurance coverage up to
$50.0 million with a $500,000 aggregate deductible for liability, physical
damage, and cargo claims per incident. During the third quarter, the Company
sought replacement excess coverage after the insurance agent failed to produce
proof of insurance on the policies for which the Company had obtained binders as
of July 15, 2002. The replacement coverage is for an aggregate $4.0 million of
insurance coverage with a $1.0 million aggregate deductible for liability,
physical damage, and cargo claims per incident. The new policy increases the
Company's exposure for claims both within the deductible limit and in excess of
the maximum coverage. The Company's premium expense will decrease by
approximately 40%. The Company intends to pursue its legal rights against the
insurance agent and its errors and omissions policy. The Company accrues the
estimated cost of the uninsured portion of pending claims. These accruals are
based on management's evaluation of the nature and severity of the claim and
estimates of future claims development based on historical trends. Insurance and
claims expense will vary based on the frequency and severity of claims, the
premium expense, and the level of self insured retention.
Communications and utilities expense decreased $0.4 million (21.5%), to $1.6
million in the 2002 period, from $2.0 million in the 2001 period. As a
percentage of freight revenue, communications and utilities decreased to 1.2% in
the 2002 period, from 1.4% in the 2001 period.
General supplies and expenses, consisting primarily of headquarters and other
terminal facilities expenses, increased $0.2 million (6.6%), to $3.6 million in
the 2002 period, from $3.4 million in the 2001 period. As a percentage of
freight revenue, general supplies and expenses remained essentially constant at
2.6% and 2.5% of freight revenue in the 2002 and 2001 periods, respectively.
Depreciation and amortization, consisting primarily of depreciation of revenue
equipment, increased $1.0 million (9.8%), to $11.5 million in the 2002 period
from $10.5 million in the 2001 period. As a percentage of freight revenue,
depreciation and amortization increased to 8.5% in the 2002 period from 7.6% in
the 2001 period. The Company has increased the annual depreciation expense on
Page 13
the 2001 model year tractors to approximate the Company's recent experience with
disposition values and expectation for future disposition values. In addition,
depreciation expense is expected to rise in the future as the cost of new
tractors has increased and the residual value has decreased. Depreciation and
amortization expense is net of any gain or loss on the disposal of tractors and
trailers. Loss on the disposal of tractors and trailers was approximately $0.3
million in the 2002 period compared to approximately $0.1 million in the 2001
period. Amortization expense relates to deferred debt costs incurred and
covenants not to compete from five acquisitions. Goodwill amortization ceased
beginning January 1, 2002, in accordance with SFAS No. 142, and the Company will
evaluate goodwill and certain intangibles for impairment, annually prospectively
beginning in 2002. During the second quarter of 2002, the Company completed its
analysis of goodwill for impairment and concluded there was no impairment. The
favorable impact of goodwill no longer being amortized was approximately $75,000
for the three months ended September 30, 2002.
Other expense, net, decreased $1.1 million (41.6%), to $1.6 million in the 2002
period, from $2.7 million in the 2001 period. As a percentage of freight
revenue, other expense decreased to 1.2% in the 2002 period from 2.0% in the
2001 period. The decrease was the result of lower debt balances and more
favorable interest rates. Included in the other expense category are interest
expense, interest income, and the pre-tax non-cash losses related to the
accounting for interest rate derivatives under SFAS 133, which amounted to $0.7
million in the 2002 period and $0.9 million in the 2001 period.
The Company's income tax expense for the 2002 period was $3.6 million or 49.8%
of income before taxes. The Company's income tax expense for the 2001 period was
$1.4 million or 62.0% of income before taxes. The effective tax rate is
different from the expected combined tax rate due to permanent differences
related to a per diem pay structure implemented during the third quarter of
2001. Due to the nondeductible portion of per diem expenses, the Company's tax
rate will fluctuate in future periods as income fluctuates.
Primarily as a result of the factors described above, net income increased $2.8
million (327.3%), to $3.6 million in the 2002 period (2.7% of revenue) from $0.8
million in the 2001 period (0.6% of revenue).
