-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Duu60uQtdTfL6oedgoX6NYfEY5L+9fCCXWHHGsz8cYqnL3UAa+HDpoakp3ktr8eW iffu1/9ArndmcMWLwSVL9A== 0001008886-98-000045.txt : 19980901 0001008886-98-000045.hdr.sgml : 19980901 ACCESSION NUMBER: 0001008886-98-000045 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980831 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COVENANT TRANSPORT INC CENTRAL INDEX KEY: 0000928658 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 880320154 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-24960 FILM NUMBER: 98700969 BUSINESS ADDRESS: STREET 1: 400 BIRMINGHAM HIGHWAY CITY: CHATTANOOGA STATE: TN ZIP: 37419 BUSINESS PHONE: 4238211212 MAIL ADDRESS: STREET 1: 400 BIRMINGHAM HIGHWAY CITY: CHATTANOOGA STATE: TN ZIP: 37419 10-Q/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549-1004 FORM 10-Q/A (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-24960 Covenant Transport, Inc. (Exact name of registrant as specified in its charter) Nevada 88-0320154 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) 400 Birmingham Hwy. Chattanooga, TN 37419 (423) 821-0121 (Address, including zip code, and telephone number, including area code, of registrant's principal executive office) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. YES X NO ____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date (June 30, 1998) Class A Common Stock, $.01 par value: 12,554,600 shares Class B Common Stock, $.01 par value: 2,350,000 shares Exhibit Index is on Page 13 Page 1 of 14 PART I FINANCIAL INFORMATION PAGE NUMBER Item 1. Financial statements Condensed consolidated balance sheets as of December 31, 1997 and June 30, 1998 (unaudited) 3 Condensed consolidated statements of operations for the three and six months ended June 30, 1997 and 1998 (unaudited) 4 Condensed consolidated statements of cash flows for the six months ended June 30, 1997 and 1998 (unaudited) 5 Notes to condensed consolidated financial statements (unaudited) 6 Item 2. Management's discussion and analysis of financial condition and results of operations 8 PART II OTHER INFORMATION PAGE NUMBER Item. 1. Legal proceedings 13 Items 2 and 3. Not applicable Items 4. Submission of Matters to a vote of Security Holders 13 Item 5. Not applicable Item 6. Exhibits and reports on Form 8-K 13 Page 2 of 14 COVENANT TRANSPORT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) ASSETS December 31 June 30 1997 1998 Current assets: Cash and cash equivalents $ 2,609,520 $ 110,530 Accounts receivable, net of allowance of $810,000 in 1997 and $942,251 in 1998 37,792,308 46,223,198 Drivers advances and other receivables 964,575 1,414,690 Tire and parts inventory 1,120,684 1,588,872 Prepaid expenses 3,773,556 7,037,185 Deferred income taxes 1,111,000 1,111,485 ------------- ------------- Total current assets 47,371,643 57,485,960 Property and equipment, at cost 228,931,936 252,892,002 Less accumulated depreciation and amortization 67,310,934 65,621,230 ------------- ------------- Net property and equipment 161,621,002 187,270,772 Other 6,263,491 5,327,377 ------------- ------------- Total assets $ 215,256,136 $ 250,084,109 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 1,565,639 $ 1,481,930 Accounts payable 5,328,346 5,122,715 Accrued expenses 9,073,554 11,314,004 Accrued income taxes 724,815 36,769 ------------- ------------- Total current liabilities 16,692,354 17,955,418 Long-term debt, less current maturities 80,811,783 77,557,987 Deferred income taxes 22,155,000 24,120,607 ------------- ------------- Total liabilities 119,659,137 119,634,012 Stockholders' equity: Class A common stock, $.01 par value; 11,010,250 and 12,554,600 shares issued and outstanding as of December 1997 and June 30, 1998 110,103 125,546 respectively Class B common stock, $.01 par value; 2,350,000 shares issued and outstanding 23,500 23,500 Additional paid-in-capital 50,634,369 78,237,510 Retained earnings 44,829,027 52,063,541 ------------- ------------- Total stockholders' equity 95,596,999 130,450,097 ------------- ------------- Total liabilities and stockholders' equity $ 215,256,136 $ 250,084,109 ============= ============= The accompanying notes are an integral part of these condensed consolidated financial statements. Page 3 of 14 COVENANT TRANSPORT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 (unaudited)
