-----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, Cl1XMiKCYo29L9Y1314ZlHDv3Vbf+O/mzFfZ4T+MP2Dokt/SpcIWO/29GIqYimC5 jB2X8+fV0S/RsmleRzWuew== 0001008886-99-000013.txt : 19990330 0001008886-99-000013.hdr.sgml : 19990330 ACCESSION NUMBER: 0001008886-99-000013 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 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-K SEC ACT: SEC FILE NUMBER: 000-24960 FILM NUMBER: 99575988 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-K 1 FORM 10-K ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the Fiscal Year Ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED). For the transition period from to Commission file number 0-24960 COVENANT TRANSPORT, INC. (Exact name of registrant as specified in its charter) Nevada 88-0320154 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 400 Birmingham Highway Chattanooga, Tennessee 37419 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: 423/821-1212 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: $0.01 Par Value Class A Common Stock Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO[ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $62.0 million as of March 23, 1999 (based upon the $14.125 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 their family members, and no other persons, are affiliates. As of March 23, 1999, the registrant had 12,561,550 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 1999 annual meeting of stockholders that will be filed no later than April 30, 1999. 1 Cross Reference Index The following cross reference index indicates the document and location of the information contained herein and incorporated by reference into the Form 10-K. Document and Location --------------------- Part I ------ Item 1 Business Page 3 herein Item 2 Properties Page 5 herein Item 3 Legal Proceedings Page 5 herein Item 4 Submission of Matters to a Vote of Security Holders Page 6 herein Part II ------- Item 5 Market for the Registrant's Common Equity and Related Stockholder Matters Page 6 herein Item 6 Selected Financial Data Page 7 herein Item 7 Management's Discussion and Analysis of Financial Page 8 herein Condition and Results of Operations Item 7A Quantitative and Qualitative Disclosures About Market Risk Page 15 herein Item 8 Financial Statements and Supplementary Data Page 16 herein Item 9 Changes in and Disagreements with Accountants on Page 16 herein Accounting and Financial Disclosure Part III -------- Item 10 Directors and Executive Officers of the Pages 2-3 of Proxy Statement Registrant Item 11 Executive Compensation Pages 5-7 of Proxy Statement Item 12 Security Ownership of Certain Beneficial Owners and Page 9-10 of Proxy Statement Management Item 13 Certain Relationships and Related Transactions Page 4 of Proxy Statement Part IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K Page 18 herein - ------------------ This report contains "forward-looking statements" in paragraphs that are marked with an asterisk. 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 - Cautionary Statement Regarding Forward-Looking Statements" for additional information and factors to be considered concerning forward-looking statements. 2 PART I ITEM 1. BUSINESS General Covenant Transport, Inc. ("Covenant," or the "Company") is a truckload carrier that offers just-in-time and other premium transportation service for customers throughout the United States. Covenant was founded by David and Jacqueline Parker in 1985 with 25 tractors and 50 trailers. In thirteen years of operating, the Company's fleet has grown to 2,608 tractors and 4,526 trailers, and in 1998 revenue grew to $370.5 million. In recent years, the Company has grown both internally and through acquisitions, although prior to 1997 most growth was internal. In 1995, Covenant acquired the assets of two small Dalton, Georgia-based truckload carriers that specialized in transporting carpet to the Pacific Northwest. In August 1997, the Company accelerated its acquisition strategy. Covenant first acquired the customer relationships of $13 million annual revenue Trans-Roads, Inc., a dry van team-driver operation based near Atlanta, Georgia. In October 1997, Covenant acquired the stock of Bud Meyer Truck Lines, Inc. ("Bud Meyer"), a $45 million annual revenue truckload carrier that focuses on providing temperature-controlled transportation service for shippers primarily in the frozen food and consumer products industries. In August 1998, the Company purchased certain assets of Gouge Trucking, Inc., a $4 million truckload carrier located in North Carolina. In October 1998, Covenant acquired all of the outstanding stock of Southern Refrigerated Transport, Inc., a $23 million annual revenue truckload carrier and Tony Smith Trucking, Inc. (Southern Refrigerated Transport, Inc. and Tony Smith Trucking, Inc. shall be referred to collectively as "SRT"), both located in southwest Arkansas. Also in October 1998, the Company formed a new division, Covenant Transport Logistics to support the needs of certain large customers. The Company's corporate structure includes 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 Leasing, Inc., a Nevada corporation; Intellectual Property Co., a Nevada corporation, Covenant Acquisition Co., a Nevada shell corporation; Bud Meyer Truck Lines, Inc., a Minnesota corporation; Southern Refrigerated Transport, Inc., an Arkansas corporation; and Tony Smith Trucking, Inc., an Arkansas corporation. Covenant Leasing, Inc. was formed in March 1997 with the purpose of leasing equipment to the operating subsidiary. Intellectual Property Co. was formed in March 1997 with the purpose of holding of the intellectual property of the Company. Operations Covenant approaches its operations as an integrated effort of marketing, customer service, and fleet management. The Company's customer service and marketing personnel emphasize both new account development and expanded service for current customers. Customer service representatives provide day-to-day contact with customers, while the sales force targets