As a result of the foregoing, the Company's net margin increased to 2.7% in the
2002 period from 0.6% in the 2001 period.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2002 TO NINE MONTHS ENDED
SEPTEMBER 30, 2001
Freight revenue (total revenue before fuel surcharge and accessorial revenue)
decreased $7.9 million (1.9%), to $403.1 million in the nine months ended
September 30, 2002, from $411.1 million in the same period of 2001. The
Company's revenue was affected by a 3.8% decrease in weighted average tractors
partially offset by a 4.1% increase in revenue per tractor per week, to $2,796
in the 2002 period from $2,685 in the 2001 period. Weighted average tractors
decreased to 3,679 in the 2002 period from 3,823 in the 2001 period. The Company
has elected to constrain the size of its tractor fleet until fleet production
and profitability improve.
Salaries, wages, and related expenses, net of accessorial revenue of $5.1
million in the 2002 period and $3.9 million in the 2001 period, decreased $17.0
million (9.4%), to $164.6 million in the 2002 period, from $181.6 million in the
2001 period. As a percentage of freight revenue, salaries, wages, and related
expenses decreased to 40.8% in the 2002 period, from 44.2% in the 2001 period.
Wages for over the road drivers as a percentage of freight revenue decreased to
28.5% in 2002 from 31.5% in 2001. The decrease was largely attributable to the
Company utilizing a larger percentage of single-driver tractors, with only one
driver per tractor to be compensated, implementing changes in its pay structure
and implementing a per diem pay program for its drivers during August 2001. The
Company's payroll expense for employees other than over the road drivers
increased to 7.1% of freight revenue in the 2002 period from 6.7% of freight
revenue in the 2001 period. Health insurance, employer-paid taxes, workers'
compensation, and other employee benefits decreased to 6.5% of freight revenue
in the 2002 period from 6.9% of freight revenue in the 2001 period, partially
due to paying lower taxes due to lower payroll amounts and improving claims
experience in the Company's health insurance plan.
Fuel expense, net of fuel surcharge revenue of $8.0 million in the 2002 period
and $16.8 million in the 2001 period, decreased $1.1 million (1.8%), to $62.2
million in the 2002 period, from $63.3 million in the 2001 period. As a
percentage of freight revenue, net fuel expense remained constant at 15.4% in
the 2002 and 2001 periods. Fuel surcharges amounted to $.024 per loaded mile in
the 2002 period compared to $.050 per loaded mile in the 2001 period. Fuel costs
may be affected in the future by the Company's fuel hedging and volume purchase
commitments from time-to-time and the collectibility of fuel surcharges, as well
as by lower fuel mileage if government mandated emissions standards effective
October 1, 2002, result in less fuel efficient engines.
Operations and maintenance consist primarily of vehicle maintenance, repairs and
driver recruitment expenses. Net of accessorial revenue of $1.5 million in the
2002 period and $1.2 million in the 2001 period, operations and maintenance
increased $0.4 million (1.5%), to $28.3 million in the 2002 period, from $27.9
million in the 2001 period. As a percentage of freight revenue, operations and
maintenance increased to 7.0% in the 2002 period, from 6.8% in the 2001 period.
The Company extended the trade cycle on its tractor fleet from three years to
four years, which resulted in an increase in the number of required repairs.
Revenue equipment rentals and purchased transportation decreased $6.6 million
(12.9%), to $44.4 million in the 2002 period, from $50.9 million in the 2001
period. As a percentage of freight revenue, revenue equipment rentals and
purchased transportation
Page 14
decreased to 11.0% in the 2002 period from 12.4% in the 2001 period. The
decrease was the result of a smaller fleet of owner-operators during 2002 (an
average of 350 in 2002 compared to an average of 371 in 2001) and lower lease
payments during the nine month period (3.4% of freight revenue in the 2002
period compared to 4.1% of freight revenue in the 2001 period). The smaller
fleet resulted in lower payments to owner-operators (7.6% of freight revenue in
2002 compared to 8.3% of freight revenue in 2001). Owner-operators are
independent contractors, who provide a tractor and driver and cover all of their
operating expenses in exchange for a fixed payment per mile. Accordingly,
expenses such as driver salaries, fuel, repairs, depreciation, and interest
normally associated with Company-owned equipment are consolidated in revenue
equipment rentals and purchased transportation when owner-operators are
utilized. As of September 30, 2002, the Company had financed approximately 636
tractors and 2,631 trailers under operating leases as compared to 995 tractors
and 1,932 trailers under operating leases as of September 30, 2001. The lease
expense per tractor will increase in future periods. See Note 7 to the Condensed
Consolidated Financial Statements.
Operating taxes and licenses decreased $0.6 million (5.8%), to $10.4 million in
the 2002 period, from $11.0 million in the 2001 period. As a percentage of
freight revenue, operating taxes and licenses remained constant at 2.6% in the
2002 and 2001 periods.
