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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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
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COVENANT TRANSPORT, INC.
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(Exact name of registrant as specified in its charter)
Nevada 88-0320154
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 Birmingham Highway
Chattanooga, Tennessee 37419
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 423/821-1212
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: $0.01 Par Value
Class A Common Stock
--------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES [X] NO [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $109 million as of March 20, 2003 (based upon the
$16.60 per share closing price on that date as reported by Nasdaq). In making
this calculation the registrant has assumed, without admitting for any purpose,
that all executive officers, directors, and holders of more than 10% of a class
of outstanding common stock, and no other persons, are affiliates.
As of March 20, 2003, the registrant had 12,032,664 shares of Class A common
stock and 2,350,000 shares of Class B common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information set forth under Part III, Items 10, 11, 12, and 13 of this
Report is incorporated by reference from the registrant's definitive proxy
statement for the 2003 annual meeting of stockholders that will be filed no
later than April 18, 2003.
Cross Reference Index
---------------------
The following cross reference index indicates the document and location of the
information contained herein and incorporated by reference into the Form 10-K.
Part I Document and Location
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Item 1 Business Page 3 herein
Item 2 Properties Page 9 herein
Item 3 Legal Proceedings Page 9 herein
Item 4 Submission of Matters to a Vote of Security Holders Page 9 herein
Part II
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Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters Page 10 herein
Item 6 Selected Financial Data Page 11 herein
Item 7 Management's Discussion and Analysis of Financial Page 12 herein
Condition and Results of Operations
Item 7A Quantitative and Qualitative Disclosures About Market Risk Page 27 herein
Item 8 Financial Statements and Supplementary Data Page 27 herein
Item 9 Changes in and Disagreements with Accountants on Page 27 herein
Accounting and Financial Disclosure
Part III
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Item 10 Directors and Executive Officers of the Registrant Pages 2-3, and 12 of Proxy Statement
Item 11 Executive Compensation Pages 5-7 of Proxy Statement
Item 12 Security Ownership of Certain Beneficial Owners and Pages 9-10, and 15 of Proxy Statement
Management and Related Stockholder Matters
Item 13 Certain Relationships and Related Transactions Page 4 of Proxy Statement
Item 14 Controls and Procedures Page 28 herein
Part IV
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Item 15 Exhibits, Financial Statement Schedules, and Reports on Page 28 herein
Form 8-K
- ------------------------------------------------------
This report contains "forward-looking statements." These statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those anticipated. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors That May
Affect Future Results" for additional information and factors to be considered
concerning forward-looking statements.
PART I
ITEM 1. BUSINESS
References in this Annual Report to "we," "us," "our," or the "Company" or
similar terms refer to Covenant Transport, Inc. and its subsidiaries.
General
We are one of the ten largest truckload carriers in the United States measured
by revenue. We focus on longer lengths of haul in targeted markets where we
believe our service standards can provide a competitive advantage. We are a
major carrier for traditional truckload customers such as manufacturers and
retailers, as well as for transportation companies such as freight forwarders,
less-than-truckload carriers, and third-party logistics providers that require a
high level of service to support their businesses.
In our core long-haul business, we use the industry's largest fleet of tractors
operated by two-person driver teams to provide expedited transportation,
generally over distances from 1,500 to 2,500 miles. In this area, we offer
greater speed and reliability than rail or single-driver trucks at a lower cost
than air freight. We also operate a single driver fleet that concentrates on
expedited movements with an average length of haul of approximately 800 miles.
In both our single-driven and team-driven operations we are dedicated fleets,
which operate for the benefit of a single customer or on a defined route. This
part of our business has grown rapidly as we have expanded our participation in
the design, development, and execution of supply chain solutions for our
traditional truckload customers. In each of the past eight years, we have
provided 99% on-time performance to our customers. By targeting premium service
freight, we seek to obtain higher rates, build long-term service-based customer
relationships, and avoid competition from rail, intermodal, and trucking
companies that compete primarily on the basis of price.
Business Strategy
The key elements of our business strategy are:
Offer premium service. We offer just-in-time, transcontinental express, and
other premium services to shippers with exacting transportation requirements.
Our service standards include transporting loads coast-to-coast in 72 hours,
meeting schedules with delivery windows as narrow as 15 minutes, and delivering
99% of all loads on-time which we have accomplished in each of the last eight
years. We target such premium service freight to obtain higher rates, build
long-term, service-based customer relationships, and avoid competition from
rail, intermodal, and trucking companies that compete primarily on the basis of
price.
Operate in targeted markets. We operate in targeted markets where our service
can provide a competitive advantage. Our primary market historically has been
expedited long-haul freight transportation predominantly using two-person driver
teams. Our industry-leading 1,200 driver teams can provide significantly faster,
more predictable service than rail, intermodal, or single-driver service over
long lengths of haul at a fraction of the cost of air freight. In addition, we
offer dedicated fleets, which operate for the benefit of a single customer or on
a defined route. This part of our business has grown rapidly as we have expanded
our participation in the design, development, and execution of supply chain
solutions for customers. We also offer long-haul refrigerated service that
targets premium temperature-controlled business mainly originating on the West
Coast. We believe that our concentration on longer lengths of haul and our large
capacity of driver teams differentiate us from competitors in our targeted
markets.
Focus on equipment utilization. We use our longer lengths of haul and
disciplined operating lanes to enhance asset utilization and deliver operating
efficiencies. We seek to continue to improve our asset utilization by adding
freight within our existing traffic lanes faster than adding new equipment
capacity. We intend to grow our fleet only when profit margins justify
expansion. A high level of operational discipline creates more predictable
movements, reduces empty miles, and shortens turn times between loads.
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Seek partnerships with other transportation companies. A significant portion of
our business focuses on providing services to other transportation companies
that require a high level of service to support their operations. In 2002,
transportation providers, such as logistics companies, freight forwarders,
less-than-truckload companies, and deferred air freight providers, comprised the
largest market sector we served. We seek to grow by continuing to serve as a
partner, rather than a competitor, to other transportation providers.
Use technology to enhance operating efficiency. We have made significant
investments in technologies that reduce costs, afford a competitive advantage
with service-sensitive customers, and promote economies of scale. In particular,
we believe we are beginning to realize the benefits of freight optimization
software that allows us to more accurately analyze the profitability of each
customer, route, and load. We also use satellite-based tracking and
communication systems, document imaging, fuel routing software, and electronic
access to customer load information and electronic transmission of shipping
instructions.
Customers and Operations
We operate throughout the United States and in parts of Canada and Mexico, with
substantially all of our revenue generated from within the United States. All of
our assets are domiciled in the United States, and for the past three years less
than one percent of our revenue has been generated in Canada and Mexico. The
largest part of our business, which comprised 72% of our 2002 revenue, is
medium-to-long haul dry van service that we provide by using single and
two-person driver teams. Our dedicated fleets, which serve a defined customer or
route, comprised 13% of our 2002 revenue. We also operate a long-haul
temperature-controlled business, which frequently hauls dry freight to the West
Coast and temperature-controlled freight to the East, and this portion of our
business comprised 15% of 2002 revenue. Part of this business is operated by our
subsidiary, Southern Refrigerated Transport, Inc. under its own tradename.
Our primary customers include manufacturers and retailers, as well as other
transportation companies. In 2002, our five largest customers were Con-Way
Transportation, Eagle Global Logistics, Emery Air Freight, Shaw Industries, and
Target Corporation. In the aggregate, subsidiaries of CNF, Inc. accounted for
approximately 11%, 13%, and 11% of our revenue in 2000, 2001, and 2002,
respectively.
We approach our operations as an integrated effort of marketing, customer
service, and fleet management. Our customer service and marketing personnel
emphasize both new account development and expanded service for current
customers. Customer service representatives provide day-to-day contact with
customers, while the sales force targets driver-friendly freight that will
increase lane density.
Fleet managers at each operations center plan load coverage according to
customer requirements and relay pick-up, delivery, routing, and fueling
instructions to our drivers. The fleet managers attempt to route most of our
trucks over selected operating lanes. We believe this assists us in balancing
traffic between eastbound and westbound movements, reducing empty miles, and
improving the reliability of delivery schedules.
We use proven technology, including freight optimization software that permits
us to perform sophisticated analyses of profitability and other factors on each
customer, route, and load. We installed the software in late 2000 and in 2001
began inputting and tracking data and customizing our analyses. We have begun to
realize the benefits of superior freight selection based on several months of
history.
We equip our tractors with a satellite-based tracking and communications system
that permits direct communication between drivers and fleet managers. We believe
that this system enhances our operating efficiency and improves customer service
and fleet management. This system also updates the tractor's position every 30
minutes, which allows us and our customers to locate freight and accurately
estimate pick-up and delivery times. We also use the system to monitor engine
idling time, speed, performance, and other factors that affect operating
efficiency.
As an additional service to customers, we offer electronic data interchange and
Internet-based communication for customer usage in tendering loads and accessing
information such as cargo position, delivery times, and billing information.
These services allow us to communicate electronically with our customers,
permitting real-time
4
information flow, reductions or eliminations in paperwork, and the employment of
fewer clerical personnel. Since 1997, we have used a document imaging system to
reduce paperwork and enhance access to important information.
Our operations generally follow the seasonal norm for the trucking industry.
Equipment utilization is usually at its highest from May to August, maintains
high levels through October, and generally decreases during the winter holiday
season and as inclement weather impedes operations.
Drivers and Other Personnel
Driver recruitment, retention, and satisfaction are essential to our success,
and we have made each of these factors a primary element of our strategy. We
emphasize driver-friendly operations throughout the Company. We have implemented
automated programs to signal when a driver is scheduled to be routed toward
home, and we assign fleet managers specific tractor units, regardless of
geographic region, to foster positive relationships between the drivers and
their principal contact with us.
We use driver teams in a substantial portion of our tractors. Driver teams
permit us to provide expedited service over our long average length of haul,
because driver teams are able to handle longer routes and drive more miles while
remaining within Department of Transportation ("DOT") safety rules. We believe
that these teams contribute to greater equipment utilization than most carriers
with predominately single drivers. The use of teams, however, increases
personnel costs as a percentage of revenue and the number of drivers we must
recruit. At December 31, 2002, teams operated approximately 29% of our tractors.
The single driver fleets operate fewer miles per tractor and experience more
empty miles but these factors are expected to be offset by higher revenue per
loaded mile and the reduced employee expense of only one driver.
We are not a party to a collective bargaining agreement and our employees are
not represented by a union. At December 31, 2002, we employed approximately
4,894 drivers and approximately 1,169 nondriver personnel. We believe that we
have a good relationship with our personnel.
Revenue Equipment
We believe that operating high quality, late-model equipment contributes to
operating efficiency, helps us recruit and retain drivers, and is an important
part of providing excellent service to customers. Our historical policy has been
to operate our tractors while under warranty to minimize repair and maintenance
cost and reduce service interruptions caused by breakdowns. In conjunction with
the extension of our trade cycle on tractors from three to four years in 2001,
we purchased extended warranties on major components. We also order most of our
equipment with uniform specifications to reduce our parts inventory and
facilitate maintenance. At December 31, 2002, our 3,738 tractors had an average
age of 26 months and our 7,485 trailers had an average age of 55 months.
Approximately 84% of these trailers were dry vans and the remainder were
temperature-controlled vans.
We have taken delivery of our model year 2003 tractors from Freightliner and
expect to begin taking delivery of model year 2004 tractors shortly. The new
tractors are covered by tradeback agreements that guarantee us a defined
trade-in value if we purchase a replacement tractor from Freightliner. The
combination of an increased price for the new tractors and a decreased trade-in
value for used tractors is increasing our cost of equipment for future periods.
We are considering changing our tractor trade cycle back to a period of less
than four years. We are evaluating the decision based on maintenance costs,
capital requirements, prices of new and used tractors, and other factors. If we
decide to return to a shorter trade cycle, our capital expenditures and
financing costs would increase, and we would expect our maintenance costs to
decrease.
Industry and Competition
According to the American Trucking Associations (ATA), the U.S. market for
truck-based transportation services generated total revenues of approximately
$610 billion in 2001 and is projected to grow in line with the overall U.S.
economy. We operate in the highly fragmented for-hire truckload segment of this
market, which the ATA estimates
5
generated revenues of approximately $274 billion in 2001. Our dedicated business
also competes for the private fleet portion of the overall trucking market (also
estimated by the ATA at approximately $274 billion in revenues in 2001), by
seeking to convince private fleet operators to outsource or supplement their
private fleets. Measured by annual revenue, the ten largest dry van truckload
carriers accounted for approximately $12 billion or four percent of annual
for-hire truckload revenue in 2001.
The United States trucking industry is highly competitive and includes thousands
of for-hire motor carriers, none of which dominates the market. Service and
price are the principal means of competition in the trucking industry. We
compete to some extent with railroads and rail-truck intermodal service but
differentiate ourself from rail and rail-truck intermodal carriers on the basis
of service because rail and rail-truck intermodal movements are subject to
delays and disruptions arising from rail yard congestion, which reduces the
effectiveness of such service to customers with time-definite pick-up and
delivery schedules.
We believe that the cost and complexity of operating trucking fleets are
increasing and that economic and competitive pressures are likely to force many
smaller competitors and private fleets to consolidate or exit the industry. As a
result, we believe that larger, better capitalized companies, like us, will have
greater opportunities to increase profit margins and gain market share. In the
market for dedicated services, we believe that truckload carriers, like us, have
a competitive advantage over truck lessors, who are the other major participants
in the market, because we can offer lower prices by utilizing back-haul freight
within our network that traditional lessors do not have.
Insurance and Claims
We have increased the self-insured retention portion of our insurance coverage
for most claims significantly over the past several years. In 2000, our
deductible was $12,500 for our casualty program and $250,000 for workers'
compensation. During the first quarter of 2003, we renewed our casualty program
and increased our self insured retention level to a combined $2.0 million per
occurrence for liability, and $1.0 million per occurrence for cargo loss and
damage coverage. In our casualty program, we now self-insure for the first $2.0
million of exposure in our primary layer as well as the first $2.0 million of
exposure in our $15.0 million of excess coverage. Our aggregate limit of
coverage is $20.0 million for our casualty program. We maintain a workers'
compensation plan and group medical plan for our employees with a deductible
amount of $500,000 for each workers' compensation claim and a deductible amount
of $225,000 for each group medical claim. In the first quarter of 2003, we
adopted a workers' compensation plan with a deductible level of $1.0 million per
occurrence and renewed our group medical plan with a deductible amount of
$250,000. The following chart reflects the major changes in our casualty program
since March 1, 2001:
Primary Coverage Excess Coverage
Coverage Period Primary Coverage SIR/deductible Excess Coverage SIR/deductible
- -------------------------------------------------------------------------------------------------------------------
March 2000 - March 2001 $1.0 million $12,500 $15 million $0
March 2001 - March 2002 $1.0 million $250,000 $49 million $3.0 million
March 2002 - July 2002 $2.0 million $500,000 $48 million $3.0 million
July 2002 - November 2002 $2.0 million $500,000 $0 * $0 *
November 2002 - March 2003 $4.0 million $1.0 million $16.0 million $3.0 million
March 2003 - March 2004 $5.0 million $2.0 million** $15.0 million $2.0 million
* Represents period for which no proof of insurance was available from agent
and coverage was determined to be invalid. We are pursuing legal remedies
against the insurance agency and its errors and omissions policy, but we
can make no assurance of recovery.
** Does not include $1.0 million self insured retention for cargo.
On July 15, 2002, we received a binder for $48.0 million of excess insurance
coverage over our $2.0 million primary layer. Subsequently, we were forced to
seek replacement excess coverage after the insurance agent retained the premium
and failed to produce proof of insurance coverage. We obtained replacement
coverage of $4.0 million with
6
a $1.0 million self-insured retention in November 2002. We filed a lawsuit to
recover the premiums paid and to seek coverage from the insurance agency and its
errors and omissions policy, on any claims that exceed $2.0 million in exposure.