driver-friendly freight that will increase lane density. The Company's primary customers include manufacturers, retailers, and other transportation companies. Other transportation companies primarily consist of less than truckload and air freight carriers, third-party freight consolidators, and freight forwarders who seek Covenant's expedited and just-in-time service. In 1998, other transportation companies were Covenant's two largest customers, and manufacturing was the largest industry served. No single customer accounted for 10% or more of the Company's revenue during any of the last three fiscal years. Covenant conducts its operations from its headquarters in Chattanooga, Tennessee, the Bud Meyer headquarters in Lake City, Minnesota, and the SRT headquarters in Ashdown, Arkansas. Fleet managers plan load coverage according to customer information requirements and relay pick-up, delivery, routing, and fueling instructions to the Company's drivers. The fleet managers attempt to route most of the Company's trucks over selected operating lanes. The resulting lane density assists the Company in balancing traffic between eastbound and westbound movements, reducing empty miles, and improving the reliability of delivery schedules. Covenant utilizes proven technology, including the Qualcomm OmnitracsTM and SensortracsTM systems, to increase operating efficiency and improve customer service and fleet management. The Omnitracs system is a satellite based tracking and communications system that permits direct communication between drivers and fleet managers. The Omnitracs system also updates the tractor's position every 30 minutes to permit shippers and the Company to locate freight and accurately estimate pick-up and delivery times. The Company uses the Sensortracs system to 3 monitor engine idling time, speed, and performance, and other factors that affect operating efficiency. All of the Company's tractors have been equipped with the Qualcomm systems since 1995 and the Company has added Qualcomm systems, if necessary, to the tractors obtained in its acquisitions. As an additional service to customers, the Company offers electronic data interchange ("EDI"), which allows customers and the Company to communicate electronically, permitting real-time information flow, reductions or eliminations in paperwork, and fewer clerical personnel. With EDI customers can receive updates as to cargo position, delivery times, and other information. It also allows customers to communicate electronically delivery, local distribution, and account payment instructions. Since 1997, the Company has used a document imaging system to reduce paperwork and enhance access to important information. Drivers and Other Personnel Driver recruitment, retention, and satisfaction are essential to Covenant's success, and the Company has made each of these factors a primary element of its strategy. Driver-friendly operations are emphasized throughout the Company. The Company has implemented automatic programs to signal when a driver is scheduled to be routed toward home, and fleet managers are assigned specific tractor units, regardless of geographic region, to foster positive relationships between the drivers and their principal contact with the Company. In addition, Covenant has offered per-mile wage increases to Company drivers in 1996, 1997, and 1998 and continues to aggressively seek rate increases from customers in part to fund higher driver pay. Covenant differentiates its primary dry van business from many shorter-haul truckload carriers by its use of driver teams. Driver teams permit the Company to provide expedited service over its long average length of haul, because driver teams are able to handle longer routes and drive more miles while remaining within Department of Transportation ("DOT") safety rules. Management believes that these teams contribute to greater equipment utilization than most carriers with predominately single drivers. The use of teams, however, increases personnel costs as a percentage of revenue and the number of drivers the Company must recruit. At December 31, 1998, teams operated over 49.2% of the Company's tractors. The tractors of Bud Meyer and SRT are operated primarily by single drivers. The single driver fleets operate fewer miles per tractor and experience more empty miles but these higher expenses are being offset by higher revenue per loaded mile because of reduced employee expense and the benefits of increased density on Company lanes. Covenant is not a party to a collective bargaining agreement and its employees are not represented by a union. At December 31, 1998, the Company employed 4,003 drivers and 755 nondriver personnel. Management believes that the Company has a good relationship with its personnel. Revenue Equipment Management believes that operating high-quality, efficient equipment is an important part of providing excellent service to customers. The Company's policy is to operate its tractors while under warranty to minimize repair and maintenance cost and reduce service interruptions caused by breakdowns. The Company also orders most of its equipment with uniform specifications to reduce its parts inventory and facilitate maintenance. The Company's fleet of 2,608 tractors had an average age of 18 months at December 31, 1998, and all tractors remained covered by manufacturer's warranties. Management believes that a late model tractor fleet is important to driver recruitment and retention and contributes to operating efficiency. The Company utilizes conventional tractors equipped with large sleeper compartments. At December 31, 1998, the Company owned 4,526 trailers. Over 83% of the Company's trailers were 53-feet long by 102-inch wide, dry vans. The Company also operated approximately 567 53-foot and approximately 186 48-foot temperature-controlled trailers. At year end the trailers had a fleetwide average age of 40 months. Competition The United States trucking industry is highly competitive and includes thousands of for-hire motor carriers, none of which dominates the