Insurance and claims, consisting primarily of premiums and deductible amounts
for liability, physical damage, and cargo damage insurance and claims, increased
$3.5 million (18.3%), to $22.8 million in the 2002 period from $19.3 million in
the 2001 period. As a percentage of freight revenue, insurance increased to 5.7%
in the 2002 period from 4.7% in the 2001 period. The increase is a result of an
industry-wide increase in insurance rates, which the Company addressed by
adopting an insurance program with significantly higher deductible exposure that
is partially offset by lower premium rates. The deductible amount increased from
$5,000 in 2000, to $250,000 in 2001, to $500,000 in March of 2002, to $1.0
million in November of 2002. On July 15, 2002, the Company obtained binders for
excess insurance coverage up to $50.0 million with a $500,000 aggregate
deductible for liability, physical damage, and cargo claims per incident. During
the third quarter, the Company sought replacement excess coverage after the
insurance agent failed to produce proof of insurance on the policies for which
the Company had obtained binders as of July 15, 2002. The replacement coverage
is for an aggregate $4.0 million of insurance coverage with a $1.0 million
aggregate deductible for liability, physical damage, and cargo claims per
incident. The new policy increases the Company's exposure for claims both within
the deductible limit and in excess of the maximum coverage. The Company's
premium expense will decrease by approximately 40%. The Company intends to
pursue its legal rights against the insurance agent and its errors and omissions
policy. The Company accrues the estimated cost of the uninsured portion of
pending claims. These accruals are based on management's evaluation of the
nature and severity of the claim and estimates of future claims development
based on historical trends. Insurance and claims expense will vary based on the
frequency and severity of claims, the premium expense, and the level of self
insured retention.
Communications and utilities expense decreased $0.5 million (9.6%), to $5.1
million in the 2002 period, from $5.6 million in the 2001 period. As a
percentage of freight revenue, communications and utilities remained essentially
constant at 1.3% and 1.4% in the 2002 and 2001 periods, respectively.
General supplies and expenses, consisting primarily of headquarters and other
terminal facilities expenses, increased $0.4 million (3.6%), to $10.7 million in
the 2002 period, from $10.4 million in the 2001 period. As a percentage of
freight revenue, general supplies and expenses increased to 2.7% in the 2002
period, from 2.5% in the 2001 period.
Depreciation, amortization and impairment charge, consisting primarily of
depreciation of revenue equipment, increased $7.1 million (23.2%), to $37.5
million in the 2002 period from $30.4 million in the 2001 period. As a
percentage of freight revenue, depreciation and amortization increased to 9.3%
in the 2002 period from 7.4% in the 2001 period. The increase is the result of a
$3.3 million pre-tax impairment charge, increased depreciation expense and
losses on the sale of equipment. The impairment charge is related to
approximately 327 model year 1998 through 2000 in use tractors. See "Impairment
of Tractor Values and Future Expense" below for additional information. The
Company's approximately 1,400 model year 2001 tractors were not affected by the
charge. The Company has increased the annual depreciation expense on the 2001
model year tractors to approximate the Company's recent experience with
disposition values and expectation for future disposition values. In addition,
depreciation expense is expected to rise in the future as the cost of new
tractors has increased and the residual value has decreased. Depreciation and
amortization expense is net of any gain or loss on the disposal of tractors and
trailers. Loss on the disposal of tractors and trailers was approximately $1.6
million in the 2002 period compared to a $16,000 loss in the 2001 period.
Amortization expense relates to deferred debt costs incurred and covenants not
to compete from five acquisitions. Goodwill amortization ceased beginning
January 1, 2002, in accordance with SFAS No. 142, and the Company will evaluate
goodwill and certain intangibles for impairment, annually prospectively
beginning in 2002. During the second quarter of 2002, the Company tested its
goodwill for impairment and found no impairment. The positive impact of goodwill
no longer being amortized was approximately $230,000 for the nine months ended
September 30, 2002.
Other expense, net, decreased $3.5 million (48.5%), to $3.7 million in the 2002
period, from $7.2 million in the 2001 period. As a percentage of freight
revenue, other expense decreased to 0.9% in the 2002 period from 1.7% in the
2001 period. The decrease was the result of lower debt balances and more
favorable interest rates. Included in the other expense category are interest
expense, interest income, and the pre-tax non-cash losses related to the
accounting for interest rate derivatives under SFAS No. 133, which amounted to
$0.9 million in the 2002 and 2001 periods.