Three months ended Six months ended June 30, June 30, 1997 1998 1997 1998 ---- ---- ----- ---- Revenue $ 70,059,872 $ 89,010,384 $ 132,647,730 $ 168,834,010 Operating expenses: Salaries, wages, and related expenses 31,707,144 39,906,749 59,392,373 75,148,452 Fuel, oil and road expenses 14,912,295 16,334,048 30,471,920 32,256,016 Revenue equipment rentals and purchased transportation 1,105,296 5,429,421 1,532,684 10,431,303 Repairs 1,304,095 1,808,598 2,571,528 3,643,364 Operating taxes and licenses 1,814,210 2,061,861 3,347,722 4,378,819 Insurance 1,904,821 2,304,017 3,690,729 4,818,080 General supplies and expenses 3,861,624 5,002,419 7,552,614 9,440,491 Depreciation and amortization, including gain on disposition of equipment 6,332,759 7,262,487 12,688,787 14,035,438 ------------- ------------- ------------- ------------- Total operating expenses 62,942,244 80,109,600 121,248,357 154,151,963 ------------- ------------- ------------- ------------- Operating income 7,117,628 8,900,784 11,399,373 14,682,047 Interest expense 1,477,113 1,542,378 2,844,600 3,003,537 ------------- ------------- ------------- ------------- Income before income taxes 5,640,515 7,358,402 8,554,773 11,678,510 Income tax expense 2,088,000 2,798,600 3,164,000 4,444,000 ------------- ------------- ------------- ------------- Net income $ 3,552,515 $ 4,559,802 $ 5,390,773 $ 7,234,510 ============= ============= ============= ============= Earnings per share: Basic and diluted earnings per share $ 0.27 $ 0.32 $ 0.40 $ 0.52 ============= ============= ============= ============= Weighted average common shares outstanding 13,350 14,392 13,350 13,877 ============= ============= ============= ============= Adjusted weighted average common shares and assumed conversions outstanding 13,350 14,413 13,350 13,901 ============= ============= ============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements. Page 4 of 14 COVENANT TRANSPORT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1997 AND 1998 (unaudited) 1997 1998 Cash flows from operating activities: Net income $ 5,390,773 $ 7,234,510 Adjustments to reconcile net income to net cash provided by operating activities: Provision for losses on receivables 193,195 180,000 Depreciation and amortization 12,809,956 15,667,923 Deferred income taxes 3,284,000 1,965,532 Gain on disposition of property and equipment (121,169) (1,632,485) Changes in operating assets and liabilities: Receivables and advances (4,588,491) (8,484,911) Prepaid expenses (645,445) (3,264,114) Tire and parts inventory (111,115) (468,188) Accounts payable and accrued expenses 5,012,986 1,346,854 ------------- ------------- Net cash flow provided by operating activities 21,224,690 12,545,121 Cash flows from investing activities: Acquisition of property and equipment (32,130,066) (57,231,541) Proceeds from disposition of property and equipment 5,803,350 17,906,352 ------------- ------------- Net cash flow used in investing activities (26,326,716) ( 39,325,189) Cash flows from financing activities: Proceeds from issuance of long-term debt 14,000,000 38,000,000 Repayments of long-term debt (12,000,000) (41,337,507) Exercise of stock options -- 67,424 Proceeds from equity offering -- 27,551,160 ------------- ------------- Net cash flow provided by financing activities 2,000,000 24,281,077 ------------- ------------- Net change in cash and cash equivalents (3,102,026) (2,498,991) Cash and cash equivalents at beginning of period 3,491,543 2,609,520 Cash and cash equivalents at end of period $ 389,517 $ 110,530 ============= ============= The accompanying notes are an integral part of these condensed consolidated financial statements. Page 5 of 14 COVENANT TRANSPORT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 1. Basis of Presentation The condensed consolidated financial statements include the accounts of Covenant Transport, Inc., a Nevada holding company, and its wholly-owned subsidiaries (the Company). All significant intercompany balances and transactions have been eliminated in consolidation. The financial statements have been prepared, without audit, in accordance with generally accepted accounting principles, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the accompanying financial statements include all adjustments which are necessary for a fair presentation of the results for the interim periods presented, such adjustments being of a normal recurring nature. Certain information and footnote disclosures have been condensed or omitted pursuant to such rules and regulations. The December 31, 1997 Condensed Consolidated Balance Sheet was derived from the audited balance sheet of the Company for the year then ended. It is suggested that these condensed consolidated financial statements and notes thereto be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 1997. Results of operations in interim periods are not necessarily indicative of results to be expected for a full year. Note 2. Basic and Diluted Earnings Per Share The following table sets forth for the periods indicated the calculation of net earnings per share included in the Company's Condensed Consolidated Statement of Operations:
Three months ended Six months ended June 30 June 30 1997 1998 1997 1998 ---- ---- ---- ---- Numerator: Net Income $ 3,552,515 $ 4,559,802 $ 5,390,773 $ 7,234,510 Denominator: Denominator for basic earnings per share -- weighted-average shares 13,350,000 14,392,000 13,350,000 13,877,000 Effect of dilutive securities: Employee stock options -- 21,040 -- 23,940 ------------- ------------- ------------- ------------- Denominator for diluted earnings per share -- adjusted weighted- average shares and assumed conversions 13,350,000 14,413,040 13,350,000 13,900,940 ============= ============= ============= ============= Basic earnings per share: $ 0.27 $ 0.32 $ 0.40 $ 0.52 ============= ============= ============= ============= Diluted earnings per share: $ 0.27 $ 0.32 $ 0.40 $ 0.52 ============= ============= ============= =============
Page 6 of 14 Note 3. Audit The Internal Revenue Service is currently auditing the Company's tax return for 1995. No assessment of additional amounts owed by the Company has been made by the Internal Revenue Service to date. Based upon discussions with the Company's tax advisors, management does not anticipate any material liability resulting from the audit. Note 4. Income Taxes Income tax expense varies from the amount computed by applying the federal corporate income tax rate of 35% to income before income taxes primarily due to state income taxes, net of federal income tax effect, which were approximately 1% higher in the quarter ended June 30, 1998 as compared with the quarter ended June 30, 1997. FORWARD LOOKING STATEMENTS This document contains forward-looking statements in paragraphs that are marked with an asterisk. Statements by the Company in press releases, public filings, and stockholder reports, as well as oral public statements by Company representatives, also may contain certain forward looking information. Forward-looking information is subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Without limitation, these risks and uncertainties include economic factors such as recessions, downturns in customers' business cycles, surplus inventories, inflation, fuel price increases, and higher interest rates; the resale value of the Company's used revenue equipment; the availability and compensation of qualified drivers; competition from trucking, rail, and intermodal competitors; and the ability to identify acceptable acquisition targets and negotiate, finance, and consummate acquisitions and integrate acquired companies. Readers should review and consider the various disclosures made by the Company in its press releases, stockholder reports, and public filings, as well as the factors explained in greater detail in the Company's annual report on Form 10-K. Page 7 of 14 COVENANT TRANSPORT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Company's revenue grew 27.3%, to $168.8 million in the six months ended June 30, 1998, compared with $132.6 million during the same period of 1997. The Company was able to increase the revenue per tractor to over $3,000 per tractor per week, which had a positive effect on fixed expenses as a percentage of revenue. The Company's pretax margin expanded to 6.9% of revenue from 6.4% of revenue, reflecting improved revenue per tractor and lower costs of operation (particularly fuel) as a percentage of revenue. Although the Company's pretax margin expanded, there were significant fluctuations among expense categories, primarily as a result of two factors: (i) the growing percentage of the Company's tractor fleet being obtained through owner-operators; and (ii) the use of operating leases to finance a substantial portion of the revenue equipment added during the second half of 1997. Costs associated with revenue equipment acquired under operating leases or through agreements with owner-operators are expensed as "revenue equipment rentals and purchased transportation." For these categories of equipment the Company does not incur costs such as interest and depreciation as it might with owned equipment. In addition, for owner-operator tractors, driver compensation, fuel, communications, and certain other expenses are borne by the owner-operator and are not incurred by the Company. Obtaining equipment from owner-operators and under operating leases effectively shifts expenses from interest to "above the line" operating expenses. Because of fluctuations that may occur from time-to-time in the percentage of the Company's fleet that is owned versus obtained from owner-operators and under operating leases, management intends to evaluate the Company's efficiency using pretax margin and net margin rather than operating ratio.(*) The following table sets forth the percentage relationship of certain items to revenue for the three and six months ended June 30, 1997 and 1998:
Three months ended Six months ended June 30, June 30, 1997 1998 1997 1998 ---- ---- ---- ---- Revenue 100.0% 100.0% 100.0% 100.0% Operating expenses: Salaries, wages, and related expenses 45.2 44.8 44.8 44.5 Fuel, oil, and road expenses 21.3 18.4 23.0 19.1 Revenue equipment rentals and purchased transportation 1.6 6.1 1.1 6.2 Repairs 1.9 2.0 1.9 2.2 Operating taxes and licenses 2.6 2.3 2.5 2.6 Insurance 2.7 2.6 2.8 2.8 General supplies and expenses 5.5 5.6 5.7 5.6 Depreciation and amortization, including gain on disposition of equipment 9.0 8.2 9.6 8.3 ---- ---- ---- ---- Total operating expenses 89.8 90.0 91.4 91.3 ---- ---- ---- ---- Operating income 10.2 10.0 8.6 8.7 Interest expense 2.1 1.7 2.1 1.8 ---- ---- ---- ---- Income before income taxes 8.1 8.3 6.5 6.9 Income tax expense 3.0 3.2 2.4 2.6 ---- ---- ---- ---- Net income 5.1% 5.1% 4.1% 4.3% ===== ===== ===== ===== Page 8 of 14
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998 TO THREE MONTHS ENDED JUNE 30, 1997 Revenue increased $18.9 million (27.0%), to $89.0 million in the 1998 period from $70.1 million in the 1997 period. The revenue increase was primarily generated by a 28.9% increase in weighted average tractors, to 2,268 during the 1998 period from 1,759 during the 1997 period, as the Company expanded internally to meet demand from new customers and higher volume from existing customers, as well as externally through the acquisitions of Trans-Roads, Inc. and Bud Meyer Truck Lines, Inc. during August and October of 1997, respectively. The Company's average revenue per loaded mile increased to approximately $1.17 during the 1998 period from $1.13 during the 1997 period. The increase was attributable to per-mile rate increases negotiated by the Company as well as higher revenue per loaded mile at Bud Meyer Truck Lines. The increase in average revenue per loaded mile more than offset an increase in empty miles percentage. Revenue per total mile increased to $1.10 in the 1998 period from $1.07 in the 1997 period ($1.06 without fuel surcharge). Salaries, wages, and related expenses increased $8.2 million (25.9%), to $39.9 million in the 1998 period from $31.7 million in the 1997 period. As a percentage of revenue, salaries, wages and related expenses decreased to 44.8% of revenue in the 1998 period from 45.2% in the 1997 period. Driver wages as a percentage of revenue decreased to 32.9% in the 1998 period from 33.3% in the 1997 period as the use of owner-operators more than offset a $ .025 per mile pay increase that went into effect in April 1998. Non-driving employee payroll expense remained essentially constant at 5.3% in the 1998 period and 5.2% in the 1997 period. Fuel, oil, and road expenses increased $1.4 million (9.5%), to $16.3 million in the 1998 period from $14.9 million in the 1997 period. As a percentage of revenue, fuel, oil and road expenses decreased to 18.4% of revenue in the 1998 period from 21.3% in the 1997 period primarily as a result of improved fuel prices during the 1998 period. Fuel surcharges were not in effect during the 1998 period and amounted to nearly $.01 per mile during the 1997 period. Revenue equipment rentals and purchased transportation increased $4.3 million(391.2%), to $5.4 million in the 1998 period from $1.1 million in the 1997 period. As a percentage of revenue, revenue equipment rentals and purchased transportation increased to 6.1% in the 1998 period from 1.6% in the 1997 period. During 1997, the Company began using owner-operators of revenue equipment, who provide a tractor and driver and cover all of their operating expenses in exchange for a fixed payment per mile. Accordingly, expenses such as driver salaries, fuel, repairs, depreciation, and interest normally associated with Company-owned equipment are consolidated in revenue equipment rentals and purchased transportation when owner-operators are utilized. The Company also entered into operating leases of 241 tractors during 1997. Repairs increased approximately $500,000 (38.7%), to $1.8 million in the 1998 period from $1.3 million in the 1997 period. As a percentage of revenue, repairs remained essentially constant at 2.0% in the 1998 period and 1.9% in the 1997 period. Operating taxes and licenses increased approximately $248,000 (13.7%), to $2.1 million in the 1998 period from $1.8 million in the 1997 period. As a percent of revenue, operating taxes and licenses decreased to 2.3% in the 1998 period from 2.6% in the 1997 period. The expense as a percent of revenue is the result of an evening out from unusually high expenses in the first quarter of 