market. Service and price are the principal means of competition in the trucking industry. The Company targets primarily the market segment that demands just-in-time and other premium services. Management believes that this segment generally offers higher freight rates than the segment that is less dependent upon timely service and 4 that the Company's size and use of driver teams are important in competing in this segment. The Company competes to some extent with railroads and rail-truck intermodal service but differentiates itself from rail and rail-truck intermodal carriers on the basis of service because rail and rail-truck intermodal movements are subject to delays and disruptions arising from rail yard congestion, which reduces the effectiveness of such service on traffic with time-definite pick-up and delivery schedules. Regulation The Company is a common and contract motor carrier of general commodities. Historically, the Interstate Commerce Commission (the "ICC") and various state agencies regulated motor carriers' operating rights, accounting systems, mergers and acquisitions, periodic financial reporting, and other matters. In 1995, federal legislation preempted state regulation of prices, routes, and services of motor carriers and eliminated the ICC. Several ICC functions were transferred to the DOT. Management does not believe that regulation by the DOT or by the states in their remaining areas of authority has had a material effect on the Company's operations. The Company's employee and independent contractor drivers also must comply with the safety and fitness regulations promulgated by the DOT, including those relating to drug and alcohol testing and hours of service. The DOT has rated the Company "satisfactory," which is the highest safety and fitness rating. The Company's operations are subject to various federal, state, and local environmental laws and regulations, implemented principally by the Federal Environmental Protection Agency and similar state regulatory agencies, governing the management of hazardous wastes, other discharge of pollutants into the air and surface and underground waters, and the disposal of certain substances. If the Company should be involved in a spill or other accident involving hazardous substances, if any such substances were found on the Company's property, or if the Company were found to be in violation of applicable laws and regulations, the Company could be responsible for clean-up costs, property damage, and fines or other penalties, any one of which could have a materially adverse effect on the Company. The Company does not have on-site underground fuel storage tanks at any of its locations. Management believes that its operations are in material compliance with current laws and regulations. Fuel Availability and Cost The Company actively manages its fuel costs by routing the Company's drivers through fuel centers with which the Company has negotiated volume discounts. Average fuel prices were lower in 1998 than 1997, and the cost of fuel was below the level at which the Company received fuel surcharges. The Company historically has been able to pass through most increases in fuel prices and taxes to customers in the form of higher rates and surcharges, although short-term fluctuations are not fully recovered. At December 31, 1998, approximately 28.3% of the Company's projected 1999 purchases of fuel were subject to hedging contracts. ITEM 2. PROPERTIES Covenant maintains eleven terminals located on its major traffic lanes in Chattanooga, Tennessee; Lake City, Minnesota; Oklahoma City, Oklahoma; Fremont, California; Dalton, Georgia; Pomona, California; Dallas, Texas; El Paso, Texas; Delanco, New Jersey; Indianapolis, Indiana; and Ashdown, Arkansas. The terminals provide driver recruiting centers, a base for drivers in proximity to their homes, transfer locations for trailer relays on transcontinental routes, and parking space for equipment dispatch and maintenance. In 1996, the Company's headquarters and main terminal was relocated to approximately 75 acres of property in Chattanooga, Tennessee. The facilities include an office building of approximately 82,000 square feet, which houses all of the Company's administrative and operations personnel, the Company's 45,000 square-foot principal maintenance facility, and a truck wash. The Company's other maintenance facilities are Oklahoma City, Dalton, Lake City, and Ashdown. The Company leased property in Chattanooga, Tennessee and in Greer, South Carolina from related parties until June 1998 when both leases were terminated without any further obligation by the Company. ITEM 3. LEGAL PROCEEDINGS The Company from time to time is a party to litigation arising in the ordinary course of its business, substantially all of which involves claims for personal injury and property damage incurred in the transportation of freight. The Company maintains insurance covering losses in excess of a $2,500 deductible 5 from cargo loss and physical damage claims, and losses in excess of a $5,000 deductible from personal injury and property damage. The Company maintains a fully insured workers' compensation plan for its employees. Each of the primary insurance policies has a limit of $1.0 million per occurrence, and the Company carries excess liability coverage, which management believes is adequate to cover exposure to claims at any level reasonably anticipated. The Company is not aware of any claims or threatened claims that might materially adversely affect its operations or financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the year ended December 31, 1998, no matters were submitted to a vote of security holders. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Price Range of Common Stock The Company's Class A Common Stock has been traded on the National Market under the symbol "CVTI." The following table sets forth for the calendar periods indicated the range of high and low sales price for the Company's Class A Common Stock as reported by Nasdaq from January 1, 1997 to December 31, 1998.