Page 15
The Company's income tax expense for the nine months ended September 30, 2002
was $7.7 million or 56.9% of income before taxes. The Company's income tax
expense for the 2001 period was $1.9 million or 53.3% of income before taxes.
The effective tax rate is different from the expected combined tax rate due to
permanent differences related to a per diem pay structure implemented during the
third quarter of 2001. Due to the nondeductible effect of per diem, the
Company's tax rate will fluctuate in future periods as income fluctuates.
Primarily as a result of the factors described above, net income increased $3.3
million (202.6%), to $4.9 million in the 2002 period (1.2% of revenue) from $1.6
million in the 2001 period (0.4% of revenue).
As a result of the foregoing, the Company's net margin increased to 1.2% in the
2002 period from 0.4% in the 2001 period.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's growth has required significant capital investments.
The Company historically has financed its expansion requirements with borrowings
under a line of credit, cash flows from operations, long-term operating leases,
and borrowings under installment notes payable to commercial lending
institutions and equipment manufacturers. The Company's primary sources of
liquidity at September 30, 2002, were funds provided by operations, proceeds
under the Securitization Facility (as defined below), borrowings under its
primary credit agreement, which had maximum available borrowing of $120.0
million at September 30, 2002 (the "Credit Agreement") and operating leases of
revenue equipment. The Company believes its sources of liquidity are adequate to
meet its current and projected needs for at least the next twelve months.
Net cash provided by operating activities was $55.7 million in the 2002 period
and $51.5 million in the 2001 period. The 2001 period included an unusually
large collection of receivables that had resulted from billing problems during
2000. In 2002, there was an increase in depreciation and amortization which
included a $3.3 million pre-tax impairment charge as well as an increase in
claims accruals as the Company increased its self insured retention amounts.
Net cash used in investing activities was $33.4 million in the 2002 period and
$37.4 million in the 2001 period. Net cash used in investing activities in 2002
related to the purchase of tractors, which were previously financed through
operating leases, and the acquisition of new revenue equipment (net of
trade-ins) using proceeds from the Credit Agreement. In 2001, approximately $15
million was related to the financing of the Company's headquarters facility,
which was previously financed through an operating lease that expired in March
2001. The Company financed the facility using proceeds from the Credit
Agreement. The Company agreed to purchase and trade approximately 1,000 tractors
during 2002, of which approximately half of the trade package was completed
during the third quarter of 2002. The Company expects to complete the trade
package during the fourth quarter of 2002 and also will purchase approximately
300 trailers during the fourth quarter. The Company expects capital
expenditures, primarily for revenue equipment (net of trade-ins) to be
approximately $30.0 million in the fourth quarter of 2002 and approximately $80
million in 2003, in each case exclusive of acquisitions.
Net cash used in financing activities was $21.6 million in the 2002 period and
$15.3 million in the 2001 period. At September 30, 2002, the Company had
outstanding debt of $73.1 million, primarily consisting of $50.1 million in the
Securitization Facility and $20.0 million drawn under the Credit Agreement.
Interest rates on this debt range from 1.8% to 6.5%.
During the first quarter of 2002, the Company prepaid the remaining $20.0
million in previously outstanding 7.39% ten year private placement notes with
borrowings from the Credit Agreement. In conjunction with the prepayment of the
borrowings, the Company recognized an approximate $0.9 million after-tax
extraordinary loss to reflect the early extinguishment of debt.
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 September 30, 2002, the
margin was 1.00%. The Credit Agreement is guaranteed by the Company and all of
the Company's subsidiaries except CVTI Receivables Corp ("CRC").
The Credit Agreement has a maximum borrowing limit of $120.0 million. Borrowings
related to revenue equipment are limited to the lesser of 90% of net book value
of revenue equipment or $120.0 million. Letters of credit are limited to an
aggregate commitment of $20.0 million. The Credit Agreement includes a "security
agreement" such that the Credit Agreement may be collateralized by virtually all
assets of the Company if a covenant violation occurs. A commitment fee, that is
adjusted quarterly between 0.15% and 0.25% per annum based on cash flow
coverage, is due on the daily unused portion of the Credit Agreement. As of
September 30, 2002, the Company had borrowings under the Credit Agreement in the
amount of $20.0 million with a weighted average interest rate of 2.8% and the
Company had borrowing availability of $80.8 million under the Credit Agreement.