Currently, we are not aware of any such claims. If one or more claims from this
period exceeded $2.0 million in amount, our financial condition and results of
operations could be materially and adversely affected.
Regulation
We are a common and contract motor carrier of general commodities. Historically,
the Interstate Commerce Commission (the "ICC") and various state agencies
regulated motor carriers' operating rights, accounting systems, mergers and
acquisitions, periodic financial reporting, and other matters. In 1995, federal
legislation preempted state regulation of prices, routes, and services of motor
carriers and eliminated the ICC. Several ICC functions were transferred to the
DOT. We do not believe that regulation by the DOT or by the states in their
remaining areas of authority has had a material effect on our operations. Our
employees and independent contractor drivers also must comply with the safety
and fitness regulations promulgated by the DOT, including those relating to drug
and alcohol testing and hours of service. The DOT has rated us "satisfactory"
which is the highest safety and fitness rating.
Over the past three years, the DOT has considered proposals to amend the
hours-in-service requirements applicable to truck drivers. The DOT sent a final
rule, which has not been published, to the Office of Management and Budget
("OMB") in January, 2003 for OMB review and approval. Any change which reduces
the potential or practical amount of time that drivers can spend driving could
adversely affect us. We are unable to predict the nature of any changes that may
be adopted. The DOT also is considering requirements that trucks be equipped
with certain equipment that the DOT believes would result in safer operations.
The cost of the equipment, if required, could adversely affect our profitability
if shippers are unwilling to pay higher rates to fund the purchase of such
equipment.
Our operations are subject to various federal, state, and local environmental
laws and regulations, implemented principally by the Federal Environmental
Protection Agency and similar state regulatory agencies, governing the
management of hazardous wastes, other discharge of pollutants into the air and
surface and underground waters, and the disposal of certain substances. If we
should be involved in a spill or other accident involving hazardous substances,
if any such substances were found on our property, or if we were found to be in
violation of applicable laws and regulations, we could be responsible for
clean-up costs, property damage, and fines or other penalties, any one of which
could have a materially adverse effect on us. We believe that our operations are
in material compliance with current laws and regulations.
Fuel Availability and Cost
We actively manage our fuel costs by routing our drivers through fuel centers
with which we have negotiated volume discounts. During 2002, the cost of fuel
was in the range at which we received fuel surcharges. Even with the fuel
surcharges, the high price of fuel decreased our profitability. Although we
historically have been able to pass through a substantial part of increases in
fuel prices and taxes to customers in the form of higher rates and surcharges,
the increases usually are not fully recovered. We do not collect surcharges on
fuel used for non-revenue miles, out-of-route miles, or fuel used while the
tractor is idling. At December 31, 2002, we had purchase commitments for
approximately 36.0 million gallons in 2003 and 3.6 million gallons in 2004.
Additional Information
At December 31, 2002, our corporate structure included Covenant Transport, Inc.,
a Nevada holding company organized in May 1994 and its wholly owned
subsidiaries: Covenant Transport, Inc., a Tennessee corporation organized in
November 1985; Covenant Asset Management, Inc., a Nevada corporation; CIP, Inc.,
a Nevada corporation; Covenant.com, Inc., a Nevada corporation; Southern
Refrigerated Transport, Inc. ("SRT"), an Arkansas corporation; Tony Smith
Trucking, Inc., an Arkansas corporation; Harold Ives Trucking Co., an Arkansas
corporation; CVTI Receivables Corp. ("CRC"), a Nevada corporation, Terminal
Truck Broker, Inc., an Arkansas corporation, and Volunteer Insurance Limited, a
Cayman Island company.
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Our headquarters are located at 400 Birmingham Highway, Chattanooga, Tennessee
37419, and our website address is www.covenanttransport.com. Our Annual Report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
all other reports we file with the SEC pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 are available free of charge through our
website.
This report contains forward-looking statements. Additional written or oral
forward-looking statements may be made by us from time to time in our filings
with the Securities and Exchange Commission or otherwise. The words "believes,"
"expects," "anticipates," "estimates," and "projects," and similar expressions
identify forward-looking statements, which speak only as of the date the
statement was made. Such forward-looking statements are within the meaning of
that term in Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements are inherently subject to risks and uncertainties, some of which
cannot be predicted or quantified. Future events and actual results could differ
materially from those set forth in, contemplated by, or underlying the
forward-looking statements. Statements in this report, including the Notes to
the Consolidated Financial Statements and "Management's Discussion and Analysis
of Financial Condition and Results of Operations," describe factors, among
others, that could contribute to or cause such differences. Additional factors
that could cause actual results to differ materially from those expressed in
such forward-looking statements are set forth in "Business" in this report. We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events, or otherwise.
Non-Audit Services Performed by Independent Accountants
Pursuant to Section 10A(i)(2) of the Securities Exchange Act of 1934, as added
by Section 202 of the Sarbanes-Oxley Act of 2002, we are responsible for
disclosing to investors the non-audit services approved by our Audit Committee
to be performed by KPMG LLP, our independent accountants. Non-audit services are
defined as services other than those provided in connection with an audit or a
review of our financial statements. Following the adoption of the Sarbanes-Oxley
Act of 2002, our Audit Committee preapproved non-audit services, consisting of
accounting advisory services with respect to SEC filings, which subsequently
were or are being performed by KPMG LLP. Additional non-audit services will be
preapproved in the future.
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ITEM 2. PROPERTIES
Our headquarters and main terminal are located on approximately 180 acres of
property in Chattanooga, Tennessee, that include an office building of
approximately 182,000 square feet, our approximately 65,000 square-foot
principal maintenance facility, a body shop of approximately 16,600 square feet,
and a truck wash. We maintain sixteen terminals located on our major traffic
lanes in the cities listed below. These terminals provide a base for drivers in
proximity to their homes, a transfer location for trailer relays on
transcontinental routes, parking space for equipment dispatch, and the other
uses indicated below.
Driver
Terminal Locations Maintenance Recruitment Sales Ownership
------------------ ----------- ----------- ----- ---------
Chattanooga, Tennessee x x x Owned
Dalton, Georgia x x Owned
Greensboro, North Carolina Leased
Dayton, Ohio Leased
Delanco, New Jersey Leased
Indianapolis, Indiana Leased
Ashdown, Arkansas x x x Owned
Little Rock, Arkansas x Owned
Oklahoma City, Oklahoma x Owned
Hutchins, Texas x Owned
El Paso, Texas Leased
Laredo, Texas Leased
French Camp, California Leased
Fontana, California x Leased
Long Beach, California Owned
Pomona, California x Owned
ITEM 3. LEGAL PROCEEDINGS
From time to time we are a party to litigation arising in the ordinary course of
business, most of which involves claims for personal injury and property damage
incurred in the transportation of freight. As of December 31, 2002, we were not
a party to any lawsuit or governmental proceeding that, if adversely determined,
would be expected to have a materially adverse effect on our financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ended December 31, 2002, no matters were
submitted to a vote of security holders.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
Our Class A Common Stock is traded on the Nasdaq National Market, under the
symbol "CVTI." The following table sets forth for the calendar periods indicated
the range of high and low sales price for our Class A Common Stock as reported
by Nasdaq from January 1, 2001 to December 31, 2002.
Period High Low
------ ---- ---
Calendar Year 2001
1st Quarter $16.313 $10.250
2nd Quarter $17.560 $11.130
3rd Quarter $15.500 $ 9.100
4th Quarter $16.700 $ 9.310
Calendar Year 2002
1st Quarter $17.190 $14.350
2nd Quarter $21.990 $14.250
3rd Quarter $23.000 $15.410
4th Quarter $19.260 $15.260
As of March 20, 2003, we had approximately 45 stockholders of record of our
Class A Common Stock. However, we estimate that we have approximately 2,200
stockholders because a substantial number of our shares are held of record by
brokers or dealers for their customers in street names.
Dividend Policy
We have never declared and paid a cash dividend on our common stock. It is the
current intention of our Board of Directors to continue to retain earnings to
finance our growth and reduce our indebtedness rather than to pay dividends. The
payment of cash dividends is currently limited by agreements relating to our
credit agreements. Future payments of cash dividends will depend upon our
financial condition, results of operations, and capital commitments,
restrictions under then-existing agreements, and other factors deemed relevant
by our Board of Directors.
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ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
(In thousands, except per share and operating data amounts)
Years Ended December 31,
2002 2001 2000 1999 1998
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Statement of Operations Data:
Freight revenue $541,830 $ 547,028 $ 552,429 $ 472,741 $ 370,546
Fuel and accessorial surcharges 22,588 26,593 31,561 6,626 3,315
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Total revenue $564,418 $ 573,621 $ 583,990 $ 479,367 $ 373,861
Operating expenses:
Salaries, wages, and related expenses 227,332 244,849 244,704 205,686 167,309
Fuel expense 96,332 103,894 104,154 74,150 56,318
Operations and maintenance 39,625 39,410 36,267 29,985 24,503
Revenue equipment rentals and
purchased transportation 59,265 65,104 76,200 49,330 24,250
Operating taxes and licenses 13,934 14,358 14,940 11,777 10,334
Insurance and claims 31,761 27,838 18,907 14,096 11,936
Communications and utilities 7,021 7,439 7,189 5,682 4,328
General supplies and expenses 14,677 14,468 13,970 10,380 8,994
Depreciation and amortization, including
gains (losses) on disposition of
equipment and impairment of assets (1) 49,497 56,324 38,879 35,591 30,192
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Total operating expenses 539,444 573,684 555,210 436,677 338,164
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Operating income (loss) 24,974 (63) 28,780 42,690 35,697
Other (income) expense:
Interest expense 3,542 7,855 9,894 5,993 6,252
Interest income (63) (328) (520) (480) (328)
Other 916 799 (368) - -
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Other (income) expenses, net 4,395 8,326 9,006 5,513 5,924
----------------------------------------------------------------------------
Income (loss) before income taxes 20,579 (8,389) 19,774 37,177 29,773
Income tax expense (benefit) 11,415 (1,727) 7,899 14,900 11,490
----------------------------------------------------------------------------
Income (loss) before extraordinary loss on
early extinguishment of debt 9,164 (6,662) 11,875 22,277 18,283
Extraordinary loss on early extinguishment
of debt, net of income tax benefit 890 - - - -
----------------------------------------------------------------------------
Net income (loss) $ 8,274 $ (6,662) $ 11,875 $ 22,277 $ 18,283
============================================================================
(1) Includes a $3.3 million and a $15.4 million pre-tax impairment charges in
2002 and 2001, respectively.
Basic earnings per share $ 0.58 $ (0.48) $ 0.82 $ 1.49 $ 1.27
Diluted earnings per share 0.57 (0.48) 0.82 1.48 1.27
Weighted average common shares
outstanding 14,223 13,987 14,404 14,912 14,393
Weighted average common shares
outstanding for assumed conversions 14,519 13,987 14,533 15,028 14,440
11
Years Ended December 31,
Selected Balance Sheet Data 2002 2001 2000 1999 1998
-----------------------------------------------------------------------------
Net property and equipment $ 238,488 $ 231,536 $ 256,049 $ 269,034 $ 200,537
Total assets 361,541 349,782 390,513 383,974 272,959
Long-term debt, less current maturities 1,300 29,000 74,295 140,497 84,331
Stockholders' equity $ 175,588 $ 161,902 $ 167,822 $ 163,852 $ 141,522
Selected Operating Data:
Net margin as a percentage of freight
revenue 1.5% (1.2%) 2.1% 4.7% 4.9%
Average revenue per loaded mile $ 1.22 $ 1.21 $ 1.23 $ 1.20 $ 1.18
Average revenue per total mile $ 1.13 $ 1.12 $ 1.13 $ 1.11 $ 1.10
Average revenue per tractor per week $ 2,812 $ 2,737 $ 2,790 $ 3,078 $ 3,045
Average miles per tractor per year 129,906 127,714 128,754 144,601 144,000
Weighted average tractors for year (1) 3,680 3,791 3,759 2,929 2,333
Total tractors at end of period (1) 3,738 3,700 3,829 3,521 2,608
Total trailers at end of period (2) 7,485 7,702 7,571 6,199 4,526
(1) Includes monthly rental tractors.
(2) Excludes monthly rental trailers.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, the discussion in this
annual report contains forward-looking statements that involve risk,
assumptions, and uncertainties that are difficult to predict. Statements that
constitute forward-looking statements are usually identified by words such as
"anticipates," "believes," "estimates," "projects," "expects," or similar
expressions. These statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Such statements are based
upon the current beliefs and expectations of our 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 our
services or loss of one or more or our 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 our 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 and 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 these factors
along with the various disclosures we make in press releases, stockholder
reports, and public filings, as well as the factors explained in greater detail
under "Factors that May Affect Future Results" herein.
Overview
We are one of the ten largest truckload carriers in the United States measured
by revenue. We focus on longer lengths of haul in targeted markets where we
believe our service standards can provide a competitive advantage. We are a
major carrier for traditional truckload customers such as manufacturers and
retailers, as well as for transportation companies such as freight forwarders,
less-than-truckload carriers, and third-party logistics providers that require a
high level of service to support their businesses.
12
Between 1991 and 1999, we grew our revenue before fuel and other surcharges from
$41.2 million to $472.7 million through internal growth and acquisitions. Over
the same period, we grew net income from $823,000, or $.08 per diluted share, to
$22.3 million, or $1.48 per diluted share. We believe this rapid growth was
strategically important, as we gained the size and equipment capacity to cover
additional traffic lanes and geographic areas for customers, participate in
competitive bids to transport freight for major shippers and develop a
substantial dedicated service business.
Beginning in 2000, the combination of softening freight demand and our rapid
expansion affected our profitability, as we were unable to obtain the freight
rates and levels of asset utilization we expected. At the same time, rising
insurance premiums and depressed used truck prices increased our operating
costs. As a result, our freight revenue declined slightly and our net income
declined to $11.9 million in 2000. We experienced a net loss of $6.7 million in
2001, including a $15.4 million pre-tax impairment charge relating to the
reduced market value of our used tractors.
Following the setbacks in 2000 and early 2001, we adopted several business
practices in 2001 that were designed to improve our profitability and
particularly, our average revenue per tractor, our chief measure of asset
utilization. The most significant of these practices were constraining the size
of our tractor and trailer fleets until profit margins justify expansion,
increasing freight volumes within our existing traffic lanes, replacing lower
yielding freight, implementing selective rate increases, and reinforcing our
cost control efforts. We believe that a combination of these business practices
and an improved freight environment contributed to substantial improvement in
our operating performance between 2001 and 2002. For 2002, our revenue declined
from $547.0 million to $541.8 million, but our net income improved to $8.3
million, including a $3.3 million pre-tax charge relating to the market value of
our used tractors and a $890,000 after-tax extraordinary item relating to early
extinguishment of debt, both in the first quarter of 2003.
Revenue
We generate substantially all of our revenue by transporting freight for our
customers. We also derive revenue from fuel surcharges, loading and unloading
activities, equipment detention, and other accessorial services. Freight
revenue, which is our revenue before fuel and accessorial surcharges, has
accounted for approximately 95% of our revenue over the past three years.
Generally, we are paid by the mile or by the load for our services. The main
factors that affect our revenue are the revenue per mile we receive from our
customers, the percentage of miles for which we are compensated, and the numbers
of miles we generate with our equipment. These factors relate, among other
things, to the U.S. economy, inventory levels, the level of truck capacity in
our markets, specific customer demand, the percentage of team-driven tractors in
our fleet, and our average length of haul.
Since 2000 we have held our fleet size relatively constant. An overcapacity of
trucks in our fleet and the industry generally as the economy slowed contributed
to lower equipment utilization and pricing pressure.