1998. For the past three years, operating taxes and licenses have historically averaged 2.6%. Insurance increased approximately $399,000 (21.0%), to $2.3 million in the 1998 period from $1.9 million in the 1997 period. As a percentage of revenue, insurance remained essentially constant at 2.6% of revenue in the 1998 period and 2.7% in the 1997 period as the reduction in insurance premiums per million dollars of revenue was partially offset by an increase in accident claims and higher deductible limits ($5,000 compared with $2,500) . General supplies and expenses, consisting primarily of driver recruiting, communications expenses, facilities expenses and integration costs pertaining to Bud Meyer Truck Lines, increased $1,141,000 (29.5%), to $5.0 million in the 1998 period from $3.9 million in the 1997 period. As a percentage of revenue, general supplies and expenses essentially remained the same at 5.6% of revenue in the 1998 period and 5.5% for the same period in 1997. Depreciation and amortization, consisting primarily of depreciation of revenue equipment, increased approximately $930,000 (14.7%), to $7.3 million in the 1998 period from $6.3 million in the 1997 period. As a percentage of revenue, depreciation and amortization decreased to 8.2% of revenue in the 1998 period from 9.0% in the 1997 period as the Company obtained a greater percentage of its fleet through owner operators and leased revenue equipment. Interest expense increased approximately $65,000 (4.4%), to $1.5 million in the 1998 period from $1.5 million in the 1997 period. Interest expense decreased to 1.7% of revenue in the 1998 period from 2.1% in the 1997 period, as the Company contracted with more owner-operators during the 1998 period and benefited from having more leased equipment. Additionally, the Company reduced interest expense due to the repayment of indebtedness with the proceeds from the sale of stock during the second quarter. Page 9 of 14 As a result of the foregoing,the Company's pretax margin improved to 8.3% in the the 1998 period versus 8.1% in the 1997 period. The Company's effective tax rate was 38.0% in the 1998 period compared with 37.0% in the 1997 period reflecting increased state income taxes in the 1998 period. Primarily as a result of the factors described above, net income increased approximately $1,007,000 (28.4%), to $4.6 million in the 1998 period (5.1% of revenue) from $3.6 million in the 1997 period (5.1% of revenue). COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 TO SIX MONTHS ENDED JUNE 30, 1997 Revenue increased $36.2 million (27.3%), to $168.8 million in the 1998 period from $132.6 million in the 1997 period. The revenue increase was primarily generated by a 25.9% increase in weighted average tractors to 2,197 during the 1998 period from 1,745 during the 1997 period, as the Company expanded internally to meet demand from new customers and higher volume from existing customers, as well as externally through the acquisitions of Trans-Roads, Inc. and Bud Meyer Truck Lines, Inc. during August and October of 1997, respectively. The Company's average revenue per loaded mile increased to approximately $1.16 during the 1998 period from $1.12 during the 1997 period. The increase was attributable to per-mile rate increases negotiated by the Company as well as higher revenue per loaded mile at Bud Meyer Truck Lines. The increase in average revenue per loaded mile more than offset an increase in empty miles percentage. Revenue per total mile increased to $1.09 in the 1998 period from $1.06 in the 1997 period ($1.05 without fuel surcharge). Salaries, wages, and related expenses increased $15.8 million (26.5%), to $75.1 million in the 1998 period from $59.4 million in the 1997 period. As a percentage of revenue, salaries, wages and related expenses decreased to 44.5% of revenue in the 1998 period from 44.8% in the 1997 period. Driver wages as a percentage of revenue decreased to 32.2% in the 1998 period from 32.9% in the 1997 period as the use of owner-operators more than offset a $ .025 per mile pay increase that went into effect in April 1998. Non-driving employee payroll expense remained essentially constant at 5.3% in the 1998 period and 5.2% in the 1997 period. Fuel, oil, and road expenses increased $1.8 million (5.9%), to $32.3 million in the 1998 period from $30.0 million in the 1997 period. As a percentage of revenue, fuel, oil and road expenses decreased to 19.1% of revenue in the 1998 period from 22.9% in the 1997 period primarily as a result of improved fuel prices during the 1998 period. Fuel surcharges were not in effect during the 1998 period and amounted to nearly $.01 per mile during the 1997 period. Revenue equipment rentals and purchased