Page 16
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 incorporated in
Nevada. CRC sells a percentage ownership in such receivables to an unrelated
financial entity. The Company can receive up to $62 million of proceeds, subject
to eligible receivables, and will pay a service fee recorded as interest
expense, based on commercial paper interest rates plus an applicable margin of
0.41% per annum and a commitment fee of 0.10% per annum on the daily unused
portion of the Facility. The Securitization Facility is collateralized by the
receivables of CRC. The net proceeds under the Securitization Facility are
required to be shown as a current liability because the term, subject to annual
renewals, is 364 days. The transaction did not meet the criteria for sale
treatment under SFAS No. 140 and is reflected as a secured borrowing in the
financial statements. As of September 30, 2002, there were $50.1 million in
borrowings outstanding.
The Credit Agreement and Securitization Facility contain certain restrictions
and covenants relating to, among other things, dividends, tangible net worth,
cash flow, acquisitions and dispositions, and total indebtedness. These
agreements are cross-defaulted.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
decisions based upon estimates, assumptions, and factors it considers as
relevant to the circumstances. Such decisions include the selection of
applicable accounting principles and the use of judgment in their application,
the results of which impact reported amounts and disclosures. Changes in future
economic conditions or other business circumstances may affect the outcomes of
management's estimates and assumptions. Accordingly, actual results could differ
from those anticipated. A summary of the significant accounting policies
followed in preparation of the financial statements is contained in Note 1 of
the financial statements contained in the Company's annual report on Form 10-K.
Other footnotes describe various elements of the financial statements and the
assumptions on which specific amounts were determined.
The Company's critical accounting policies include the following:
Revenue Recognition - Freight revenue, drivers' wages and other direct operating
expenses are recognized on the date shipments are delivered to the customer.
Property and Equipment - Depreciation is calculated using the straight-line
method over the estimated useful lives of the assets. Revenue equipment has been
depreciated over five to eight years with salvage values ranging from 18% to
48%. Gains or losses on disposal of revenue equipment are included in the
caption entitled depreciation, amortization and impairment charge in the
statements of operations. Impairment can be impacted by management's estimate of
the property and equipment's useful lives.
Impairment of Long-Lived Assets - Long-lived assets to be disposed of are
reported at the lower of the carrying value or the fair value less costs to
sell. The Company evaluates the carrying value of long-lived assets held for use
for impairment losses by analyzing the operating performance and future cash
flows for those assets, whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable. The Company
adjusts the carrying value of the underlying assets if the sum of expected
undiscounted cash flows is less than the carrying value. Impairment can be
impacted by management's projection of future cash flows, the level of cash
flows and salvage values, the methods of estimation used for determining fair
values and the impact of guaranteed residuals.
Insurance and Other Claims - The Company's insurance program for liability,
workers' compensation, group medical, property damage, cargo loss and damage,
and other sources involves self insurance with high risk retention levels. In
2001, the Company adopted an insurance program with significantly higher
deductibles. The deductible amount increased from $5,000 in 2000, to $250,000 in
2001, to $500,000 in March of 2002, to $1.0 million in November of 2002. On July
15, 2002, the Company obtained binders for excess insurance coverage up to $50.0
million with a $500,000 aggregate deductible for liability, physical damage, and
cargo claims per incident. During the third quarter, the Company sought
replacement excess coverage after the insurance agent failed to produce proof of
insurance on the policies for which the Company had obtained binders as of July
15, 2002. The replacement coverage is for an aggregate $4.0 million of insurance
coverage with a $1.0 million aggregate deductible for liability, physical
damage, and cargo claims per incident. The new policy increases the Company's
exposure for claims both within the deductible limit and in excess of the
maximum coverage. The Company's premium expense will decrease by approximately
40%. The Company intends to pursue its legal rights against the insurance agent
and its errors and omissions policy. The Company accrues the estimated cost of
the uninsured portion of pending claims. These accruals are based on
management's evaluation of the nature and severity of the claim and estimates of
future claims development based on historical trends. Insurance and claims
expense will vary based on the frequency and severity of claims, the premium
expense and the level of self insured retention.