Revenue from an acquired operation that generated approximately $80 million in
revenue in the year prior to its acquisition helped offset the loss of revenue
from certain existing customers whose freight volumes were affected by the
economy or who sought lower priced service. The main constraints on our internal
growth are the ability to recruit and retain a sufficient number of qualified
drivers and, in times of slower economic growth, to add profitable freight.
In addition to constraining fleet size, we reduced our number of two-person
driver teams during 2001 and into 2002 to better match the demand for expedited
long-haul service. Our single driver fleets generally operate in shorter lengths
of haul, generate fewer miles per tractor, and experience more non-revenue
miles, but 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. We expect operating statistics and
expenses to shift with the mix of single and team operations.
13
Expenses and Profitability
Over the past three years the trucking industry has experienced a significant
increase in operating costs. The main factors for the industry as well as for us
have been an increased annual cost of tractors due to higher initial prices and
lower used truck values, a higher overall cost of insurance and claims, and
elevated fuel prices. Other than those categories, our expenses have remained
relatively constant or have declined.
Looking forward, our profitability goal is to return to an operating ratio of
approximately 90%. We expect this to require additional improvements in revenue
per tractor per week to overcome expected additional cost increases of new
revenue equipment (discussed below), and other general increases in operating
costs, as well as to expand our margins. Because a large percentage of our costs
is variable, changes in revenue per mile affect our profitability to a greater
extent than changes in miles per tractor.
Revenue Equipment
We operate approximately 3,738 tractors and 7,485 trailers. Of our tractors, at
December 31, 2002, approximately 2,471 were owned, 891 were financed under
operating leases, and 376 were provided by owner-operators, who own and drive
the tractors. Of our trailers, at December 31, 2002, approximately 4,857 were
owned and approximately 2,628 were financed under operating leases. Over the
past several years, the market value of used equipment has deteriorated. In
recognition of this fact, we recognized pre-tax impairment charges of $15.4
million in the fourth quarter of 2001 and $3.3 million in the first quarter of
2003 in relation to the reduced value of our model year 1998 through 2000
tractors. In addition, we increased the depreciation rate/lease expense on our
remaining tractors to reflect our expectations concerning market value at
disposition. We estimate 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. Although we believe the additional
depreciation will bring the carrying values of the model year 2001 tractors in
line with future disposition values, we do not have trade-in agreements covering
those tractors. Our assumptions represent our best estimate, and actual values
could differ by the time those tractors are scheduled for trade.
Because of the adverse change from historical purchase prices and residual
values, the annual expense per tractor on model year 2003 and 2004 tractors is
expected to be higher than the annual expense on the model year 1999 and 2000
units being replaced. We believe the increase in depreciation expense was
approximately one-half cent per mile pre-tax during 2002 and will grow to
approximately one cent per mile pre-tax in 2003 as all of these new units are
delivered. By the time the model year 2001 tractors are traded and the entire
fleet is converted in 2004, we expect the total increase in expense to be
approximately one and one-half cent pre-tax per mile. The timing of these
expenses could be affected if we change our tractor trade cycle to three years,
which we are considering. If the tractors are leased instead of purchased, the
references to increased depreciation would be reflected as additional lease
expense.
We finance a portion of our tractor and trailer fleet with off-balance sheet
operating leases. These leases generally run for a period of three years for
tractors and seven years for trailers. With our tractor trade cycle currently at
approximately four years, we have been purchasing the leased tractors at the
expiration of the lease term, although there is no commitment to purchase the
tractors. The first trailer leases expire in 2005, and we have not determined
whether to purchase trailers at the end of these leases.
Owner-operators provide a tractor and a driver and are responsible for all
operating expenses in exchange for a fixed payment per mile. We do not have the
capital outlay of purchasing the tractor.
The payments to owner-operators and the financing of equipment under operating
leases are recorded in revenue equipment rentals and purchased transportation.
Expenses associated with owned equipment, such as interest and depreciation, are
not incurred, and for owner-operator tractors, driver compensation, fuel, and
other expenses are not incurred. Because obtaining equipment from
owner-operators and under operating leases effectively shifts financing expenses
from interest to "above the line" operating expenses, we evaluate our efficiency
using net margin rather than operating ratio.
14
Transplace
Effective July 1, 2000, we combined our logistics business with the logistics
businesses of five other transportation companies into a company called
Transplace, Inc. Transplace operates an Internet-based global transportation
logistics service. Initially, we accounted for our 12.4% investment in
Transplace using the equity method of accounting. During the third quarter of
2001, Transplace changed its filing status to a C corporation and as a result,
we determined it appropriate to account for our investment using the cost method
of accounting.
The following table sets forth the percentage relationship of certain items to
freight revenue, excluding fuel and accessorial surcharges for each of the three
years-ended December 31:
2002 2001 2000
-----------------------------------------
Freight revenue (1) 100.0% 100.0% 100.0%
Operating expenses:
Salaries, wages, and related expenses (1) 40.7 43.8 43.4
Fuel expense (1) 15.2 15.4 14.3
Operations and maintenance (1) 6.9 6.9 6.3
Revenue equipment rentals and purchased
transportation 10.9 11.9 13.8
Operating taxes and licenses 2.6 2.6 2.7
Insurance and claims 5.9 5.1 3.4
Communications and utilities 1.4 1.4 1.3
General supplies and expenses 2.7 2.6 2.5
Depreciation and amortization, including gains
(losses) on disposition of equipment and
impairment of assets(2) 9.1 10.3 7.0
-----------------------------------------
Total operating expenses 95.4 100.0 94.8
-----------------------------------------
Operating income 4.6 0.0 5.2
Other (income) expense, net 0.8 1.5 1.6
-----------------------------------------
Income (loss) before income taxes 3.8 (1.5) 3.6
Income tax expense (benefit) 2.1 (0.3) 1.4
-----------------------------------------
Income (loss) before extraordinary loss on early
extinguishment of debt 1.7 (1.2) 2.1
Extraordinary loss on early extinguishment of
debt, net of income tax benefit 0.2 0.0 0.0
-----------------------------------------
Net income (loss) 1.5% (1.2%) 2.1%
=========================================
(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, $6.7 million, $5.4 million, and $4.7 million; fuel
expense, $13.8 million, $19.5 million, and $25.3 million; operations and
maintenance, $2.0 million, $1.6 million, and $1.5 million in 2002, 2001 and
2000, respectively.
(2) Includes a $3.3 million and a $15.4 million pre-tax impairment charge or
2.8% and 0.6% of freight revenue in 2002 and 2001, respectively.
COMPARISON OF YEAR ENDED DECEMBER 31, 2002 TO YEAR ENDED DECEMBER 31, 2001
Freight revenue (total revenue less fuel surcharge and accessorial revenue)
decreased $5.2 million (1.0%), to $541.8 million in 2002, from $547.0 million in
2001. Our revenue was affected by a 2.9% decrease in weighted average number of
tractors partially offset by a 2.7% increase in revenue per tractor per week to
$2,812 in 2002 from $2,737 in 2001. The revenue per tractor per week increase
was primarily generated by a 1.7% higher utilization of equipment and a 1.0%
higher rate per total mile. Weighted average tractors decreased 2.9% to 3,680 in
2002 from
15
3,791 in 2001. We have elected to constrain the size of our tractor fleet until
fleet production and profitability improve.
Salaries, wages, and related expenses, net of accessorial revenue of $6.7
million in 2002 and $5.4 million in 2001, decreased $18.8 million (7.9%), to
$220.7 million in 2002, from $239.5 million in 2001. As a percentage of freight
revenue, salaries, wages, and related expenses decreased to 40.7% in 2002, from
43.8% in 2001. Wages for over the road drivers as a percentage of freight
revenue decreased to 27.2% in 2002 from 30.1% in 2001. The decrease was largely
attributable to us utilizing a larger percentage of single-driver tractors, with
only one driver per tractor to be compensated, implementing changes in our pay
structure and implementing a per diem pay program for our drivers during August
2001. As a percentage of freight revenue, our payroll expense for employees
other than over the road drivers increased to 7.2% in 2002 from 6.7% in 2001 due
to growth in headcount and local drivers in the dedicated fleet. Health
insurance, employer-paid taxes, workers' compensation, and other employee
benefits decreased to 6.2% in 2002 from 6.6% in 2001. The decrease was primarily
due to lower employer-paid taxes related to lower wage levels and was partially
offset by increases in workers' compensation and health insurance costs related
to rising medical expenses, which are expected to continue to increase in future
periods.
Fuel expense, net of fuel surcharge revenue of $13.8 million in 2002 and $19.5
million in 2001, decreased $1.9 million (2.2%), to $82.5 million in 2002, from
$84.4 million in 2001. As a percentage of freight revenue, net fuel expense
remained relatively constant at 15.2% in 2002 and 15.4% in 2001. Fuel surcharges
amounted to $.031 per loaded mile in 2002 compared to $.043 per loaded mile in
2001. Fuel prices have increased sharply during the first two months of 2003
because of reasons such as unrest in Venezuela and the Middle East and low
inventories. Higher fuel prices will increase our operating expenses. Fuel costs
may be affected in the future by volume purchase commitments, the collectibility
of fuel surcharges, and lower fuel mileage due to government mandated emissions
standards that were effective October 1, 2002, and will result in less fuel
efficient engines. We did not have any fuel hedging contracts at December 31,
2002.
Operations and maintenance consist primarily of vehicle maintenance, repairs and
driver recruitment expenses. Net of accessorial revenue of $2.0 million in 2002
and $1.6 million in 2001, operations and maintenance decreased $0.2 million to
$37.6 million in 2002 from $37.8 million in 2001. As a percentage of freight
revenue, operations and maintenance remained essentially constant at 6.9% in
2002 and 2001. We extended the trade cycle on our tractor fleet from three years
to four years, which resulted in an increase in the number of required repairs.
However, the increased repair costs were offset by reduced driver recruitment
expenses. We expect maintenance costs to decrease as we take delivery of new
tractors. Driver recruiting expense may increase if shipping volumes increase
and create greater demand for trucking services.
Revenue equipment rentals and purchased transportation decreased $5.8 million
(9.0%), to $59.2 million in 2002, from $65.1 million in 2001. As a percentage of
freight revenue, revenue equipment rentals and purchased transportation
decreased to 10.9% in 2002 from 11.9% in 2001. The decrease was the result of
lower lease payments (3.2% of freight revenue in 2002 compared to 3.9% of
freight revenue in 2001) and a smaller fleet of owner-operators during 2002 (an
average of 355 in 2002 compared to an average of 360 in 2001). The smaller fleet
of owner-operators resulted in lower payments to owner-operators (7.7% of
freight revenue in 2002 compared to 8.0% of freight revenue in 2001). We expect
our annual cost of tractor and trailer ownership and/or leasing to increase in
future periods. The increase is expected to result from a combination of higher
initial prices of new equipment, lower resale values for used equipment, and
increased depreciation/lease payments on some of our existing equipment over
their remaining lives in order to better match expected book values or lease
residual values with market values at the equipment disposal date. To the extent
equipment is leased under operating leases, the amounts will be reflected in
revenue equipment rentals and purchased transportation. To the extent equipment
is owned or obtained under capitalized leases, the amounts will be reflected as
depreciation expense and interest expense. Those expense items will fluctuate
with changes in the percentage of our equipment obtained under operating leases
versus owned and under capitalized leases.
Operating taxes and licenses decreased $0.4 million (3.0%), to $13.9 million in
2002, from $14.4 million in 2001. As a percentage of freight revenue, operating
taxes and licenses remained essentially constant at 2.6% in 2002 and 2001.
16
Insurance and claims, consisting primarily of premiums and deductible amounts
for liability, physical damage, and cargo damage insurance and claims, increased
$3.9 million (14.1%), to $31.8 million in 2002 from $27.8 million in 2001. As a
percentage of freight revenue, insurance increased to 5.9% in 2002 from 5.1% in
2001. The increase is a result of an industry-wide increase in insurance rates,
which we addressed by adopting an insurance program with significantly higher
self insured retention exposure that is partially offset by lower premium rates.
The retention level for our primary insurance layer increased from $12,500 in
2000 to $250,000 in 2001 to $500,000 in March of 2002, to $1.0 million in
November of 2002, and to $2.0 million on March 1, 2003. From July 15, 2002 to
November 10, 2002, our excess insurance coverage over the $2.0 million primary
layer we had in effect ($4.0 million from November 11 to November 22, 2002) was
determined to be invalid. Although we are not aware of any claim that is
expected to exceed our primary coverage, any such claim would be uninsured
unless the agent's errors and omissions policy provides coverage. In the event
of an uninsured claim our financial condition and results of operations could be
materially and adversely affected.
We accrue the estimated cost of the uninsured portion of pending claims. These
accruals are based on our 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. Because of higher
self-insured retentions, our future expenses of insurance and claims may be
higher or more volatile than in historical periods.
Communications and utilities decreased $0.4 million (5.6%), to $7.0 million in
2002, from $7.4 million in 2001. As a percentage of freight revenue,
communications and utilities remained essentially constant at 1.4% in 2002 and
2001.
General supplies and expenses, consisting primarily of headquarters and other
terminal facilities expenses, increased $0.2 million (1.4%), to $14.7 million in
2002, from $14.5 million in 2001. As a percentage of freight revenue, general
supplies and expenses remained essentially constant at 2.7% in 2002 and 2.6% in
2001.
Depreciation, amortization and impairment charge, consisting primarily of
depreciation of revenue equipment, decreased $6.8 million (12.1%), to $49.5
million in 2002 from $56.3 million in 2001. As a percentage of freight revenue,
depreciation and amortization decreased to 9.1% in 2002 from 10.3% in 2001. The
decrease is the result of impairment charges, partially offset by increased
depreciation expense and losses on the sale of equipment. We recognized pre-tax
charges of approximately $3.3 million and $15.4 million, in 2002 and 2001,
respectively, to reflect an impairment in tractor values. Depreciation and
amortization expense is net of any gain or loss on the sale of tractors and
trailers. Loss on the sale of tractors and trailers was approximately $2.4
million in 2002 and $217,000 in 2001. We expect our annual cost of tractor and
trailer ownership and/or leasing to increase in future periods. The increase is
expected to result from a combination of higher initial prices of new equipment,
lower resale values for used equipment, and increased depreciation/lease
payments on some of our existing equipment over their remaining lives in order
to better match expected book values or lease residual values with market values
at the equipment disposal date. To the extent equipment is leased under
operating leases, the amounts will be reflected in revenue equipment rentals and
purchased transportation. To the extent equipment is owned or obtained under
capitalized leases, the amounts will be reflected as depreciation expense and
interest expense. Those expense items will fluctuate with changes in the
percentage of our equipment obtained under operating leases versus owned and
under capitalized leases. 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 we evaluate goodwill and certain intangibles for impairment, annually.
During the second quarter of 2002, we tested our goodwill for impairment and
found no impairment. The positive impact of goodwill no longer being amortized
was approximately $310,000 for 2002.
Other expense, net, decreased $3.9 million (47.2%), to $4.4 million in 2002,
from $8.3 million in 2001. As a percentage of freight revenue, other expense
decreased to 0.8% in 2002 from 1.5% in 2001. 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 pre-tax non-cash
losses related to the accounting for interest rate derivatives under SFAS No.
133, which amounted to $0.9 million in 2002 and $0.7 million in 2001.
17
Our income tax expense in 2002 was $11.4 million or 55.5% of income before
taxes. Our income tax benefit for 2001 was $1.7 million or 20.6% of loss before
income 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, our tax rate will fluctuate in future periods as income fluctuates.
As a result of the factors described above, net earnings increased $14.9 million
(224.2%), to $8.3 million income in 2002 (1.5% of revenue), from $6.7 million
loss in 2001 (1.2% of revenue). Prior to the $3.3 million and $15.4 million
pre-tax charges for impairment, net income for 2002 and 2001 would have been
$11.2 million ($0.77 diluted earnings per share) and $2.9 million ($0.21 diluted
earnings per share) respectively.