transportation increased $8.9 million(580.6%), to $10.4 million in the 1998 period from $1.5 million in the 1997 period. As a percentage of revenue, revenue equipment rentals and purchased transportation increased to 6.1% in the 1998 period from 1.2% in the 1997 period. During 1997, the Company began using owner-operators of revenue equipment, who provide a tractor and driver and cover all of their operating expenses in exchange for a fixed payment per mile. Accordingly, expenses such as driver salaries, fuel, repairs, depreciation, and interest normally associated with Company-owned equipment are consolidated in revenue equipment rentals and purchased transportation when owner-operators are utilized. The Company also entered into operating leases of 241 tractors during 1997. Repairs increased approximately $1.1 million (41.7%), to $3.6 million in the 1998 period from $2.6 million in the 1997 period. As a percentage of revenue, repairs increased to 2.2% in the 1998 period from 1.9% in the 1997 period. The increase was primarily as a result of repairs made to improve the condition of equipment prior to the trade of older equipment and from an increase in the number of tractors and trailers damaged in accidents experienced by the Company. Operating taxes and licenses increased approximately $1.0 million (30.8%), to $4.4 million in the 1998 period from $3.3 million in the 1997 period. As a percent of revenue, operating taxes and licenses essentially remained constant at 2.6% in the 1998 period and 2.5% in the 1997 period. Insurance increased approximately $1.1 million (30.5%), to $4.8 million in the 1998 period from $3.7 million in the 1997 period. As a percentage of revenue, insurance remained essentially constant at 2.9% of revenue in the 1998 period and 2.8% in the 1997 period as the reduction in insurance premiums per million dollars of revenue was partially offset by an increase in accident claims and higher deductible limits ($5,000 compared with $2,500) . General supplies and expenses, consisting primarily of driver recruiting, communications expenses, facilities expenses and integration costs pertaining to Bud Meyer Truck Lines, increased $1.9 million (24.9%), to $9.4 million in the 1998 period from $7.6 million in the 1997 period. As a percentage of revenue, general supplies and expenses essentially remained the same at 5.6% of revenue in the 1998 period and 5.7% for the same period in 1997. Page 10 of 14 Depreciation and amortization, consisting primarily of depreciation of revenue equipment, increased approximately $1.3 million (10.6%), to $14.0 million in the 1998 period from $12.7 million in the 1997 period. As a percentage of revenue, depreciation and amortization decreased to 8.3% of revenue in the 1998 period from 9.6% in the 1997 period as the Company obtained a greater percentage of its fleet through owner operators and leased revenue equipment. Interest expense increased approximately $159,000 (5.6%), to $3.0 million in the 1998 period from $2.8 million in the 1997 period. Interest expense decreased to 1.8% of revenue in the 1998 period from 2.1% in the 1997 period, as the Company contracted with a greater percentage of owner-operators during the 1998 period and benefited from having leased equipment. Additionally, the Company reduced interest expense due to the repayment of indebtedness with the proceeds from the sale of stock during the second quarter. As a result of the foregoing, the Company's pretax margin improved to 6.9% in the 1998 period versus 6.4% in the 1997 period. The Company's effective tax rate was 38.0% in the 1998 period compared with 37.0% in the 1997 period reflecting increased state income taxes in the 1998 period. Primarily as a result of the factors described above, net income increased approximately $1.8 million (34.2%), to $7.2 million in the 1998 period (4.3% of revenue) from $5.4 million in the 1997 period (4.1% of revenue). LIQUIDITY AND CAPITAL RESOURCES The growth of the Company's business has required significant investments in new revenue equipment. The Company has financed its revenue equipment with borrowings under a line of credit, cash flows from operations, long-term operating leases, and a small portion with borrowings under installment notes payable to commercial lending institutions and equipment manufacturers. The Company's primary sources of liquidity at June 30, 1998, were funds provided by operations, borrowings under its primary credit agreement, which had maximum available borrowing of $100 million at June 30, 1998 (the "Credit Agreement")and the proceeds from a stock offering, which closed May 1998. The Company believes its sources of liquidity are adequate to meet its current and projected needs.