Derivative Instruments and Hedging Activities - From time-to-time, the Company
engages in activities that expose it to market risks, including the effects of
changes in interest rates and fuel prices. Financial exposures are managed as an
integral part of the Company's risk management program, which seeks to reduce
potentially adverse effects that the volatility of the interest rate and fuel
markets may
Page 17
have on operating results. Hedging activities could defer the recognition of
losses to future periods. All derivatives are recognized on the balance sheet at
their fair values. The Company also formally assesses, both at the hedge's
inception and on an ongoing basis, whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes in fair values
or cash flows of hedged items. When it is determined that a derivative is not
highly effective as a hedge or that it has ceased to be a highly effective
hedge, the Company discontinues hedge accounting prospectively.
When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair-value hedge, the Company
continues to carry the derivative on the balance sheet at its fair value, and no
longer adjusts the hedged asset or liability for changes in fair value. The
adjustment of the carrying amount of the hedged asset or liability is accounted
for in the same manner as other components of the carrying amount of that asset
or liability. When hedge accounting is discontinued because the hedged item no
longer meets the definition of a firm commitment, the Company continues to carry
the derivative on the balance sheet at its fair value, removes any asset or
liability that was recorded pursuant to recognition of the firm commitment from
the balance sheet and recognizes any gain or loss in earnings. When hedge
accounting is discontinued because it is probable that a forecasted transaction
will not occur, the Company continues to carry the derivative on the balance
sheet at its fair value, and gains and losses that were accumulated in other
comprehensive income are recognized immediately in earnings. In all other
situations in which hedge accounting is discontinued, the Company continues to
carry the derivative at its fair value on the balance sheet, and recognizes any
changes in its fair value in earnings. The Company does not regularly engage in
speculative transactions, nor does it regularly hold or issue financial
instruments for trading purposes.
Lease Accounting - The Company leases a significant portion of its tractor and
trailer fleet using operating leases. Substantially all of the leases have
residual value guarantees under which the Company must insure that the lessor
receives a negotiated amount for the equipment at the expiration of the lease.
In accordance with SFAS No. 13, Accounting for Leases, the rental expense under
these leases is reflected as an operating expense under "revenue equipment
rentals and purchased transportation." Operating leases are carried off balance
sheet in accordance with SFAS No. 13.
Contractual Obligations and Commitments - The Company had commitments
outstanding related to equipment, debt obligations, and diesel fuel purchases as
of January 1, 2002. Contractual commitments changed during the first quarter of
2002 as a result of the payoff of senior notes with proceeds from the Credit
Agreement, and the purchase of 327 tractors off lease in February, 2002. The
Company had commitments to acquire revenue equipment for approximately $154
million at December 31, 2001. These purchases are expected to be financed by
debt, proceeds from sales of existing equipment, and cash flows from operations.
The Company has the option to cancel such commitments with 60 days notice.
The following table sets forth the Company's contractual cash obligations and
commitments as of January 1, 2002.
Payments Due By Period There-
(in thousands) Total 2002 2003 2004 2005 2006 after
---------------------------------------------------------------------------------------
Long Term Debt $49,150 $20,150 $26,000 $3,000 $ - $ - $ -
Short Term Debt 48,130 48,130 - - - - -
Operating Leases 68,517 20,137 15,393 7,944 7,151 6,789 11,103
Lease residual value guarantees 55,153 15,720 19,562 - 423 2,348 17,100
Purchase Obligations:
Diesel fuel 68,147 31,427 36,720 - - - -
Equipment 153,698 72,298 81,400 - - - -
---------------------------------------------------------------------------------------
Total Contractual Cash
Obligations $442,795 $207,862 $179,075 $10,944 $7,574 $9,137 $28,203
=======================================================================================
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 drivers. Innovations in equipment technology and
comfort along with government-mandated emissions standards and an increase in
Page 18
market prices generally have resulted in higher new 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 in fuel expense usually are not fully recovered. In the fourth
quarter of 1999, fuel prices escalated rapidly and have remained high throughout
most of 2000, 2001, and into 2002. 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.
IMPAIRMENT OF TRACTOR VALUES AND FUTURE EXPENSE
During 2001, the market value of used tractors was significantly below both
historical levels and the carrying values on the Company's financial statements.
The Company extended the trade cycle of its tractors from three years to four
years during 2001, which delayed any significant disposals into 2002 and later
years. The market for used tractors did not improve by the time the Company
negotiated a tractor purchase and trade package with Freightliner Corporation
for calendar years 2002 and 2003 covering the sale of model year 1998 through
2000 tractors and the purchase of an equal number of replacement units. The
significant difference between the carrying values and the sale prices of the
used tractors combined with the Company's less profitable results during 2001
caused the Company to test for asset impairment under applicable accounting
rules. In the test, the Company measured the expected undiscounted future cash
flows to be generated by the tractors over the remaining useful lives and the
disposal value at the end of the useful life against the carrying values. The
test indicated impairment, and during the fourth quarter of 2001, and the first
quarter of 2002, the Company recognized pre-tax charges of approximately $15.4
million and $3.3 million, respectively, to reflect an impairment in tractor
values. The charges related to the Company's approximately 2,100 model year 1998
through 2000 in-use tractors.