Period High Low Calendar Year 1997 1st Quarter $16.000 $11.250 2nd Quarter $18.125 $13.750 3rd Quarter $20.250 $16.250 4th Quarter $20.125 $14.750 Calendar Year 1998 1st Quarter $23.000 $14.375 2nd Quarter $23.313 $15.000 3rd Quarter $20.500 $9.188 4th Quarter $19.500 $9.250
As of March 26, 1999, the Company had approximately 46 stockholders of record of its Class A Common Stock. However, the Company estimates that it has approximately 2,000 stockholders because a substantial number of the Company's shares are held of record by brokers or dealers for their customers in street names. Dividend Policy The Company has never declared and paid a cash dividend on its common stock. It is the current intention of the Company's Board of Directors to continue to retain earnings to finance the growth of the Company's business rather than to pay dividends. The payment of cash dividends is currently limited by agreements relating to the Company's $100 million line of credit, $25 million in senior notes due October 2005, and the operating lease covering the Company's headquarters and terminal facility. Future payments of cash dividends will depend upon the financial condition, results of operations, and capital commitments of the Company, restrictions under then-existing agreements, and other factors deemed relevant by the Board of Directors. 6
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA SELECTED FINANCIAL AND OPERATING DATA (In thousands except per share and operating data amounts) Years Ended December 31, ---- ---- ---- ---- ---- 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- Statement of Operations Data: Revenue $131,926 $180,346 $236,267 $297,861 $370,546 Operating expenses: Salaries, wages, and related expenses 57,675 83,747 108,818 131,522 164,589 Fuel, oil, and road expenses 27,282 37,802 55,340 64,910 68,292 Revenue equipment rentals and purchased transportation 2,785 1,230 605 8,492 24,250 Repairs 2,285 3,569 4,293 5,885 8,366 Operating taxes and licenses 3,479 4,679 6,065 7,514 9,393 Insurance 4,510 4,907 6,115 8,655 10,370 General supplies and expenses 8,650 9,648 12,825 16,277 19,397 Depreciation and amortization 9,310 16,045 22,139 26,482 30,192 ----- ------ ------ ------ ------ Total operating expenses 115,976 161,627 216,200 269,737 334,849 ------- ------- ------- ------- ------- Operating income 15,950 18,719 20,067 28,124 35,697 Interest expense 4,736 4,162 5,987 6,274 5,924 ------ ------ ------ ------ ------ Income before income taxes 11,214 14,557 14,080 21,850 29,773 Income tax expense 3,951 5,274 5,102 8,148 11,490 ------ ------ ------ ------ ------ Net income (1) $ 7,263 $ 9,283 $ 8,978 $ 13,702 $ 18,283 ======== ======== ======== ======== ======== Basic and diluted earnings per share $ 0.69 $ 0.70 $ 0.67 $ 1.03 $ 1.27 Weighted average common shares outstanding 10,496 13,350 13,350 13,360 14,393 Adjusted weighted average common shares outstanding and assumed conversions outstanding 10,496 13,350 13,353 13,360 14,440 Balance Sheet Data: Net property and equipment $ 87,882 $ 127,408 $144,384 $161,621 $200,537 Total assets 112,552 169,381 187,148 215,256 272,959 Long-term debt, less current maturities 27,734 80,150 83,110 80,812 84,331 Stockholders' equity $ 63,469 $ 72,752 $ 81,730 $ 95,597 $141,522 Selected Operating Data: Pretax Margin (2) 8.5% 8.1% 6.0% 7.3% 8.0% Average revenue per loaded mile (3) 1.09 1.09 1.10 1.13 1.18 Average revenue per total mile 1.03 1.03 1.04 1.07 1.10 Average length of haul in miles 1,840 1,811 1,780 1,653 1,508 Average miles per tractor per year 159,921 148,669 150,778 149,117 144,000 Average revenue per tractor per week $ 3,165 $ 2,942 $ 2,994 $ 3,059 $ 3,045 Weighted average tractors for year (4) 796 1,179 1,509 1,866 2,333 Total tractors at end of period (4) 1,001 1,343 1,629 2,136 2,608 Total trailers at end of period (4) 1,651 2,554 3,048 3,948 4,526