As a result of the foregoing, our net margin increased to 1.5% in 2002 from
(1.2%) in 2001.
COMPARISON OF YEAR ENDED DECEMBER 31, 2001 TO YEAR ENDED DECEMBER 31, 2000
Revenue decreased $5.4 million (1.0%), to $547.0 million in 2001, from $552.4
million in 2000. Our growth was affected by a 1.9% decrease in revenue per
tractor per week to $2,737 in 2001 from $2,790 in 2000. The revenue per tractor
per week decrease was primarily generated by a 0.8% lower utilization of
equipment and a 1.3% lower rate per total mile due to a less robust freight
environment. Weighted average tractors increased 0.9% to 3,791 in 2001 from
3,759 in 2000. Due to a weak freight environment, we have elected to constrain
the size of our tractor fleet until profitability improves.
Salaries, wages, and related expenses decreased $0.6 million (0.2%), to $239.4
million in 2001, from $240.0 million in 2000. As a percentage of revenue,
salaries, wages, and related expenses increased to 43.8% in 2001, from 43.4% in
2000. Even though the percentage of total miles driven by company trucks
increased (89.8% in 2001 vs. 86.1% in 2000), wages for over the road drivers as
a percentage of revenue decreased to 30.1% in 2001 from 30.6% in 2000, partially
due to our implementation of cost reduction strategies including a per diem pay
program for our drivers during August 2001. Our payroll expense for employees
other than over the road drivers increased to 6.7% of revenue in 2001 from 6.2%
of revenue in 2000 due to growth in headcount and local drivers in the dedicated
fleet. Health insurance, employer paid taxes, and workers' compensation
increased to 6.6% of revenue in 2001, from 6.4% in 2000. The increase as a
percentage of revenue was primarily the result of increased group health
insurance claims in 2001 as compared to 2000.
Fuel expense increased $5.6 million (7.1%), to $84.4 million in 2001, from $78.8
million in 2000. As a percentage of revenue, fuel expense increased to 15.4% in
2001 from 14.3% in 2000. This increase was due to the increased usage of company
trucks (due to the decrease in our utilization of owner-operators, who pay for
their own fuel purchases), lower quantities and less efficient pricing of fuel
contracted using purchase commitments, and slightly lower fuel economy. These
increases were partially offset by fuel surcharges, which amounted to $.043 per
loaded mile or approximately $19.5 million in 2001 compared to $.057 per loaded
mile or approximately $25.3 million in 2000. Fuel costs may be affected in the
future by lower fuel mileage if government mandated emissions standards
effective October 1, 2002, are implemented as scheduled.
Operations and maintenance, consisting primarily of vehicle maintenance, repairs
and driver recruitment expenses, increased $3.0 million (8.5%), to $37.8 million
in 2001, from $34.8 million in 2000. As a percentage of revenue, operations and
maintenance increased to 6.9% in 2001, from 6.3% in 2000. We extended the trade
cycle on our tractor fleet from three years to four years, which resulted in an
increase in the number of required repairs.
Revenue equipment rentals and purchased transportation decreased $11.1 million
(14.5%), to $65.1 million in 2001, from $76.1 million in 2000. As a percentage
of revenue, revenue equipment rentals and purchased transportation decreased to
11.9% in 2001 from 13.8% in 2000. The decrease was primarily the result of a
smaller fleet of owner-operators during 2001 (an average of 360 in 2001 compared
to an average of 509 in 2000). Over the past year, it has become more difficult
to retain owner-operators due to the challenging operating conditions. The
smaller fleet resulted in lower payments to owner operators (8.0% of revenue in
2001 compared to 10.7% of revenue in 2000).
18
Owner-operators are independent contractors, who provide a tractor and driver
and cover all of their operating expenses in exchange for a fixed payment per
mile. Accordingly, expenses such as driver salaries, fuel, repairs,
depreciation, and interest normally associated with company-owned equipment are
consolidated in revenue equipment rentals and purchased transportation when
owner-operators are utilized. The decrease from lower owner operator expense was
partially offset by our entry into additional operating leases. As of December
31, 2001, we had financed approximately 963 tractors and 2,564 trailers under
operating leases as compared to 1,090 tractors and 1,541 trailers under
operating leases as of December 31, 2000. The equipment leases will increase
this expense category in the future, while reducing depreciation and interest
expense.
Operating taxes and licenses decreased $0.6 million (3.9%), to $14.4 million in
2001, from $14.9 million in 2000. As a percentage of revenue, operating taxes
and licenses remained essentially constant at 2.6% in 2001 as compared to 2.7%
in 2000.
Insurance and claims, consisting primarily of premiums and deductible amounts
for liability, physical damage, and cargo damage insurance and claims, increased
$8.9 million (47.2%), to $27.8 million in 2001 from $18.9 million in 2000. As a
percentage of revenue, insurance increased to 5.1% in 2001 from 3.4% in 2000.
The increase is a result of an industry-wide increase in insurance rates, which
we addressed by adopting an insurance program with significantly higher
deductible exposure that is partially offset by lower premium rates. The
deductible amount increased from $5,000 in 2000 to $250,000 in 2001. In 2002, we
increased our deductible to $500,000. Our insurance program for liability,
physical damage, and cargo damage involves self-insurance with varying risk
retention levels. Claims in excess of these risk retention levels are covered by
insurance in amounts which we consider adequate. We accrue the estimated cost of
the uninsured portion of pending claims. These accruals are based on our
evaluation of the nature and severity of the claim and estimates of future
claims development based on historical trends. Insurance and claims expense will
vary based on the frequency and severity of claims, the premium expense and the
lack of self insured retention.
Communications and utilities increased $0.3 million (3.5%), to $7.4 million in
2001, from $7.2 million in 2000. As a percentage of revenue, communications and
utilities remained essentially constant at 1.4% in 2001 as compared to 1.3% in
2000.
General supplies and expenses, consisting primarily of headquarters and other
terminal facilities expenses, increased $0.5 million (3.6%), to $14.5 million in
2001, from $14.0 million in 2000. As a percentage of revenue, general supplies
and expenses remained essentially constant at 2.6% in 2001 and 2.5% in 2000.
Depreciation and amortization, including gains (losses) on disposition of
equipment and impairment of assets, consisting primarily of depreciation of
revenue equipment, increased $17.4 million (44.9%), to $56.3 million in 2001
from $38.9 million in 2000. As a percentage of revenue, depreciation and
amortization increased to 10.3% in 2001 from 7.0% in 2000. The increase is
primarily the result of a $15.4 million pre-tax impairment charge related to
approximately 1,770 model year 1998 through 2000 tractors in use. We will
recognize an additional impairment charge on 325 tractors in the first quarter
of 2002. See "Critical Accounting Policies/Impairment of Long-Lived Assets" for
additional information. Our approximately 1,400 model year 2001 tractors are not
affected by the charge. We have increased the annual depreciation expense on the
2001 model year tractors to approximate our recent experience with disposition
values. Depreciation and amortization expense is net of any gain or loss on the
sale of tractors and trailers. Loss on the sale of tractors and trailers was
approximately $217,000 in 2001 compared to a gain of $1.0 million in 2000
period. Amortization expense relates to deferred debt costs incurred and
covenants not to compete from five acquisitions, as well as goodwill from eight
acquisitions. Goodwill amortization will cease beginning January 1, 2002, in
accordance with SFAS 142 and we will evaluate goodwill and certain intangibles
for impairment, annually prospectively beginning January 2002.
Other expense, net, decreased $0.7 million (7.6%), to $8.3 million in 2001, from
$9.0 million in 2000. As a percentage of revenue, other expense remained
essentially constant at 1.5% in the 2001 period from 1.6% in the 2000 period.
Included in the other expense category is interest expense, interest income, and
a $0.7 million pre-tax non-cash adjustment related to the accounting for
interest rate derivatives under SFAS 133. Excluding the non-cash
19
adjustment, other expense decreased $1.4 million (15.6%), to $7.6 million in the
2001 period from $9.0 million in the 2000 period. The decrease was the result of
lower debt balances and interest rates.
As a result of the foregoing, our pre-tax margin decreased to (1.5%) in 2001
compared with 3.6% in 2000.
Our income tax benefit for 2001 was $1.7 million or 20.6% of loss before income
taxes. Our income tax expense for 2000 was $7.9 million or 39.9% of earnings
before income taxes. In 2001, the effective tax rate is different from the
expected combined tax rate due to permanent differences related to a per diem
pay structure implemented during the third quarter of 2001. Due to the
nondeductible effect of per diem, our tax rate will fluctuate in future periods
as earnings fluctuate.
As a result of the factors described above, net earnings decreased $18.5 million
(156.1%), to $6.6 million loss in 2001 (1.2% of revenue), from $11.9 million
income in 2000 (2.1% of revenue). Prior to the $15.4 million pre-tax charge for
impairment, net income and earnings per share for 2001 would have been $2.9
million and $0.21, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Historically our growth has required significant capital investments. We
historically have financed our expansion requirements with borrowings under a
line of credit, cash flows from operations and long-term operating leases. Our
primary sources of liquidity at December 31, 2002, were funds provided by
operations, proceeds under the Securitization Facility (as defined below),
proceeds under the Credit Agreement (as defined below) and operating leases of
revenue equipment. We believe our sources of liquidity are adequate to meet our
current and projected needs for at least the next twelve months.
Net cash provided by operating activities was $67.2 million in 2002, $73.8
million in 2001 and $48.7 million in 2000. Our primary sources of cash flow from
operations in 2002 were net income and depreciation and amortization, which
included a $3.3 million pre-tax impairment charge. The 2001 period included an
unusually large collection of receivables that had resulted from billing
problems during 2000 and a large increase in depreciation and amortization,
associated with the $15.4 million pre-tax impairment charge. Our number of days
sales in accounts receivable increased to 43 days in 2002 from 41 days in 2001.
Net cash used in investing activities was $56.4 million in 2002, $31.3 million
in 2001 and $33.3 million in 2000. In 2002, net cash used in investing
activities 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. During 2000 and 2001,
capital expenditures were lower than in previous years due to our planned slower
fleet growth as well as our decision to lengthen our tractor trade cycle. In
2001, approximately $15 million was related to the financing of our headquarters
facility, which was previously financed through an operating lease that expired
in March 2001. We financed the facility using proceeds from the Credit
Agreement. During 2000, approximately $12.7 million related to a $5.0 million
investment in Transplace and $7.7 million for the acquisition of certain assets
of CTS. We expect capital expenditures, primarily for revenue equipment (net of
trade-ins), to be approximately $80.0 million in 2003, exclusive of
acquisitions, if we remain on a four-year trade cycle for tractors. If we change
our trade cycle back to three years, our capital expenditures could increase
significantly. We also are considering alternatives for accelerating our trailer
disposition schedule, which could affect our capital expenditures or lease
commitments.
Net cash used in financing activities was $11.2 million in 2002, $44.3 million
in 2001 and $14.1 million in 2000. During 2002, we reduced outstanding balance
sheet debt by $13.8 million. At December 31, 2002, we had outstanding debt of
$83.5 million, primarily consisting of $43.0 million drawn under the Credit
Agreement, $39.2 million in the Securitization Facility, and a $1.3 million
interest bearing note to the former primary stockholder of SRT. Interest rates
on this debt range from 1.5% to 6.5%.
In 2000, we authorized a stock repurchase plan for up to 1.5 million shares to
be purchased in the open market or through negotiated transactions. In 2000, a
total of 971,500 shares had been purchased with an average price of
20
$8.17. During 2001 and 2002, we did not purchase any additional shares through
the repurchase plan. The stock repurchase program has no expiration date.
In December 2000, we entered into the Credit Agreement with a group of banks,
which matures December 2003 and was extended in February 2003 for an additional
two years. Borrowings under the Credit Agreement are based on the banks' base
rate or LIBOR and accrue interest based on one, two, or three month LIBOR rates
plus an applicable margin that is adjusted quarterly between 0.75% and 1.25%
based on cash flow coverage. At December 31, 2002, the margin was 0.875%. The
Credit Agreement is guaranteed by the Company and all of the Company's
subsidiaries except CVTI Receivables Corp. and Volunteer Insurance Limited.
At December 31, 2002, the Credit Agreement had a maximum borrowing limit of
$120.0 million. When the facility was extended in February 2003, the borrowing
limit was reduced to $100.0 million with an accordion feature which permits an
increase up to a borrowing limit of $160 million. Borrowings related to revenue
equipment are limited to the lesser of 90% of net book value of revenue
equipment or the maximum borrowing limit. Letters of credit were limited to an
aggregate commitment of $20.0 million at December 31, 2002, and were increased
to a limit of $50.0 million in February 2003. The Credit Agreement includes a
"security agreement" such that the Credit Agreement may be collateralized by
virtually all of our assets if a covenant violation occurs. A commitment fee,
that is adjusted quarterly between 0.15% and 0.25% per annum based on cash flow
coverage, is due on the daily unused portion of the Credit Agreement. As of
December 31, 2002, we had borrowings under the Credit Agreement in the amount of
$43.0 million with a weighted average interest rate of 2.3%.
In December 2000, we entered into a $62 million revolving accounts receivable
securitization facility (the "Securitization Facility"). On a revolving basis,
we sell our interests in our 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. We
can receive up to $62 million of proceeds, subject to eligible receivables and
will pay a service fee recorded as interest expense, based on commercial paper
interest rates plus an applicable margin of 0.41% per annum and a commitment fee
of 0.10% per annum on the daily unused portion of the Facility. As discussed in
the financial statement footnotes, the net proceeds under the Securitization
Facility are required to be shown as a current liability because the term,
subject to annual renewals, is 364 days. As of December 2002, there were $39.2
million in proceeds received. CRC does not meet the requirements for off-balance
sheet accounting, therefore, it is reflected in our consolidated financial
statements.
In October 1995, we issued $25 million in ten-year senior notes to an insurance
company. The notes were retired on March 15, 2002, with borrowings from the
Credit Agreement. We incurred a $0.9 million after-tax extraordinary item ($1.4
million pre-tax) to reflect the early extinguishment of this debt in the first
quarter of 2002.
The Credit Agreement and Securitization Facility contain certain restrictions
and covenants relating to, among other things, dividends, tangible net worth,
cash flow, acquisitions and dispositions, and total indebtedness and are
cross-defaulted. We are in compliance with the Credit Agreement and
Securitization Facility as of December 31, 2002.
Contractual Obligations and Commitments - We had commitments outstanding related
to equipment, debt obligations, and diesel fuel purchases as of December 31,
2002. These purchases are expected to be financed by debt, proceeds from sales
of existing equipment, and cash flows from operations. We have the option to
cancel commitments relating to equipment with 60 days notice.
21
The following table sets forth our contractual cash obligations and commitments
as of December 31, 2002.
Payments Due By Period There-
(in thousands) Total 2003 2004 2005 2006 2007 after
-------------------------------------------------------------------------------------
Long Term Debt $ 1,300 $ - $ 1,300 $ - $ - $ - $ -
Short Term Debt 82,230 82,230 - - - - -
Operating Leases 62,308 21,017 12,502 10,852 6,823 4,665 6,449
Lease residual value guarantees 56,802 25,699 - 9,910 3,553 5,590 12,050
Purchase Obligations:
Diesel fuel 52,477 48,020 4,457 - - - -
Equipment 85,986 85,986 - - - - -
-------------------------------------------------------------------------------------
Total Contractual Cash
Obligations $341,103 $262,952 $18,259 $20,762 $10,376 $10,255 $18,499
=====================================================================================
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us 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 our estimates and
assumptions. Accordingly, actual results could differ from those anticipated. A
summary of the significant accounting policies followed in preparation of the
financial statements is contained in Note 1 of the financial statements attached
hereto. Other footnotes describe various elements of the financial statements
and the assumptions on which specific amounts were determined.