The approximately 1,400 model year 2001 tractors were not affected by the
impairment charges. The Company has evaluated the 2001 model year tractors for
impairment and determined that such units were not impaired. These units are not
expected to be disposed of for 24 to 36 months following December 31, 2001. The
Company has adjusted the depreciation rate of its owned model year 2001 tractors
to approximate its recent experience with disposition values and expectation
concerning future disposition values. The Company also increased the lease
expense on its leased units since it expects to purchase the leased tractors at
the end of the three-year leases and operate them for the last year of its
four-year trade cycle. Although management believes the additional depreciation
will bring the carrying values of the model year 2001 tractors in line with
future disposition values, the Company does not have trade-in agreements
covering those tractors. See Note 7 to the Condensed Consolidated Financial
Statements. These assumptions represent management's best estimate and actual
values could differ by the time those tractors are scheduled for trade.
Management estimates the impact of the change in the estimated useful lives and
depreciation on the 2001 model year tractors to be approximately $1.5 million
pre-tax or $.06 per share annually.
Because of the adverse change from historical purchase prices and residual
values, the annual expense per tractor on model year 2003 and 2004 tractors is
expected to be higher than the annual expense on the model year 1999 and 2000
units being replaced. Management expects the increase in depreciation expense to
be approximately one-half cent per mile pre-tax during the first year and grow
to approximately one cent per mile pre-tax as all of these new units are
delivered. By the time the model year 2001 tractors are traded and the entire
fleet is converted, management expects the total increase in expense to be
approximately one and one-half cent pre-tax per mile. If the tractors are leased
instead of purchased, the references to increased depreciation would be
reflected as additional lease expense.
Page 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks from changes in (i) certain commodity
prices and (ii) certain interest rates on its debt.
COMMODITY PRICE RISK
Prices and availability of all petroleum products are subject to political,
economic, and market factors that are generally outside the Company's control.
Because the Company's operations are dependent upon diesel fuel, significant
increases in diesel fuel costs could materially and adversely affect the
Company's results of operations and financial condition. Historically, the
Company has been able to recover a portion of short-term fuel price increases
from customers in the form of fuel surcharges. The price and availability of
diesel fuel can be unpredictable as well as the extent to which fuel surcharges
could be collected to offset such increases. For the first nine months of 2002,
diesel fuel expenses net of fuel surcharge represented 15.5% of the Company's
total operating expenses and 15.4% of freight revenue. The Company uses purchase
commitments through suppliers to reduce a portion of its exposure to fuel price
fluctuations. At September 30, 2002, the national average price of diesel fuel
as provided by the U.S. Department of Energy was $1.438 per gallon. At September
30, 2002, the notional amount for purchase commitments during 2002 was 9.3
million gallons. At September 30, 2002, the price of the notional 9.3 million
gallons would have produced approximately $2.1 million of income to offset fuel
expense if the price of fuel remained the same as of September 30, 2002. At
September 30, 2002, a ten percent increase in the price of fuel would produce an
additional $1.3 million of income to offset fuel expense. At September 30, 2002,
a ten percent change in the price of fuel would increase or decrease the gain on
fuel purchase commitments by approximately $1.3 million. In addition, during the
third quarter of 2001, the Company entered into two heating oil commodity swap
contracts to hedge its exposure to diesel fuel price fluctuations. These
contracts are considered highly effective and each calls for 1.5 million gallons
of fuel purchases at fixed prices of $0.695 and $0.629 per gallon, respectively,
through the remainder of 2002. At September 30, 2002 the cumulative fair value
of these heating oil contracts was an asset of $0.6 million, which was recorded
in accrued expenses with the offset to other comprehensive loss, net of taxes.