(1) Tenn-Ga Leasing, Inc. ("Tenn-Ga"), was a revenue equipment leasing company formed by a related party to serve as a financing alternative for a portion of the Company's revenue equipment prior to May 31, 1994. Tenn-Ga was an S corporation and was not subject to federal and state corporate income taxes. If Tenn-Ga had been subject to corporate income taxes in 1994, the Company's consolidated pro forma net income would have been $7,038,000 in 1994. As a result of the Company's acquisition of substantially all of Tenn-Ga's assets effective May 31, 1994, the results of the Company and Tenn-Ga were not combined in future periods. (2) Because obtaining equipment from owner-operators and under operating leases effectively shifts financial expenses from interest to "above the line" operating expenses, the Company intends to evaluate its efficiency using pretax margin and net margin rather than operating ratio. (3) Includes fuel surcharge in 1996 and 1997. Excluding the fuel surcharge, the Company estimates that average revenue per loaded mile was $1.09 and $1.12 respectively. (4) Includes monthly rental tractors and excludes monthly rental trailers. 7 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview During the three year period ended December 31, 1998, the Company increased its revenue at a compounded annual growth rate of 27.1%, as revenue increased to $370.5 million in 1998 from $180.3 million in 1995. A significant increase in fleet size to meet customer demand as well as an increase in the freight rates contributed to revenue growth over this period. In addition to internal growth, the Company completed four acquisitions during the three-year period ended 1998. In August 1997, the Company acquired the customer relationships of Trans-Roads, Inc., a $13 million annual revenue carrier based near Atlanta, Georgia. In October 1997, the Company purchased all of the outstanding capital stock of Bud Meyer, a $45 million annual revenue temperature-controlled carrier based in Lake City, Minnesota. In August 1998, the Company acquired certain assets of Gouge Trucking, Inc., a $4 million annual revenue carrier located in North Carolina. In October 1998, the Company purchased all of the outstanding capital stock of Southern Refrigerated Transport, Inc., a $23 million annual revenue truckload carrier and Tony Smith Trucking, Inc., both located in southwest Arkansas. Additionally, the Company formed a new division, Covenant Transport Logistics, in October 1998. The Company intends to continue to grow both internally and through acquisitions, with the main constraint on internal growth being the ability to recruit and retain sufficient numbers of qualified drivers. The Company has increased net income approximately 33.4% to $18.3 million in 1998 from $13.7 million in 1997. Several factors contributed to the increase, including declining fuel prices and negotiating higher freight rates from substantially all customers. Although higher driver compensation partially offset the increased freight rates, management believes the Company benefited from attracting and retaining more drivers.(*) Changes in several operating statistics and expense categories are expected to result from actions the Company has taken in 1997 and 1998. Both Bud Meyer and SRT operate predominately single-driver tractors, as opposed to the primarily team-driver tractor fleet operated by Covenant's long-haul, dry van operation. The single driver fleets operate fewer miles per tractor and experience more empty miles. The Company's operating statistics and expenses are expected to shift in future periods with the mix of single, team, and temperature-controlled operations.(*) The Company also initiated the use of owner-operators of tractors in 1997 and had contracted with approximately 175 owner-operators as of December 31, 1998. Owner-operators provide a tractor and a driver and bear all operating expenses in exchange for a fixed lease payment per mile. In addition, the Company does not have the capital outlay of purchasing the tractor. In 1997, the Company also financed approximately 240 tractors under operating leases. In 1998, the Company financed an additional 185 tractors and 69 trailers under operating leases. The lease payments to owner-operators and the financing of tractors under operating leases appear as operating expenses under 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, communications, and other expenses are not incurred. Because obtaining equipment from owner-operators and under operating leases effectively shifts financing expenses from interest to "above the line" operating expenses, the Company intends to evaluate its efficiency using pretax margin and net margin rather than operating ratio.(*) (*) May contain "forward looking" statements. 8