Our critical accounting policies include the following:
Revenue Recognition - Revenue, drivers' wages and other direct operating
expenses are recognized on the date shipments are delivered to the customer. We
record revenue on a net basis for transactions on which we functioned as a
broker in 1999 and 2000. Prior to January 1, 2002, we reported revenue net of
fuel surcharges and accessorial revenue and netted such amounts against the
related expense items. Effective January 1, 2002, we began including those items
in revenue in our statement of operations, and the prior period statements of
operations have been conformed with the reclassification.
Property and Equipment - Depreciation is calculated using the straight-line
method over the estimated useful lives of the assets. Historically, we
depreciated revenue equipment over five to seven years with salvage values
ranging from 25% to 33 1/3%. During 2000, we extended our estimate for the
useful life of our dry van trailers acquired between July 2000 and March 2001
from seven to eight years and increased the salvage value to approximately 48%
of cost. We based this decision on market experience at that time. We are
re-evaluating the salvage value, useful life, and annual depreciation of these
trailers based on the current market environment. Any change could result in
greater annual expense in the future. In September 2001, we changed our
estimated useful life and salvage value to seven years and 43% of cost for new
trailers. Gains or losses on disposal of revenue equipment are included in
depreciation in the statements of income.
22
Impairment of Long-Lived Assets - In August 2001, the FASB issued Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("SFAS 144"), which supersedes both SFAS 121 and
the accounting and reporting provisions of Accounting Principles Board Opinion
No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions ("Opinion 30") for the disposal of a segment of a
business (as previously defined in that Opinion). SFAS 144 retains the
fundamental provisions in SFAS 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated with
SFAS 121. For example, SFAS 144 provides guidance on how a long-lived asset that
is used as part of a group should be evaluated for impairment, establishes
criteria for when a long-lived asset is held for sale, and prescribes the
accounting for a long-lived asset that will be disposed of other than by sale.
SFAS 144 retains the basic provisions of Opinion 30 on how to present
discontinued operations in the income statement but broadens that presentation
to include a component of an entity (rather than a segment of a business). We
adopted SFAS 144 on January 1, 2002. We evaluate the carrying value of
long-lived assets by analyzing the operating performance and future cash flows
for those assets, whenever events or changes in circumstances indicate that the
carrying amounts of such assets may not be recoverable. We adjust the carrying
value of the underlying assets if the sum of the expected cash flows is less
than the carrying value. Impairment can be impacted by our projection of future
cash flows, the level of cash flows and salvage values, the methods of
estimatation used for determining fair values and the impact of guaranteed
residuals.
Insurance and Other Claims - Our insurance program for liability, property
damage, and cargo loss and damage, involves self insurance with high risk
retention levels. We have increased the self-insured retention portion of our
insurance coverage from $12,500 for each claim in 2000 to $1.0 million plus an
additional layer from $4.0 million to $7.0 million for each claim at November
2002. Effective March 2003, we increased our primary coverage to $5.0 million
with a $2.0 million retention level, plus an additional layer from $5.0 million
to $7.0 million for each claim. We accrue the estimated cost of the uninsured
portion of pending claims. These accruals are based on our evaluation of the
nature and severity of the claim and estimates of future claims development
based on historical trends. The rapid and substantial increase in our
self-insured retention makes these estimates an important accounting judgment.
Insurance and claims expense will vary based on the frequency and severity of
claims, the premium expense and the lack of self insured retention.
In addition to our primary insurance coverage we normally carry excess coverage
in amounts that have ranged from $16.0 million to $49.0 million. On July 15,
2002, we received a binder for $48.0 million of excess insurance coverage over
our $2.0 million primary layer. Subsequently, we were forced to seek replacement
coverage after the insurance agent retained the premium and failed to produce
proof of insurance coverage. If one or more claims from the period July to
November 2002 exceeded $2.0 million in amount, we would be required to accrue
for the potential or actual loss and our financial condition and results of
operations could be materially and adversely affected. We are not aware of any
such claims at this time.
We maintain a workers' compensation plan and group medical plan for our
employees with a deductible amount of $500,000 for each workers' compensation
claim and a deductible amount of $225,000 for each group medical claim. In the
first quarter of 2003, we adopted a workers' compensation plan with a self
insured retention level of $1.0 million per occurrence and renewed our group
medical plan with a deductible amount of $250,000.
Lease Accounting - We lease a significant portion of our tractor and trailer
fleet using operating leases. Substantially all of the leases have residual
value guarantees under which we 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." To the extent the expected value at the
lease termination date is lower than the residual value guarantee, we accrue for
the difference over the remaining lease term. The estimated values at lease
termination involve management judgments. Operating leases are carried off
balance sheet in accordance with SFAS No. 13.
23
INFLATION AND FUEL COSTS
Most of our operating expenses are inflation-sensitive, with inflation generally
producing increased costs of operations. During the past three years, the most
significant effects of inflation have been on revenue equipment prices and the
compensation paid to the drivers. Innovations in equipment technology and
comfort have resulted in higher tractor prices, and there has been an
industry-wide increase in wages paid to attract and retain qualified drivers. We
historically have 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 us than many other
carriers because of our long average length of haul. Most of our contracts with
customers contain fuel surcharge provisions. Although we historically have been
able to pass through most long-term increases in fuel prices and taxes to
customers in the form of surcharges and higher rates, increases usually are not
fully recovered. Fuel prices have remained high throughout most of 2000, 2001,
and 2002, which has increased our cost of operating. The elevated level of fuel
prices has continued into 2003.
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.
Our 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 our 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 our dry
van operation. During September and October, business increases as a result of
increased retail merchandise shipped in anticipation of the holidays.
The table below sets forth quarterly information reflecting our equipment
utilization (miles per tractor per period) during 2000, 2001, and 2002. We
believe that equipment utilization more accurately demonstrates the seasonality
of our business than changes in revenue, which are affected by the timing of
deliveries of new revenue equipment. Results of any one or more quarters are not
necessarily indicative of annual results or continuing trends.
Equipment Utilization Table
(Miles Per Tractor Per Period)
First Quarter Second Quarter Third Quarter Fourth Quarter
-----------------------------------------------------------------------------------
2000 31,095 31,869 32,948 32,784
2001 30,860 32,073 32,496 32,286
2002 30,986 33,461 32,664 32,801
FACTORS THAT MAY AFFECT FUTURE RESULTS
A number of factors, over which we have little or no control, may affect our
future results. Factors that might cause such a difference include, but are not
limited to, the following:
Economic Factors - Negative economic factors such as recessions, downturns in
customers' business cycles, surplus inventories, inflation, and higher interest
rates could impair our operating results by decreasing equipment utilization or
increasing costs of operations.
24
Fuel Prices - The price of diesel fuel has remained at elevated levels for much
of the past three years. Fuel is one of our largest operating expenses, and high
fuel prices have a negative impact on our profitability. Significant
fluctuations can make collection of fuel surcharges more difficult. Continued
high fuel prices and fluctuations may affect our future results. In addition,
our volume purchase commitments during 2003 and 2004 obligate us to purchase
approximately 36 million and 3.6 million gallons in 2003 and 2004, respectively.
Rising prices of fuel will negatively impact our profitability to the extent of
purchase commitments, less the effects of fixed price arrangements and financial
hedges.
Capital Requirements - The truckload industry is very capital intensive.
Historically, we have depended on cash from operations and our credit facility
to expand the size of our fleet and maintain modern revenue equipment. We review
our tractor and trailer trade cycle from time-to-time. In 2001, we extended our
trade cycle for tractors from three years to four years because of a depressed
market for used equipment. We are considering returning to a tractor trade cycle
of less than four years if the expected overall costs of maintenance and capital
would benefit the Company. Such a change, or other changes in tractor and
trailer acquisition and financing, could materially increase our borrowing. If
we are unable to generate sufficient cash from operations and obtain financing
on favorable terms in the future, we may have to limit our growth, enter into
less favorable financing arrangements, or operate our revenue equipment for
longer periods, any of which could have a materially adverse affect on our
profitability.
Growth - We experienced significant growth in revenue between our founding in
1986 and 1999. Since 2000, however, our revenue base has remained relatively
constant. There can be no assurance that our revenue growth rate will return to
historical levels or that we can effectively adapt our management,
administrative, and operational systems to respond to any future growth. Our
operating margins could be adversely affected by future changes in and expansion
of our business or by changes in economic conditions. Slower or less profitable
growth could adversely affect our stock price.
Resale of Used Revenue Equipment - Prior to 2000, we historically recognized
gains on the sale of our revenue equipment. The market for used tractors
experienced a sharp drop in late 1999 and low resale values have continued into
2002 which led to the impairment charges described herein. The prices of used
trailers also are depressed. If the prices for used equipment remain depressed,
we could find it necessary to dispose of our equipment at lower prices, increase
our depreciation expense, and/or retain some of our equipment longer, with a
resulting increase in operating expenses.
Recruitment, Retention, and Compensation of Qualified Drivers - Competition for
drivers is intense in the trucking industry. There historically has been, and
continues to be, an industry-wide shortage of qualified drivers. This shortage
could force us to significantly increase the compensation we pay to driver
employees, curtail our growth, or experience the adverse effects of tractors
without drivers.
Competition - The trucking industry is highly competitive and fragmented. We
compete with other truckload carriers, private fleets operated by existing and
potential customers, railroads, rail-intermodal service, and to some extent with
air-freight service. Competition is based primarily on service, efficiency, and
freight rates. Many competitors offer transportation service at lower rates than
the Company. Our results could suffer if we are forced to compete solely on the
basis of rates or if economic and competitive factors increase the downward
pressure on rates.
Regulation - The trucking industry is subject to various governmental
regulations. The DOT sent a final rule, which has not been published, to the
Office of Management and Budget ("OMB") in January, 2003 for OMB review and
approval. That rule, if approved, may limit the hours-in-service during which a
driver may operate a tractor. The DOT is also considering a proposal that would
require installing certain safety equipment on tractors. The EPA has promulgated
air emission standards that have increased the cost of tractor engines and are
expected to reduce fuel mileage. Although we are unable to predict the nature of
any changes in regulations, the cost of any changes, if implemented, may
adversely affect our profitability.
25
Insurance and claims - From 2001 to present, we have adopted an insurance
program with significantly higher deductibles. An increase in the number or
severity of accidents, stolen equipment, or other loss events over those
anticipated could have a materially adverse effect on our profitability.
Acquisitions - A significant portion of our growth has occurred through
acquisitions, and acquisitions are an important component of our growth
strategy. We must continue to identify desirable target companies and negotiate,
finance, and close acceptable transactions or our growth could suffer.
New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS 143 provides new guidance on the recognition and measurement
of an asset retirement obligation and its associated asset retirement cost. It
also provides accounting guidance for legal obligations associated with the
retirement of tangible long-lived assets. SFAS 143 is effective for our fiscal
year beginning in 2003 and is not expected to materially impact our consolidated
financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 provides new guidance on the recognition
of impairment losses on long-lived assets to be held and used or to be disposed
of and also broadens the definition of what constitutes discontinued operations
and how the results of discontinued operations are to be measured and presented.
SFAS 144 was effective for our fiscal year beginning in 2002 and is not expected
to materially change the methods we use to measure impairment losses on
long-lived assets.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS 145 amends existing guidance on reporting gains and losses on
extinguishment of debt to prohibit the classification of the gain or loss as
extraordinary, as the use of such extinguishments have become part of the risk
management strategy of many companies. SFAS 145 also amends SFAS 13 to require
sale-leaseback accounting for certain lease modifications that have economic
effects similar to sale-leaseback transactions. The provisions of the Statement
related to the rescission of Statement No. 4 is applied in fiscal years
beginning after May 15, 2002. The provisions of the Statement related to
Statement No. 13 were effective for transactions occurring after May 15, 2002.
The adoption of SFAS No. 145 is expected to result in reclassification of the
fiscal year 2002 loss on extinguishment of debt.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34. This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. Interpretation No. 45
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 31, 2002 and are not
expected to have a material effect on our financial statements. The disclosure
requirements are effective for financial statements of interim or annual periods
ending after December 15, 2002. We have guarantees which are included in the
notes to these consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation/Transition and Disclosure, an amendment of FASB Statement No. 123.
SFAS 148 amends SFAS 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements. Certain of the
disclosure modifications are required for fiscal years ending after December 15,
2002 and are included in the notes to these consolidated financial statements.
We do not anticipate adopting the fair value method of accounting promulgated by
SFAS 123.
26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are exposed to market risks from changes in (i) certain commodity prices and
(ii) certain interest rates on our debt.
COMMODITY PRICE RISK
Prices and availability of all petroleum products are subject to political,
economic, and market factors that are generally outside our control. Because our
operations are dependent upon diesel fuel, significant increases in diesel fuel
costs could materially and adversely affect our results of operations and
financial condition. Historically, we have been able to recover a portion of
long-term fuel price increases from customers in the form of fuel surcharges.
The price and availability of diesel fuel can be unpredictable as well as the
extent to which fuel surcharges could be collected to offset such increases. For
2002, diesel fuel expenses net of fuel surcharge represented 15.3% of our total
operating expenses and 15.2% of freight revenue. At December 31, 2002, we had no
derivative financial instruments to reduce our exposure to fuel price
fluctuations.
We do not trade in derivatives with the objective of earning financial gains on
price fluctuations, on a speculative basis, nor do we 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, we entered into two $10 million notional amount
interest rate swap agreements to manage the risk of variability in cash flows
associated with floating-rate debt. At December 31, 2002, we had drawn $43
million under the Credit Agreement. Approximately $23 million was subject to
variable rates and the remaining $20 million was subject to interest rate swaps
that fixed the interest rates at 5.16% and 4.75% plus the applicable margin per
annum. The swaps expire January 2006 and March 2006. These derivatives are not
designated as hedging instruments under SFAS No. 133 and consequently are marked
to fair value through earnings, in other expense in the accompanying statement
of operations. At December 31, 2002, the fair value of these interest rate swap
agreements was a liability of $1.6 million. Assuming the December 31, 2002
variable rate borrowings, each one-percentage point increase or decrease in
LIBOR would affect our pre-tax interest expense by $230,000 on an annualized
basis, excluding the portion of variable rate debt covered by cancelable
interest rate swaps, and the effect of changes in fair values resulting from
those swaps.