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%. During
the first quarter of 2001, the Company entered into two $10 million notional
amount interest rate swap agreements to manage the risk of variability in cash
flows associated with floating-rate debt. At September 30, 2002, the Company had
drawn $20 million under the Credit Agreement, which was subject to the interest
rate swaps that fixed the interest rates at 5.16% and 4.75% plus the applicable
margin per annum. The swaps expire January 2006 and March 2006. These
derivatives are not designated as hedging instruments under SFAS No. 133 and
consequently are marked to fair value through earnings. At September 30, 2002,
the fair value of these interest rate swap agreements was a liability of $1.7
million. As of September 30, 2002, the Company had no variable rate borrowings
outstanding; therefore each one-percentage point increase or decrease in LIBOR
would have no affect on the Company's pre-tax interest expense.
The Company does not trade in derivatives with the objective of earning
financial gains on price fluctuations, on a speculative basis, nor does it trade
in these instruments when there are no underlying related exposures.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, an evaluation was performed
under the supervision and with the Company's management, including its Chief
Executive Officer and its Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on that evaluation, the Company's management, including its Chief Executive and
Chief Financial Officer, concluded that the Company's disclosure controls and
procedures were effective as of September 30, 2002. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to September 30, 2002,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Page 20
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
None
Items 2, 3, 4 and 5. Not applicable
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Reference Description
3.1 (1) Restated Articles of Incorporation.
3.2 (1) Amended Bylaws dated September 27, 1994.
4.1 (1) Restated Articles of Incorporation.
4.2 (1) Amended Bylaws dated September 27, 1994.
10.1 (1) 401(k) Plan filed as Exhibit 10.10.
10.2 (2) Outside Director Stock Option Plan, filed as Exhibit A.
10.3 (3) Amendment No. 1 to the Outside Director Stock Option Plan, filed as Exhibit 10.11.
10.4 (4) Credit Agreement by and among Covenant Asset Management, Inc., Covenant
Transport, Inc., Bank of America, N.A., and each other financial institution which
is a party to the Credit Agreement, dated December 13, 2000, filed as Exhibit 10.9.
10.5 (4) Loan Agreement dated December 12, 2000, among CVTI Receivables Corp.,
and Covenant Transport, Inc., Three Pillars Funding Corporation, and SunTrust
Equitable Securities Corporation, filed as Exhibit 10.10.
10.6 (4) Receivables Purchase Agreement dated as of December 12, 2000, among CVTI
Receivables Corp., Covenant Transport, Inc., and Southern Refrigerated
Transport, Inc., filed as Exhibit 10.11.
10.7 (5) Clarification of Intent and Amendment No. 1 to Loan Agreement dated
March 7, 2001, among CVTI Receivables Corp., Covenant Transport, Inc., Three Pillars Funding
Corporation, and SunTrust Equitable Securities Corporation, filed as Exhibit 10.12.
10.8 (6) Incentive Stock Plan, Amended and Restated as of May 17, 2001, filed as Appendix B.
10.9 (7) Amendment No. 1 to Credit Agreement dated August 28, 2001, among Covenant Asset
Management, Inc., Covenant Transport, Inc., Bank of America, N.A., and each other
financial institution which is a party to the Credit Agreement, filed as Exhibit 10.11.
- -----------------------------------------------------------------------------------------------------------------------------------
Previously filed as an exhibit to and incorporated by reference from:
1) Form S-1, Registration No. 33-82978, effective October 28, 1994.
2) Schedule 14A, filed April 13, 2000.
3) Form 10-Q for the quarter ended September 30, 2000.
4) Form 10-K for the year ended December 31, 2000.
5) Form 10-Q for the quarter ended March 31, 2001.
6) Schedule 14A, filed April 5, 2001.
7) Form 10-Q/A, filed July 30, 2002.
(b) A Form 8-K was filed on August 12, 2002, with respect to the certification
requirements of 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
Page 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COVENANT TRANSPORT, INC.
Date: November 14, 2002 /s/ Joey B. Hogan
---------------------------------
Joey B. Hogan
Senior Vice President and Chief Financial Officer,
in his capacity as such and on behalf of the
issuer.
CERTIFICATIONS
I, David R. Parker, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the quarterly
period ended September 30, 2002, of Covenant Transport, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations, and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures for the
registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board or directors:
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize, and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were
Page 22
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002 /s/ David R. Parker
----------------------------------------
David R. Parker
Chief Executive Officer
I, Joey B. Hogan, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the quarterly
period ended September 30, 2002, of Covenant Transport, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations, and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures for the
registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board or directors:
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize, and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Joey B. Hogan
----------------------------------------
Joey B. Hogan
Chief Financial Officer
Page 23