The following table sets forth the percentage relationship of certain items to revenue for each of the three years-ended December 31: 1996 1997 1998 ---- ---- ---- Revenue 100.0% 100.0% 100.0% Operating expenses: Salaries, Wages, and related expenses 46.1 44.2 44.4 Fuel, oil and road expenses 23.4 21.8 18.4 Revenue equipment rentals and purchased transportation 0.2 2.9 6.5 Repairs 1.8 2.0 2.3 Operating taxes and licenses 2.6 2.5 2.5 Insurance 2.6 2.9 2.8 General supplies and expenses 5.4 5.5 5.2 Depreciation and amortization 9.4 8.9 8.1 ------ ------ ------ Total operating expenses 91.5 90.6 90.4 Operating income 8.5 9.4 9.6 Interest expense 2.5 2.2 1.6 ------ ------ ------ Income before income taxes 6.0 7.3 8.0 Income tax expense 2.2 2.7 3.1 ------ ------ ------ Net income 3.8% 4.6% 4.9% ====== ====== ======
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31, 1997 Revenue increased $72.6 million (24.4%), to $370.5 million in 1998 from $297.9 million in 1997. The revenue increase was primarily generated by a 25.0% increase in weighted average tractors, to 2,333 in 1998 from 1,866 in 1997, as the Company expanded internally to serve new customers and higher volumes from existing customers, as well as externally through the acquisitions of Bud Meyer in October 1997, Gouge Trucking, Inc. in August 1998, and SRT in October 1998. The Company's average revenue per loaded mile increased to approximately $1.18 in 1998 from $1.13 in 1997. The increase was attributable to per-mile rate increases negotiated by the Company as well as higher revenue per loaded mile at Bud Meyer. The increase in average revenue per loaded mile more than offset an increase in the empty miles percentage. Revenue per total mile increased to approximately $1.10 in 1998 from $1.07 in 1997. Salaries, wages, and related expenses increased $33.1 million (25.1%), to $164.6 in 1998 from $131.5 million in 1997. As a percentage of revenue, salaries, wages, and related expenses increased to 44.4% in 1998 from 44.2% in 1997. Driver wages as a percentage of revenue decreased to 32.3% in 1998 from 32.7% in 1997 primarily because the use of owner-operators more than offset a $.025 per mile pay increase for employee drivers that went into effect in April 1998. Non-driving employee payroll expense increased to 5.5% of revenue in 1998 from 5.3% in 1997. Although the Company continued to reduce the number of non-driving employees per tractor, a larger number of participants in the Company's bonus program contributed to the increase. Health insurance, employer paid taxes, and workers' compensation increased to 6.3% of revenue in 1998 from 6.1% in 1997. The increase as a percentage of revenue was primarily the result of a higher state unemployment tax rate in 1998 as compared to the 1997 tax rate. Fuel, oil, and road expenses increased $3.4 million (5.2%), to $68.3 million in 1998 from $64.9 million in 1997. As a percentage of revenue, fuel, oil, and road expenses decreased to 18.4% in 1998 from 21.8% in 1997. The increase reflects the greater number of tractors in service in 1998. The decrease as a percentage of revenue was primarily the result of improving fuel prices during 1998 as well as the increased use of owner-operators who pay for fuel purchases. The expense for owner-operators is reflected in the revenue equipment rentals and purchased transportation expense category. Fuel surcharges were not in effect during 1998 and amounted to nearly $.01 per mile or approximately $2.4 million during 1997. Revenue equipment rentals and purchased transportation increased $15.8 million (185.5%), to $24.2 million in 1998 from $8.5 million in 1997. As a percentage of revenue, revenue equipment rentals and purchased transportation increased to 6.5% in 1998 from 2.9% in 1997. During 1998, the Company increased its use of 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. Expenses such as driver salaries, fuel, repairs, depreciation, and interest 9 normally associated with Company-owned equipment are consolidated in revenue equipment rentals and purchased transportation when owner-operators are utilized. The Company contracted with an average of 134 owner-operators during 1998. The Company also entered into operating leases for approximately 240 tractors during the fourth quarter of 1997 as well as 185 tractors and 69 trailers during 1998. The equipment leases will increase this expense category in the future, while reducing depreciation and interest. The Company also formed a logistics division in the fourth quarter of 1998 that is being reflected in this expense category.