(*) The Company's primary sources of cash flow from operations in the 1998 period were net income increased by depreciation and amortization, deferred income taxes, and accounts payable and accrued expenses. The most significant uses of cash provided by operations were to fund prepaid expenses (primarily license plates for revenue equipment) and to finance increases in receivables and advances associated with the Company's revenue growth. Net cash provided by operating activities was $12.5 million in the 1998 period and $21.2 million in the 1997 period, resulting from (1) an increase in receivables associated with a billing delay caused by the Company's imaging system that has been corrected, (2) more current payment of taxes, and (3) reduction of other accounts payable. Net cash used in investing activities was $39.3 million in the 1998 period and $26.3 million in the 1997 period. These investments were primarily to acquire additional revenue equipment as the Company expanded its operations. Projected capital expenditures for 1998 are also expected to be used primarily to acquire additional revenue equipment. The Company expects such capital expenditures, net of trade-ins, to be approximately $20.0 million in the remainder of 1998. Total projected capital expenditures, net of trade-ins, for 1998 are expected to be $60.0 million excluding the effect of any potential acquisitions.(*) The Company sold 1,540,000 shares and certain stockholders of the Company sold 960,000 shares effective April 30, 1998. The Company received net proceeds of $27.6 million in connection with the offering. The proceeds were used to reduce the Company's indebtedness under the revolving line of credit. The indebtedness was incurred primarily to acquire revenue equipment. The Company did not receive any proceeds from the sale of shares of Class A Common Stock by the selling stockholders. Net cash provided by financing activities of $24.3 million in the 1998 period was related primarily to proceeds from the sale of Company shares as well as to borrowings under the Credit Agreement. This compared with net cash provided by financing activities of $2.0 million in the 1997 period. At June 30, 1998, the Company had outstanding debt of $79.0 million, primarily consisting of approximately $49.5 million drawn under the Credit Agreement, $25.0 million in 10-year senior notes, and $4.5 million in term equipment financing. Interest rates on this debt range from 6.16% to 10.8%. The Credit Agreement is with a group of banks and has a maximum borrowing limit of $100.0 million. Borrowings related to revenue equipment are limited to the lesser of 90% of the net book value of revenue equipment or $100.0 million. Working capital borrowings are limited to 85% of eligible accounts receivable. Letters of credit are limited to an aggregate commitment of $10.0 million. The Credit Agreement includes a "security agreement" such that the Credit Agreement may be collateralized by virtually all assets of the Company if a covenant violation occurs. A commitment fee of 0.125% per annum is due on the daily unused portion of the Credit Agreement. The Company and all subsidiaries are parties to the Crdeit Agreement and related documents. Page 11 of 14 The Credit Agreement revolves for two years and then has a four-year term out if not renewed. Payments for interest are due quarterly in arrears with principal payments due in 12 equal quarterly installments beginning on the second anniversary of the date of the Credit Agreement (or any renewal). The Company renewed the loan in December 1997 and anticipates renewing the Credit Agreement on an annual basis. Borrowings under the Credit Agreement may be 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 0.375% and 0.75% based on cash flow coverage. At June 30, 1998, the margin was 0.425% The Credit Agreement, senior notes, and headquarters and terminal lease agreement contain certain restrictions and covenants relating to, among other things, dividends, tangible net worth, cash flow, acquisitions and dispositions, and total indebtedness. All of these instruments are cross-defaulted. The Company was in compliance with the agreements at June 30, 1998. YEAR 2000 The Company has completed a comprehensive review of its Year 2000 issues and its internal systems (information technology ("IT") and non-IT). The majority of the Company's application software programs are purchased from and maintained by vendors. Therefore, the Company is working with these software vendors to verify these applications become Year 2000 compliant. The Company presently believes that with modifications and updates to existing software, the cost of which is not expected to be material, the Year 