We do not trade in derivatives with the objective of earning financial gains on
price fluctuations, on a speculative basis, nor do we trade in these instruments
when there are no underlying related exposures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our audited consolidated balance sheets, statements of operations, cash flows,
stockholders' equity and comprehensive loss, and notes related thereto, are
contained at Pages 34 to 54 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the third quarter of 2001, we filed a report on Form 8-K involving a
change of accountants. Pursuant to the requirements of Regulation 304, the
disclosure called for by Regulation 304(a) need not be provided, as it was
previously reported in our Form 10-K filed April 1, 2002.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information respecting executive officers and directors set forth under the
captions "Election of Directors - Information Concerning Directors and Executive
Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" on Pages
2 to 3 and Page 12 of the Registrant's Proxy Statement for the 2003 annual
meeting of stockholders, which will be filed with the Securities and Exchange
Commission in accordance with Rule 14a-6 promulgated under the Securities
Exchange Act of 1934, as amended (the "Proxy Statement") is incorporated by
reference; provided, that the "Audit Committee Report for 2002" and the Stock
Performance Graph contained in the Proxy Statement are not incorporated by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information respecting executive compensation set forth under the caption
"Executive Compensation" on Pages 5 to 7 of the Proxy Statement is incorporated
herein by reference; provided, that the "Compensation Committee Report on
Executive Compensation" contained in the Proxy Statement is not incorporated by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information respecting security ownership of certain beneficial owners and
management set forth under the caption "Security Ownership of Certain Beneficial
Owners and Management" on Pages 9 to 10 of the Proxy Statement is incorporated
herein by reference. The information respecting equity compensation plans set
forth under the caption "Equity Compensation Plan Information" on page 15 of the
Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information respecting certain relationships and transactions of management
set forth under the captions "Compensation Committee Interlocks and Insider
Participation" and "Certain and Relationships and Related Transactions" on Page
4 of the Proxy Statement is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, an evaluation was performed
under the supervision of, and with the participation of, our management,
including our Chief Executive Officer and our Chief Financial Officer,
concerning the effectiveness of the design and operation of our disclosure
controls and procedures. Based on that evaluation, our management, including our
Chief Executive Officer and Chief Financial Officer, concluded that our
disclosure controls and procedures were effective as of December 31, 2002. There
have been no significant changes in our internal controls or in other factors
that could significantly affect internal controls subsequent to December 31,
2002, including any corrective actions with regard to significant deficiencies
and material weaknesses.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
Our audited consolidated financial statements are set forth at the following
pages of this report:
Independent Auditors' Report - KPMG LLP.......................................34
Report of Independent Accountants - PricewaterhouseCoopers LLP................35
Consolidated Balance Sheets...................................................36
28
Consolidated Statements of Operations.........................................37
Consolidated Statements of Stockholders' Equity and Comprehensive
Income (Loss)..............................................................38
Consolidated Statements of Cash Flows.........................................39
Notes to Consolidated Financial Statements....................................40
2. Financial Statement Schedules.
Financial statement schedules are not required because all required information
is included in the financial statements.
3. Exhibits.
See list under Item 15(c) below, with management compensatory plans and
arrangements being listed under Exhibits 10.1, 10.2, 10.3, and 10.8.
(b) Reports on Form 8-K during the fourth quarter ended December 31, 2002.
Forms 8-K were filed on November 7, 2002, and November 14, 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.
29
(c) 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.,
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.
16 (8) Letter of PricewaterhouseCoopers LLP regarding change in certifying
accountant.
21 (9) List of Subsidiaries.
23.1 # Independent Auditors' Consent - KPMG LLP.
23.2 # Independent Auditors' Consent - PricewaterhouseCoopers LLP.
- --------------------------------------------------------------------------------
References:
# Filed herewith
All other footnotes indicate a document previously filed as an exhibit to and
incorporated by reference from the following:
(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.
(8) Form 8-K/A filed September 26, 2001.
(9) Form 10-K/A filed July 31, 2002.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 26, 2003 By: /s/ Joey B. Hogan
------------------------------ -------------------------------
Joey B. Hogan
Senior Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature and Title Date
/s/ David R. Parker March 26, 2003
- --------------------------------------------------------------
David R. Parker
Chairman of the Board, President, and Chief Executive
Officer (principal executive officer)
/s/ Michael W. Miller March 26, 2003
- --------------------------------------------------------------
Michael W. Miller
Director
/s/ Joey B. Hogan March 26, 2003
- --------------------------------------------------------------
Joey B. Hogan
Senior Vice President and Chief Financial Officer
(principal financial and accounting officer)
/s/ R. H. Lovin, Jr. March 26, 2003
- --------------------------------------------------------------
R. H. Lovin, Jr. Director
/s/ William T. Alt March 26, 2003
- --------------------------------------------------------------
William T. Alt
Director
/s/ Robert E. Bosworth March 26, 2003
- --------------------------------------------------------------
Robert E. Bosworth
Director
/s/ Hugh O. Maclellan, Jr. March 26, 2003
- --------------------------------------------------------------
Hugh O. Maclellan, Jr.
Director
/s/ Mark A. Scudder March 26, 2003
- --------------------------------------------------------------
Mark A. Scudder
Director
31
CERTIFICATIONS
I, David R. Parker, certify that:
1. I have reviewed this annual report on Form 10-K for the fiscal year
ended December 31, 2002, of Covenant Transport, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures for the
registrant and 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 annual 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
annual report (the "Evaluation Date"); and
c. presented in this annual 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
annual report whether 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: March 26, 2003 /s/ David R. Parker
-------------------
David R. Parker
Chief Executive Officer
32
I, Joey B. Hogan, certify that:
1. I have reviewed this annual report on Form 10-K for the fiscal year
ended December 31, 2002, of Covenant Transport, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures for the
registrant and 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 annual 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
annual report (the "Evaluation Date"); and
c. presented in this annual 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
annual report whether 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: March 26, 2003 /s/ Joey B. Hogan
-----------------
Joey B. Hogan
Chief Financial Officer
33
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Covenant Transport, Inc.
We have audited the accompanying consolidated balance sheets of Covenant
Transport, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of operations, stockholders' equity and
comprehensive income (loss), and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We have conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Covenant
Transport, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for the years then ended, in
conformity with the accounting principles generally accepted in the United
States of America.
As discussed in note 1 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets.
/s/ KPMG LLP
Atlanta, Georgia
January 28, 2003
34
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Covenant Transport, Inc.
In our opinion, the consolidated statements of operations, stockholders' equity
and comprehensive loss and cash flows for the year ended December 31, 2000,
present fairly, in all material respects, the results of operations and cash
flows of Covenant Transport, Inc. and its subsidiaries for the year ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Knoxville, Tennessee
February 2, 2001
35
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(In thousands, except share data)
2002 2001
----------------- -----------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 42 $ 383
Accounts receivable, net of allowance of $1,800 in 2002
and $1,623 in 2001 65,041 62,540
Drivers advances and other receivables 3,480 4,002
Inventory and supplies 3,226 3,471
Prepaid expenses 14,450 11,824
Deferred income taxes 11,105 6,630
Income taxes receivable 2,585 4,729
----------------- -----------------
Total current assets 99,929 93,579
Property and equipment, at cost 392,498 369,069
Less accumulated depreciation and amortization (154,010) (137,533)
----------------- -----------------
Net property and equipment 238,488 231,536
Other assets 23,124 24,667
----------------- -----------------
Total assets $361,541 $349,782
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt 43,000 20,150
Securitization facility 39,230 48,130
Accounts payable 6,921 7,241
Accrued expenses 17,220 17,871
Insurance and claims accrual 21,210 11,854
----------------- -----------------
Total current liabilities 127,581 105,246
Long-term debt, less current maturities 1,300 29,000
Deferred income taxes 57,072 53,634
----------------- -----------------
Total liabilities 185,953 187,880
Commitments and contingent liabilities
Stockholders' equity:
Class A common stock, $.01 par value; 20,000,000 shares authorized; 12,999,315
and 12,680,483 shares issued and 12,027,815 and
11,708,983 outstanding as of 2002 and 2001, respectively 130 127
Class B common stock, $.01 par value; 5,000,000 shares authorized;
2,350,000 shares issued and outstanding as of 2002 and 2001 24 24
Additional paid-in-capital 84,492 79,832
Accumulated other comprehensive loss - (748)
Treasury Stock at cost; 971,500 shares as of December 31, 2002 and 2001 (7,935) (7,935)
Retained earnings 98,877 90,602
----------------- -----------------
Total stockholders' equity 175,588 161,902
----------------- -----------------
Total liabilities and stockholders' equity $361,541 $349,782
================= =================
See accompanying notes to consolidated financial statements.
36
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(In thousands, except per share data)
2002 2001 2000
---------------- ---------------- ---------------
Freight revenue $ 541,830 $547,028 $552,429
Fuel and accessorial surcharges 22,588 26,593 31,561
---------------- ---------------- ---------------
Total revenue 564,418 573,621 583,990
Operating expenses:
Salaries, wages, and related expenses 227,332 244,849 244,704
Fuel expense 96,332 103,894 104,154
Operations and maintenance 39,625 39,410 36,267
Revenue equipment rentals and purchased
transportation 59,265 65,104 76,200
Operating taxes and licenses 13,934 14,358 14,940
Insurance and claims 31,761 27,838 18,907
Communications and utilities 7,021 7,439 7,189
General supplies and expenses 14,677 14,468 13,970
Depreciation, amortization and impairment charge, including
gains (losses) on disposition of equipment (1) 49,497 56,324 38,879
---------------- ---------------- ---------------
Total operating expenses 539,444 573,684 555,210
---------------- ---------------- ---------------
Operating income (loss) 24,974 (63) 28,780
Other (income) expenses:
Interest expense 3,542 7,855 9,894
Interest income (63) (328) (520)
Other 916 799 (368)
---------------- ---------------- ---------------
Other (income) expenses, net 4,395 8,326 9,006
---------------- ---------------- ---------------
Income (loss) before income taxes 20,579 (8,389) 19,774
Income tax expense (benefit) 11,415 (1,727) 7,899
---------------- ---------------- ---------------
Income (loss) before extraordinary loss on early extinguishment of
debt 9,164 (6,662) 11,875
Extraordinary loss on early extinguishment of debt, net of income
tax benefit 890 - -
---------------- ---------------- ---------------
Net income (loss) $ 8,274 $ (6,662) $ 11,875
================ ================ ===============
Net income (loss) per share:
Income (loss) before extraordinary loss on early
extinguishment of debt $0.64 ($0.48) $0.82
Extraordinary loss, net of income tax benefit (0.06) - -
---------------- ---------------- ---------------
Total basic earnings (loss) per share: $0.58 ($0.48) $0.82
================ ================ ===============
Income (loss) before extraordinary loss on early
extinguishment of debt $0.63 ($0.48) $0.82
Extraordinary loss, net of income tax benefit (0.06) - -
---------------- ---------------- ---------------
Total diluted earnings (loss) per share: $0.57 ($0.48) $0.82
================ ================ ===============
Weighted average shares outstanding 14,223 13,987 14,404
Weighted average shares outstanding adjusted for assumed
conversions 14,519 13,987 14,533
(1) Includes a $3.3 million and a $15.4 million pre-tax impairment charges in
2002 and 2001 respectively.
See accompanying notes to consolidated financial statements.
37
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In thousands)
Additional Accumulated Total
Common Stock Paid-In Treasury Other Retained Stockholders' Comprehensive
----------------- Capital Stock Comprehensive Earnings Equity Income (Loss)
Class A Class B Income (Loss)
---------------------------------------------------------------------------------------------------
Balances at December 31, 1999 $126 $24 $ 78,313 -- -- $ 85,389 $163,852
=====================================================================================
Exercise of employee stock
options -- -- 30 -- -- -- 30
Stock repurchase -- -- -- (7,935) -- -- (7,935)
Net income -- -- -- -- -- 11,875 11,875
-------------------------------------------------------------------------------------
Balances at December 31, 2000 $126 $ 24 $78,343 $ (7,935) -- $ 97,264 $ 167,822
=====================================================================================
Exercise of employee stock
options 1 -- 1,270 -- -- -- 1,271
Income tax benefit arising
from the exercise of stock
options -- -- 219 -- -- -- 219
Comprehensive loss:
Unrealized loss on cash flow
hedging derivatives, net
of taxes -- -- -- -- (748) -- (748) (748)
Net loss -- -- -- -- -- (6,662) (6,662) (6,662)
-------------
Comprehensive loss for 2001 $(7,410)
--------------------------------------------------------------------------------------=============
Balances at December 31, 2001 $127 $ 24 $79,832 $ (7,935) $(748) $90,602 $ 161,902
=====================================================================================
Exercise of employee stock
options 3 -- 3,878 -- -- -- 3,881
Income tax benefit arising
from the exercise of stock
options -- -- 783 -- -- -- 783
Unrealized gain on cash flow
hedging derivatives, net
of taxes -- -- -- -- 748 -- 748 748
Net income -- -- -- -- -- 8,274 8,274 8,274
-------------
Comprehensive income for 2002 $9,022
--------------------------------------------------------------------------------------=============
Balances at December 31, 2002 $ 130 $ 24 $ 84,493 $(7,935) $ -- $98,876 $ 175,588
=====================================================================================
See accompanying notes to consolidated financial statements.
38
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(In thousands)
2002 2001 2000
---------------- ---------------- ----------------
Cash flows from operating activities:
Net income (loss) $8,274 ($6,662) $11,875
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on accounts receivables 852 722 535
Extraordinary loss on early extinguishment of debt,
net of tax 890 -- --
Depreciation, amortization, and impairment of assets (1) 47,090 56,107 39,181
Provision for losses on guaranteed residuals 324 -- --
Equity in earnings of affiliate -- 140 376
Income tax benefit from exercise of stock options 783 219 --
Deferred income taxes (1,537) (5,674) 6,180
Loss (gain) on disposition of property and equipment 2,407 217 (1,032)
Changes in operating assets and liabilities:
Receivables and advances (1,317) 16,610 (3,965)
Prepaid expenses (2,625) 2,090 (4,358)
Tire and parts inventory 245 (522) 97
Accounts payable and accrued expenses 11,781 10,517 (228)
---------------- ---------------- ----------------
Net cash flows provided by operating activities 67,167 73,764 48,661
Cash flows from investing activities:
Acquisition of property and equipment (70,720) (55,466) (71,427)
Proceeds from disposition of property and equipment 14,369 24,705 51,108
Acquisition of business -- (564) (7,658)
Investment in TPC -- -- (5,307)
---------------- ---------------- ----------------
Net cash used in investing activities (56,351) (31,325) (33,284)
Cash flows from financing activities:
Exercise of stock options 3,881 1,271 30
Proceeds from issuance of debt 85,000 54,000 174,119
Repayments of long-term debt (100,038) (99,519) (176,034)
Repurchase of Company stock -- -- (7,935)
Other -- (95) (717)
Checks in excess of bank balance -- -- (3,599)
---------------- ---------------- ----------------
Net cash used in financing activities (11,157) (44,343) (14,136)
---------------- ---------------- ----------------
Net change in cash and cash equivalents (341) (1,904) 1,241
Cash and cash equivalents at beginning of period 383 2,287 1,046
---------------- ---------------- ----------------
Cash and cash equivalents at end of period $42 $383 $2,287
================ ================ ================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $4,016 $7,880 $10,410
================ ================ ================
Income taxes $12,389 $967 $2,645
================ ================ ================
(1) Includes a $3.3 million and a $15.4 million pre-tax impairment charges in
2002 and 2001 respectively.
See accompanying notes to consolidated financial statements.
39
COVENANT TRANSPORT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Covenant Transport, Inc. (the "Company") is a long-haul
truckload carrier that offers premium transportation services, such as team,
refrigerated and dedicated contract services, to customers throughout the United
States. The Company operations comprise a single segment for financial reporting
purposes.
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company, a holding company incorporated in the state of Nevada
in 1994, and its wholly-owned operating subsidiaries, Covenant Transport, Inc.,
a Tennessee corporation; Harold Ives Trucking Co., an Arkansas corporation;
Terminal Truck Broker, Inc., an Arkansas corporation (Harold Ives Trucking Co.
and Terminal Truck Broker, Inc. referred together as "Harold Ives"); Southern
Refrigerated Transport, Inc., an Arkansas corporation; Tony Smith Trucking,
Inc., an Arkansas corporation; (Southern Refrigerated Transport, Inc. and Tony
Smith Trucking, Inc. referred together as "SRT"); Covenant.com, Inc., a Nevada
corporation; Covenant Asset Management, Inc., a Nevada corporation; CIP, Inc., a
Nevada corporation; CVTI Receivables Corp., ("CRC") a Nevada corporation and
Volunteer Insurance Limited, Co., a Cayman Islands company. All significant
intercompany balances and transactions have been eliminated in consolidation.
Revenue Recognition - Revenue, drivers' wages and other direct operating
expenses are recognized on the date shipments are delivered to the customer. The
Company records revenue on a net basis for transactions on which it functioned
as a broker in 2000. 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.
Cash and Cash Equivalents - The Company considers all highly liquid investments
with a maturity of three months or less to be cash equivalents.