2000 problem will not pose significant operational problems for the Company's internal systems. EXPLANATORY NOTE This amendment to Form 10-Q for the quarterly period ended June 30, 1998, is being filed to include the deferred income tax line in the Consolidated Balance Sheets that was inadvertently left out of the orginal Form 10-Q. This Form 10-Q/A is filed solely to correct that error. Page 12 of 14 COVENANT TRANSPORT, INC. AND SUBSIDIARIES PART II OTHER INFORMATION Item 1. Legal Proceedings None Items 2 and 3. Not applicable Item 4. Submission of Matters to a Vote of Security Holders. The Annual Meeting of Stockholders of Covenant Transport, Inc. was held on May 12, 1998 for the purpose of (a)ratification of the selection of Coopers & Lybrand L.L.P. as independent certified public accountants for the Company and (b) electing seven directors for one- year terms. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934, and there was no solicitation in opposition to management's nominees. Each of management's nominees for director as listed in the Proxy Statement was elected. The voting tabulation on the selection of accountants was 12,632,603 shares "FOR", 816 Shares "AGAINST", and 1,530 shares "ABSTAIN". The voting tabulation on the election of directors was as follows: Shares Shares Shares Voted Voted Voted "FOR" "AGAINST" "ABSTAIN" David R. Parker 12,611,334 0 23,615 Michael W. Miller 12,611,334 0 23,615 R. H. Lovin, Jr. 12,611,334 0 23,615 Mark A. Scudder 12,610,934 0 24,015 William T. Alt 12,610,834 0 24,115 Hugh O. Maclellan, Jr. 12,611,334 0 23,615 Robert E. Bosworth 12,610,934 0 24,015 Item 5. Not applicable Item 6. Exhibits and reports on Form 8-K. (a) Exhibits Exhibit Number Description 3.1+ Restated Articles of Incorporation. 3.2+ Amended By-Laws dated September 27, 1994. 4.1+ Restated Articles of Incorporation. 4.2+ Amended By-Laws dated September 27, 1994. 10.3++ Credit Agreement dated January 17, 1995, among Covenant Transport, Inc., a Tennessee corporation, ABN-AMRO Bank N.V., as agent, and certain other banks filed as Exhibit 10. 10.8+ Incentive Stock Plan filed as Exhibit 10.9. 10.9+ 401(k) Plan filed as Exhibit 10.10. 10.12+++ Note Purchase Agreement dated October 15, 1995, among Covenant Transport, Inc., a Tennessee corporation and CIG & Co. 10.13+++ First Amendment to Credit Agreement and Waiver dated October 15, 1995. 10.14++++ Participation Agreement dated March 29, 1996, among Covenant Transport, Inc., a Tennessee corporation, Lease Plan USA, Inc., and ABN-AMBO Bank, N.V., Atlanta Agency. 10.15++++ Second Amendment to Credit Agreement and Waiver dated April 12, 1996. Page 13 of 14 10.16++++ First Amendment to Note Purchase Agreement and Waiver dated April 1, 1996. 10.17+++++ Third Amendment to Credit Agreement and Waiver dated March 31, 1997, filed as Exhibit 10.11. 10.18+++++ Waiver to Note Purchase Agreement dated March 31, 1997, filed as Exhibit 10.12. 10.19# Second Amendment to Note Purchase Agreement dated December 30, 1997. 10.20# Fourth Amendment to Credit Agreement dated December 31, 1997. 10.21# Stock Purchase Agreement made and entered into as of October 10, 1997, by and among Covenant Transport, Inc., a Nevada corporation; Russell Meyer; and Bud Meyer Truck Lines, Inc., a Minnesota corporation. 21# List of subsidiaries. 27 Financial Data Schedule. + Filed as an exhibit to the registrant's Registration Statement on Form S-1, Registration No. 33-82978, effective October 28, 1994, and incorporated herein by reference. ++ Filed as an exhibit to the registrant's Form 10-Q for the quarter ended March 31, 1995, and incorporated herein by reference. +++ Filed as an exhibit to the registrant's Form 10-K for the year ended December 31, 1995, and incorporated herein by reference. ++++ Filed as an exhibit to the registrant's Form 10-Q for the quarter ended March 31, 1996, and incorporated herein by reference. +++++ Filed as an exhibit to the registrant's Form 10-Q for the quarter ended March 31, 1997, and incorporated herein by reference. # Filed as an exhibit to the registrant's Annual Report on Form 10-K for the period ended December 31, 1997, and incorporated herein by reference. SIGNATURE Pursuant to the requirements of the Securities and 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: August 28, 1998 /s/ Joey B. Hogan ----------------- Joey B. Hogan Treasurer and Chief Financial Officer Page 14 of 14 EX-27 2 FDS --
5 1 3-MOS DEC-31-1997 JUN-30-1998 110,530 0 47,637,888 0 1,588,872 57,485,960 252,892,002 65,621,230 250,084,109 17,955,418 0 0 0 125,546 23,500 250,084,109 0 168,834,010 0 154,151,963 0 0 3,003,537 11,678,510 4,444,000 7,234,510 0 0 0 7,234,510 0.52 0.52
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