Inventories and supplies- Inventories and supplies consist of parts, tires, fuel
and supplies. Tires on new revenue equipment are capitalized as a component of
the related equipment cost when the vehicle is placed in service and recovered
through depreciation over the life of the vehicle. Replacement tires and parts
on hand at year end are recorded at the lower of cost or market with cost
determined using the first-in, first-out (FIFO) method. Replacement tires are
expensed when placed in service.
Goodwill - Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards (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 being amortized after January 1, 2002. Goodwill was
previously amortized over twenty to forty years. 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 annual evaluation of its goodwill for impairment and determined that there
was no impairment. At December 31, 2002, the Company has approximately $11.5
million of goodwill. Had goodwill not been amortized in the previous years, the
Company's net income and net income per share would have been as follows for the
years ended December 31, 2001 and 2000:
40
(in thousands except per share data) December 31, 2001 December 31, 2000
-----------------------------------------------
Net income (loss) as reported $(6,662) $11,875
Add back goodwill amortization, net of tax 248 248
-----------------------------------------------
Adjusted net income (loss) $(6,414) $12,123
===============================================
Basic and diluted earnings (losses) per share:
As reported ($0.48) $0.82
Goodwill amortization, net of tax 0.02 0.02
-----------------------------------------------
As adjusted ($0.46) $0.84
===============================================
Intangible Assets - The Company periodically evaluates the net realizability of
the carrying amount of intangible assets. Non-compete agreements are amortized
over the life of the agreement and deferred loan costs are amortized over the
life of the loan.
Property and Equipment - Depreciation is calculated using the straight-line
method over the estimated useful lives of the assets. Historically, revenue
equipment had been depreciated over five to seven years with salvage values
ranging from 25% to 33 1/3%. During 2000, the Company extended its estimate for
the useful life of its dry van trailers from seven to eight years and increased
the salvage value to approximately 48% of cost. The Company based its decision
on recent experience and expected future utilization. Gains or losses on
disposal of revenue equipment are included in depreciation in the statements of
operations. 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 also 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.
Impairment of Long-Lived Assets - In August 2001, the FASB issued Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("SFAS 144"), which supersedes both SFAS 121 and
the accounting and reporting provisions of Accounting Principles Board Opinion
No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions ("Opinion 30") for the disposal of a segment of a
business (as previously defined in that Opinion). SFAS 144 retains the
fundamental provisions in SFAS 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated with
SFAS 121. For example, SFAS 144 provides guidance on how a long-lived asset that
is used as part of a group should be evaluated for impairment, establishes
criteria for when a long-lived asset is held for sale, and prescribes the
accounting for a long-lived asset that will be disposed of other than by sale.
SFAS 144 retains the basic provisions of Opinion 30 on how to present
discontinued operations in the income statement but broadens that presentation
to include a component of an entity (rather than a segment of a business). The
Company adopted SFAS 144 on January 1, 2002. SFAS 144 had no impact on the
Company's financial statements.
Fair Value of Financial Instruments - The Company's financial instruments
consist primarily of cash, accounts receivable, accounts payable and long term
debt. The carrying amount of cash, accounts receivable and accounts payable
approximates their fair value because of the short term maturity of these
instruments. Interest rates that are currently available to the Company for
issuance of long term debt with similar terms and remaining maturities are used
to estimate the fair value of the Company's long term debt. The carrying amount
of the Company's long term debt at December 31, 2002 and 2001 was approximately
$83.5 million and $97.3 million, respectively; including the accounts receivable
securitization borrowings and approximates the estimated fair value, due to the
variable interest rates on these instruments.
41
Capital Structure - The shares of Class A and B Common Stock are substantially
identical except that the Class B shares are entitled to two votes per share and
Class A only one vote per share. The terms of any future issuances of preferred
shares will be set by the Board of Directors.
Insurance and Other Claims - The Company's insurance program for liability,
workers compensation, group medical, property damage, cargo loss and damage, and
other sources involves self insurance with high risk retention levels. In 2001,
the Company adopted an insurance program with significantly higher deductibles.
The deductible amount increased from an aggregate $12,500 in 2000, to $250,000
in 2001, to $500,000 in March of 2002. In November 2002, the deductible amount
increased to $1.0 million per each claim with a layer from $4.0 million to $7.0
million for each claim. The Company plans to increase the deductible to $2.0
million in 2003. Losses in excess of these risk retention levels are covered by
insurance up to a maximum per claim amount of $20.0 million. The Company accrues
the estimated cost of the uninsured portion of pending claims. These accruals
are based on management's evaluation of the nature and severity of the claim and
estimates of future claims development based on historical trends. Insurance and
claims expense will vary based on the frequency and severity of claims, the
premium expense and the lack of self insured retention.
Concentrations of Credit Risk - The Company performs ongoing credit evaluations
of its customers and does not require collateral for its accounts receivable.
The Company maintains reserves which management believes are adequate to provide
for potential credit losses. The Company's customer base spans the continental
United States. Three of the Company's customers, which are autonomously managed
and operated are wholly owned subsidiaries of a public entity and when added
together amount to approximately 11%, 13% and 11% of revenue in 2000, 2001 and
2002, respectively.
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
Income Taxes - Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Derivative Instruments and Hedging Activities - In June 1998 the Financial
Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for
Derivative Instruments and Certain Hedging Activities." In June 2000 the FASB
issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activity, an Amendment of SFAS No. 133." SFAS No. 133 and SFAS No. 138
require that all derivative instruments be recorded on the balance sheet at
their respective fair values. Derivatives that are not hedges must be adjusted
to fair value through earnings. If the derivative qualifies as a hedge,
depending on the nature of the hedge, changes in its fair value are either
offset against the change in the fair value of assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The Company engages in activities
that expose it to market risks, including the effects in changes in interest
rates and fuel prices. Financial exposures are managed as an integral part of
the Company's risk management program, which seeks to reduce potentially adverse
effects that the volatility of the interest rate and fuel markets may have on
operating results. The Company does not regularly engage in speculative
transactions, nor does it regularly hold or issue financial instruments for
trading purposes.
All derivatives are recognized on the balance sheet at their fair values. On the
date the derivative contract is entered into, the Company designates the
derivative a hedge of a forecasted transaction or of the variability of cash
flows to be received or paid related to a recognized asset or liability ("cash
flow" hedge). The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
42
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as cash-flow hedges to specific
assets and liabilities on the balance sheet or to specific firm commitments or
forecasted transactions.
The Company also formally assesses, both at the hedge's inception and on an
ongoing basis, whether the derivatives that are used in hedging transactions are
highly effective in offsetting changes in fair values or cash flows of hedged
items.
Changes in the fair value of a derivative that is highly effective and that is
designated and qualifies as a fair-value hedge, along with the loss or gain on
the hedged asset or liability or unrecognized firm commitment of the hedged item
that is attributable to the hedged risk are recorded in earnings. Changes in the
fair value of a derivative that is highly effective and that is designated and
qualifies as a cash-flow hedge are recorded in other comprehensive income, until
earnings are affected by the variability in cash flows or unrecognized firm
commitment of the designated hedged item.
The Company discontinues hedge accounting prospectively when it is determined
that the derivative is no longer effective in offsetting changes in the fair
value or cash flows of the hedged item, the derivative expires or is sold,
terminated, or exercised, the derivative is undesignated as a hedging
instrument, because it is unlikely that a forecasted transaction will occur, a
hedged firm commitment no longer meets the definition of a firm commitment, or
management determines that designation of the derivative as a hedging instrument
is no longer appropriate.
When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair-value hedge, the Company
continues to carry the derivative on the balance sheet at its fair value, and no
longer adjusts the hedged asset or liability for changes in fair value. The
adjustment of the carrying amount of the hedged asset or liability is accounted
for in the same manner as other components of the carrying amount of that asset
or liability. When hedge accounting is discontinued because the hedged item no
longer meets the definition of a firm commitment, the Company continues to carry
the derivative on the balance sheet at its fair value, removes any asset or
liability that was recorded pursuant to recognition of the firm commitment from
the balance sheet and recognizes any gain or loss in earnings. When hedge
accounting is discontinued because it is probable that a forecasted transaction
will not occur, the Company continues to carry the derivative on the balance
sheet at its fair value, and gains and losses that were accumulated in other
comprehensive income are recognized immediately in earnings. In all other
situations in which hedge accounting is discontinued, the Company continues to
carry the derivative at its fair value on the balance sheet, and recognizes any
changes in its fair value in earnings.
Effect of New Accounting Pronouncements - In June 2001, the FASB issued SFAS No.
143, Accounting for Asset Retirement Obligations. SFAS 143 provides new guidance
on the recognition and measurement of an asset retirement obligation and its
associated asset retirement cost. It also provides accounting guidance for legal
obligations associated with the retirement of tangible long-lived assets. SFAS
143 is effective for the Company's fiscal year beginning in 2003 and is not
expected to materially impact the Company's consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 provides new guidance on the recognition
of impairment losses on long-lived assets to be held and used or to be disposed
of and also broadens the definition of what constitutes discontinued operations
and how the results of discontinued operations are to be measured and presented.
SFAS 144 is effective for the Company's fiscal year beginning in 2002 and is not
expected to materially change the methods used by the Company to measure
impairment losses on long-lived assets.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS 145 amends existing guidance on reporting gains and losses on
extinguishment of debt to prohibit the classification of the gain or loss as
extraordinary, as the use of such extinguishments have become part of the risk
management strategy of many companies. SFAS 145 also amends SFAS 13 to require
sale-leaseback accounting for certain lease modifications that have economic
effects similar to sale-leaseback transactions. The provisions of the Statement
related to the rescission of Statement No. 4 is applied
43
in fiscal years beginning after May 15, 2002. The provisions of the Statement
related to Statement No. 13 were effective for transactions occurring after May
15, 2002. The adoption of SFAS No. 145 is not expected to have a material effect
on the Company's financial position, results of operations or cash flows.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34. This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. Interpretation No. 45
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 31, 2002 and are not
expected to have a material effect on the Company's financial statements. The
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002. The Company has guarantees which
are included in the notes to these consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation/Transition and Disclosure, an amendment of FASB Statement No. 123.
SFAS 148 amends SFAS 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements. Certain of the
disclosure modifications are required for fiscal years ending after December 15,
2002 and are included in the notes to these consolidated financial statements.
The Company does not anticipate adopting the fair value method of accounting
promulgated by SFAS 123.
Earnings per Share ("EPS") - The Company applies the provisions of FASB SFAS No.
128, Earnings per Share, which requires companies to present basic EPS and
diluted EPS. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company.
Dilutive common stock options are included in the diluted EPS calculation using
the treasury stock method. Common stock options were not included in the diluted
EPS computation for 2001 because the options were anti-dilutive.
The following table sets forth for the periods indicated the weighed average
shares outstanding used in the calculation of net earnings per share included in
the Company's Consolidated Statement of Operations:
(in thousands except per share data) 2002 2001 2000
---------------- ---------------- ----------------
Denominator for basic earnings
per share - weighted-average shares 14,223 13,987 14,404
Effect of dilutive securities:
Employee stock options 296 - 129
---------------- ---------------- ----------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions 14,519 13,987 14,533
================ ================ ================
At December 31, 2002, the Company had three stock-based employee compensation
plans, which are described more fully in Note 12. The Company accounts for those
plans under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. No
stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates
44
the effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
(in thousands except per share data) 2002 2001 2000
----------------- ----------------- ----------------
Net income (loss), as reported: $8,274 $(6,662) $11,875
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (1,894) (2,300) (1,662)
----------------- ----------------- ----------------
Pro forma net income (loss) $6,380 $(8,962) $10,213
================= ================= ================
Basic earnings (loss) per share:
As reported $0.58 $(0.48) $0.82
Pro forma $0.45 $(0.64) $0.71
Diluted earnings (loss) per share:
As reported $0.57 $(0.48) $0.82
Pro forma $0.44 $(0.64) $0.70
Reclassifications - Certain prior period financial statement balances have been
reclassified to conform to the current period's classification.
2. INVESTMENT IN TRANSPLACE
Effective July 1, 2000, the Company combined its logistics business with the
logistics businesses of five other transportation companies into a company
called Transplace, Inc. ("TPC"). TPC operates a global transportation logistics
service and is developing programs for the cooperative purchasing of 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) annually.
Initially, the Company accounted for its 12.4% investment in TPC using the
equity method of accounting. During the third quarter of 2001, TPC changed its
filing status to a C corporation and as a result management determined it
appropriate to account for its investment using the cost method of accounting
effective July 1, 2001.
3. ACQUISITIONS
In August 2000, the Company purchased certain assets of Con-Way Truckload
Services, Inc. ("CTS") for approximately $7.7 million, which included
approximately $5.2 million for property and equipment. The acquisition has been
accounted for using the purchase method of accounting. In 2001, the Company made
a $564,000 earnout payment related to this acquisition.
45
4. PROPERTY AND EQUIPMENT
A summary of property and equipment, at cost, as of December 31, 2002 and 2001
is as follows:
(in thousands) 2002 2001
------------------------ ------------------------
Revenue equipment $311,280 $289,766
Communications equipment 15,949 15,959
Land and improvements 14,000 9,194
Buildings and leasehold improvements 39,794 39,569
Construction in progress 17 4,453
Other 11,458 10,128
------------------------ ------------------------
$392,498 $369,069
======================== ========================
Depreciation expense amounts were $46.7 million, $55.1 million and $39.0 million
in 2002, 2001 and 2000, respectively. The 2002 and 2001 amounts included a $3.3
million pre-tax impairment charge ($2.0 million after taxes) and a $15.4 million
pre-tax impairment charge ($9.6 million after taxes), respectively. The charges
related to approximately 2,100 model year 1998 through 2000 in use tractors.
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 SFAS No. 121, "Accounting
for the Impairment of Long Lived Assets and of Long Lived Assets to be disposed
of". 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 the Company recognized the pre-tax charges to
reflect an impairment in tractor values. 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 Company's approximately 1,400 model year 2001 tractors were not affected by
the charge. 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 have a shortfall in its
guaranteed residual values of approximately $1.4 million. The Company is
recording its additional lease expense ratably over the remaining lease term.
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.
46
5. OTHER ASSETS
A summary of other assets as of December 31, 2002 and 2001 is as follows:
(in thousands) 2002 2001
----------------- -----------------
Covenants not to compete $1,690 $1,690
Trade name 330 330
Goodwill 12,416 11,916
Less accumulated amortization of intangibles (2,466) (2,300)
----------------- -----------------
Net intangible assets 11,970 11,636
Investment in TPC 10,666 10,666
Other 488 2,365
----------------- -----------------
$23,124 $24,667
================= =================
6. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 2002 and 2001:
(in thousands) 2002 2001
------------------ ------------------
Borrowings under $120 million credit agreement $ 43,000 $ 26,000
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 1,300 3,000
------------------ ------------------
44,300 49,150
Less current maturities 43,000 20,150
------------------ ------------------
$1,300 $29,000
================== ==================
In December 2000, the Company entered into the Credit Agreement with a group of
banks, which matures December 2003 and was extended February 2003 for an
additional two years. Borrowings under the Credit Agreement are based on the
banks' base rate or LIBOR and accrue interest based on one, two, or three month
LIBOR rates plus an applicable margin that is adjusted quarterly between 0.75%
and 1.25% based on cash flow coverage. At December 31, 2002, the margin was
1.0%. The Credit Agreement is guaranteed by the Company and all of the Company's
subsidiaries except CVTI Receivables Corp. and Volunteer Insurance Limited, Co.
The Credit Agreement has a maximum borrowing limit of $120.0 million. When the
facility was extended in February 2003, the borrowing limit was reduced to
$100.0 million with an accordion feature which permits an increase of up to $40
million. Borrowings related to revenue equipment are limited to the lesser of
90% of net book value of revenue equipment or the maximum borrowing limit.
Letters of credit are limited to an aggregate commitment of $20.0 million and
was increased to $35.0 million in February 2003. The Credit Agreement includes a
"security agreement" such that the Credit Agreement may be collateralized by
virtually all assets of the Company if a covenant violation occurs. A commitment
fee, that is adjusted quarterly between 0.15% and 0.25% per annum based on cash
flow coverage, is due on the daily unused portion of the Credit Agreement. As of
December 31, 2002, the Company had borrowings under the Credit Agreement in the
amount of $43.0 million with a weighted average interest rate of 2.3%.
In October 1995, the Company issued $25 million in ten-year senior notes to an
insurance company. The notes were amended in 2000. On March 15, 2002, the
Company retired its $20 million in senior notes with borrowings from the Credit
Agreement. The term agreement required payments for 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.
47
The Company incurred a $0.9 million after-tax extraordinary item ($1.4 million
pre-tax) to reflect the early extinguishment of this debt in the first quarter
of 2002.
Maturities of long term debt at December 31, 2002 are as follows (in thousands):
2003 $ 43,000
2004 1,300
The Credit Agreement contains 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.
7. ACCOUNTS RECEIVABLE SECURITIZATION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
In December 2000, the Company entered into a $62 million revolving accounts
receivable securitization facility (the "Securitization Facility"). On a
revolving basis, the Company sells its interests in its accounts receivable to
CVTI Receivables Corp. ("CRC"), a wholly-owned bankruptcy-remote special purpose
subsidiary incorporated in Nevada. CRC sells a percentage ownership in such
receivables to an unrelated financial entity. The 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 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 includes
certain significant events that could cause amounts to be immediately due and
payable in the event of certain ratios. The proceeds received are reflected as a
current liability on the consolidated financial statements because the committed
term, subject to annual renewals, is 364 days. As of December 31, 2002 and 2001,
the Company had received $39.2 million and $48.1 million respectively, in
proceeds, with a weighted average interest rate of 1.5% and 2.0%, respectively.
The activity in allowance for doubtful accounts (in thousands) is as follows:
Years ended December 31: Beginning Additional Write-offs and Ending Balance
Balance provisions to other December 31,
January 1, allowance deductions
-----------------------------------------------------------------------
2002 $1,623 $852 $675 $1,800
====== ==== ==== ======
2001 $1,263 $722 $362 $1,623
====== ==== ==== ======
2000 $1,040 $535 $312 $1,263
====== ==== ==== ======
8. LEASES
The Company has operating lease commitments for office and terminal properties,
revenue equipment, computer and office equipment, exclusive of owner/operator
rentals, and month-to-month equipment rentals, summarized for the following
fiscal years (in thousands):
2003 $ 21,017
2004 12,502
2005 10,852
2006 6,823
2007 4,665
Thereafter 6,449
48
The Company's operating leases of tractors and trailers contain residual value
guarantees under which the Company guarantees a certain minimum cash value
payment to the leasing company at the expiration of the lease. The Company
estimates that the residual guarantees are approximately $56.8 million at
December 31, 2002.
Rental expense is summarized as follows for each of the three years ended
December 31:
(in thousands) 2002 2001 2000
---------------- ---------------- ----------------
Revenue equipment rentals $16,877 $19,819 $16,918
Terminal rentals 1,115 1,055 1,684
Other equipment rentals 2,943 3,198 2,904
---------------- ---------------- ----------------
$ 20,934 $ 24,072 $ 21,506
================ ================ ================
During April 1996, the Company entered into an agreement to lease its
headquarters and terminal in Chattanooga under an operating lease. The lease
provided for rental payments to be variable based upon LIBOR interest rates for
five years. This operating lease expired March 2001 and the Company purchased
the building.
9. INCOME TAX
Income tax expense (benefit) for the years ended December 31, 2002, 2001, and
2000 is comprised of:
(in thousands) 2002 2001 2000
---------------- ---------------- ----------------
Federal, current $11,598 $3,498 $1,370
Federal, deferred (387) (5,355) 5,841
State, current 1,313 449 87
State, deferred (1,109) (319) 601
---------------- ---------------- ----------------
$11,415 ($1,727) $7,899
================ ================ ================
Income tax expense varies from the amount computed by applying the federal
corporate income tax rate of 35% to income before income taxes for the years
ended December 31, 2002, 2001 and 2000 as follows:
(in thousands) 2002 2001 2000
---------------- ---------------- ----------------
Computed "expected" income tax expense $7,203 ($2,936) $6,921
State income taxes, net of federal income tax
effect 133 85 593
Change in valuation allowance (392) 392 -
Per diem allowances 3,471 1,346 -
Other, net 1,000 (614) 385
---------------- ---------------- ----------------
Actual income tax expense (benefit) $11,415 ($1,727) $7,899
================ ================ ================
49
The temporary differences and the approximate tax effects that give rise to the
Company's net deferred tax liability at December 31, 2002 and 2001 are as
follows:
(in thousands) 2002 2001
---------------------- ----------------------
Deferred tax assets:
Accounts receivable $605 $613
Accrued expenses 8,949 5,143
Intangible assets 113 256
State net operating loss carryovers 1,013 392
Deferred gain 265 -
Investments 160 160
Other comprehensive loss in equity - 458
---------------------- ----------------------
11,105 7,022
Less: valuation allowance - (392)
---------------------- ----------------------
Total gross deferred tax assets 11,105 6,630
---------------------- ----------------------
Deferred tax liability:
Property and equipment 53,167 48,501
Change in accounting methods - 304
Accrued salaries and wages 605 643
Prepaid liabilities 3,300 4,186
---------------------- ----------------------
Total deferred tax liabilities 57,072 53,634
---------------------- ----------------------
Net deferred tax liability $45,967 $47,004
====================== ======================
Based upon the expected reversal of deferred tax liabilities and the level of
historical and projected taxable income over periods in which the deferred tax
assets are deductible, the Company's management believes it is more likely than
not the Company will realize the benefits of the deductible differences at
December 31, 2002.
10. STOCK REPURCHASE PLAN
In June 2000, the Company authorized a stock repurchase plan for up to 1.0
million Company shares to be purchased in the open market or through negotiated
transactions. In July 2000, the Company authorized an additional 500,000 shares
to be repurchased. During the second quarter of 2000, 792,000 shares were
purchased at an average price of $8.14. During the third quarter of 2000,
179,500 shares were purchased at an average price of $8.27. During 2001 and
2002, the Company did not purchase any additional shares through the repurchase
plan. As of December 31, 2002 a total of 971,500 had been purchased with an
average price of $8.17. The stock repurchase program has no expiration date.
11. DEFERRED PROFIT SHARING EMPLOYEE BENEFIT PLAN
The Company has a deferred profit sharing and savings plan that covers
substantially all employees of the Company with at least six months of service.
Employees may contribute up to 17% of their annual compensation subject to
Internal Revenue Code maximum limitations. The Company may make discretionary
contributions as determined by a committee of the Board of Directors. The
Company contributed approximately $1.0 million, $1.1 million and $1.0 million in
2002, 2001 and 2000, respectively, to the profit sharing and savings plan.
12. STOCK OPTION PLANS
The Company has adopted option plans for employees and directors. Awards may be
in the form of incentive stock awards or other forms. The Company has reserved
2,165,269 shares of Class A Common Stock for distribution at the discretion of
the Board of Directors. In July 2000, the Board of Directors accelerated the
vesting schedule of
50
certain stock options granted in the years 1998, 1999 and 2000 to vest ratably
over 3 years and expire 10 years from the date of grant. Certain options granted
prior to 1998 vest ratably over 5 years and expire 10 years from the date of
grant. The following table details the activity of the incentive stock option
plan:
Weighted Options
Average Exercisable at
Shares Exercise Price Year End
---------------------------------------------------------
Under option at December 31, 1999 932,550 $14.14 354,150
Options granted in 2000 625,176 $8.87
Options exercised in 2000 (2,600) $11.45
Options canceled in 2000 (129,800) $12.39
-------------------
Under option at December 31, 2000 1,425,326 $11.99 613,026
Options granted in 2001 308,000 $16.71
Options exercised in 2001 (113,633) $11.19
Options canceled in 2001 (37,248) $10.54
-------------------
Under option at December 31, 2001 1,582,445 $12.99 856,486
Options granted in 2002 186,250 $15.61
Options exercised in 2002 (318,832) $12.22
Options canceled in 2002 (68,323) $14.29
-------------------
Under option at December 31, 2002 1,381,540 $13.48 855,685
===================
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------------
Weighted-
Number Average Weighted- Number Weighted-
Range of Exercise Outstanding at Remaining Average Exercisable At Average
Prices 12/31/02 Contractual Life Exercise Price 12/31/02 Exercise Price
- ------------------------------------------------------------------------------------------------------------------
$ 8.00 to $12.99 507,825 85 $9.39 336,939 $9.78
$13.00 to $15.99 511,626 73 $15.00 354,576 $14.82
$16.00 to $20.00 362,089 84 $17.07 164,170 $17.22
The Company accounts for its stock-based compensation plans under APB No. 25,
under which no compensation expense has been recognized because all employee
stock options have been granted with the exercise price equal to the fair value
of the Company's Class A Common Stock on the date of grant. Under SFAS No. 123,
fair value of options granted are estimated as of the date of grant using the
Black-Scholes option pricing model and the following weighted average
assumptions: risk-free interest rates ranging from 1.7% to 4.8%; expected life
of 5 years; dividend rate of zero percent; and expected volatility of 48.5% for
2000, 55.3% for 2001 and 53.3% for 2002. Using these assumptions, the fair value
of the employee stock options granted in 2000, 2001 and 2002 is $2.2 million,
$2.3 million and $1.9 million respectively, which would be amortized as
compensation expense over the vesting period of the options. Had compensation
cost been determined in accordance with SFAS No. 123, utilizing the assumptions
detailed above, the Company's net income and net income per share would have
been reduced to the following pro forma amounts for the years ended December 31,
2002, 2001 and 2000:
51
(in thousands except per share data) 2002 2001 2000
----------------- ----------------- ----------------
Net Income (loss):
As reported $8,274 $(6,662) $11,875
Pro forma $6,380 $(8,962) $10,213
Basic earnings (loss) per share:
As reported $0.58 $(0.48) $0.82
Pro forma $0.45 $(0.64) $0.71
Diluted earnings (loss) per share
As reported $0.57 $(0.48) $0.82
Pro forma $0.44 $(0.64) $0.70
13. RELATED PARTY TRANSACTIONS
Transactions involving related parties not otherwise disclosed herein are as
follows:
In February 2000, the Company sold approximately 2.5 acres of land to a
significant shareholder in the amount of $88,000 in the form of a non-interest
bearing promissory note with an 18-month term. The note was paid in full in
September 2001. During 2000, this shareholder chartered an airplane leased by
the Company in the amount of $21,198. The Company also paid approximately
$500,000 to the shareholder related to commissions on the purchase of revenue
equipment during 2000.
Tenn-Ga Truck Sales, Inc., a corporation wholly owned by a significant
shareholder, purchased used tractors and trailers from the Company for
approximately $2.0 million, $600,000 and $3.0 million during 2000, 2001 and
2002, respectively. During 2000, the Company leased revenue equipment from
Tenn-Ga Truck Sales for approximately $700,000. In 2002, the Company also
purchased equipment from Tenn-Ga Truck Sales for approximately $37,000.
In March 2000, a trucking company owned by a significant shareholder purchased
used trailers from the Company for approximately $1.4 million in exchange for an
interest-bearing promissory note, which was repaid in full in November 2000.
Subsequently, in June 2000, the Company elected to lease the trailers from the
trucking company in the amount of approximately $227,200. In November 2000, due
to an increased operational need arising from the CTS acquisition, the Company
elected to repurchase the trailers from the trucking company in the amount of
approximately $1.3 million.
In connection with the TPC investment, the Company made several cash advances to
fund the operations of TPC. The balance as of December 31, 2000 was
approximately $3.2 million, which included a $2.6 million, 8% interest-bearing
promissory note from TPC, which was paid in full in the month of February 2001.
The Company also provides transportation service for TPC. During 2002, 2001 and
2000, gross revenue from TPC was $7.4 million, $9.0 million and $1.9 million,
respectively. The accounts receivable balance as of December 31, 2002 was
approximately $700,000.
14. DERIVATIVE INSTRUMENTS
The Company adopted SFAS No. 133 effective January 1, 2001 but had no
instruments in place on that date. In 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 December 31, 2002, the fair value
of these interest rate swap agreements was a liability of $1.6 million.
52
The Company uses purchase commitments through suppliers to reduce a portion of
its cash flow exposure to fuel price fluctuations. At December 31, 2002, the
notional amount for purchase commitments for 2003 is approximately 36 million
gallons. In addition, during the third quarter of 2002, 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 called for 6 million gallons of fuel purchases
at a fixed price of $0.695 and $0.629 per gallon, respectively, and expired
December 31, 2002.
All changes in the derivatives' fair values were determined to be effective for
measurement and recognition purposes. The entire amount of gains and losses were
recognized through earnings during 2002.
The derivative activity as reported in the Company's financial statements for
the years ended December 31, 2002 and 2001 is summarized in the following:
(in thousands): 2002 2001
--------------- ----------------
Net liability for derivatives at January 1, $ (1,932) $ --
Changes in statements of operations:
Gain (loss) on derivative instruments:
Loss in value of derivative instruments that do not qualify
as hedging instruments (919) (726)
Other comprehensive income (loss):
Gain (loss) on fuel hedge contracts that qualify as cash flow
hedges 1,206 (1,206)
Tax (benefit) expense 458 (458)
Net other comprehensive gain (loss) 748 (748)
--------------- ----------------
Net liability for derivatives at December 31, $ (1,645) $ (1,932)
=============== ================
15. COMMITMENTS AND CONTINGENT LIABILITIES
The Company, in the normal course of business, is involved in certain legal
matters for which it carries liability insurance. It is management's belief that
the losses, if any, from these lawsuits will not have a materially adverse
impact on the financial condition, operations, or cash flows of the Company.
Financial risks which potentially subject the Company to concentrations of
credit risk consist of deposits in banks in excess of the Federal Deposit
Insurance Corporation limits. The Company's sales are generally made on account
without collateral. Repayment terms vary based on certain conditions. The
Company maintains reserves which management believes are adequate to provide for
potential credit losses. The majority of the Company's customer base spans the
United States. The Company monitors these risks and believes the risk of
incurring material losses is remote.
53
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In thousands except per share amounts)
Quarters ended March 31, 2002 (1) June 30, 2002 Sept. 30, 2002 Dec. 31, 2002
---------------------------------------------------------------------------------
Operating Revenue $132,219 $144,312 $141,223 $146,664
Operating income 851 7,563 8,780 7,779
Net earnings (loss) (1,667) 2,982 3,611 3,350
Basic earnings (loss) per share (0.12) 0.21 0.25 0.23
Diluted earnings (loss) per share (0.12) 0.21 0.25 0.23
Quarters ended March 31, 2001 June 30, 2001 Sept. 30, 2001 Dec. 31, 2001 (2)
---------------------------------------------------------------------------------
Operating Revenue $ 138,623 $149,169 $145,266 $ 140,563
Operating income (loss) 2,652 3,067 4,947 (10,729)
Net earnings (loss) 229 554 845 (8,290)
Basic earnings (loss) per share 0.02 0.04 0.06 (0.59)
Diluted earnings (loss) per share 0.02 0.04 0.06 (0.59)
(1) Includes a $3.3 million pre-tax impairment charge and a $890,000
extraordinary loss on early extinguishment of debt in the quarter ended
March 31, 2002.
(2) Includes a $15.4 million pre-tax impairment charge in the quarter ended
December 31, 2001.
54