(*) Repairs increased $2.5 million (42.2%) to $8.4 million in 1998 from $5.9 million in 1997. As a percentage of revenue, repairs increased to 2.3% in 1998 from 2.0% in 1997. The increase was attributable to an increase in fleet size, a slight increase in fleet age, the costs associated with preparing certain Bud Meyer equipment for trade-in, as well as an increase in repairs related to the change to a higher deductible limit under the Company 's physical damage insurance ($5,000 compared to $2,500). Operating taxes and licenses increased $1.9 million (25.0%), to $9.4 million in 1998 from $7.5 million in 1997. As a percentage of revenue, operating taxes and licenses remained essentially constant at 2.5% in the 1998 period and in the 1997 period. Insurance, consisting primarily of premiums for liability, physical damage, and cargo damage insurance, and claims, increased $1.7 million (19.8%), to $10.4 million in 1998 from $8.7 million in 1997. As a percentage of revenue, insurance decreased to 2.8% in 1998 from 2.9% in 1997 as the Company continued to reduce premiums per million dollars of revenue. General supplies and expenses, consisting primarily of headquarters and other terminal lease expense, driver recruiting expenses and communications and utilities, increased $3.1 million (19.2%), to $19.4 million in 1998 from $16.3 million in 1997. As a percentage of revenue, general supplies and expenses decreased to 5.2% in 1998 from 5.5% in 1997. The 1998 decrease as a percentage of revenue is related to the termination of the lease of the former headquarters as well as the fixed nature of a portion of these costs which was more effectively spread over higher revenue. Depreciation and amortization, consisting primarily of depreciation of revenue equipment, increased $3.7 million (14.0%), to $30.2 million in 1998 from $26.5 million in 1997. As a percentage of revenue, depreciation and amortization decreased to 8.1% in 1998 from 8.9% in 1997 as the Company utilized more owner operators, leased more revenue equipment, and realized an increase in revenue per tractor per week, which more efficiently spread this fixed cost over a larger revenue base. Amortization expense relates to deferred debt costs incurred and covenants not to compete from two 1995 and one 1998 asset acquisitions, as well as goodwill from two 1997 and two 1998 acquisitions. Interest expense decreased $0.3 million (5.6%), to $5.9 million in 1998 from $6.3 million in 1997. As a percentage of revenue, interest expense decreased to 1.6% in 1998 from 2.2% in 1997 as the result of utilizing more owner-operators, leasing more revenue equipment and averaging lower debt balances related to the Company's secondary stock offering in April 1998. As a result of the foregoing, the Company's pretax margin improved to 8.0% in 1998 from 7.3% in 1997. The Company's effective tax rate was 38.6% in 1998 and 37.3% in 1997 due to the Company paying taxes to a greater number of states. As a result of the factors described above, net income increased $4.6 million (33.4%), to $18.3 million in 1998 (4.9% of revenue) from $13.7 million in 1997 (4.6% of revenue). (*) May contain "forward looking" statements. 10 COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996 Revenue increased $61.6 million (26.1%) to $297.9 million in 1997 from $236.3 million in 1996. The revenue increase was attributable to three primary factors. First, the Company added tractors to meet demand from new and existing customers. Second, the Company negotiated rate increases with customers of approximately $.04 per loaded mile, net of fuel surcharges. Third, the Company acquired the customer relationships of Trans-Roads, Inc., a $13 million annual revenue dry van carrier in August 1997 and all the capital stock of Bud Meyer Truck Lines, Inc., a $45 million annual revenue temperature-controlled carrier in October 1997. Covenant operated 1,866 weighted average tractors during 1997 as compared with 1,509 during 1996, a 23.7% increase. Salaries, wages, and related expenses increased $22.7 million (20.9%), to $131.5 in 1997 from $108.8 million in 1996. As a percentage of revenue, salaries, wages, and related expenses decreased to 44.2% in 1997 from 46.1% in 1996. Driver wages as a percentage of revenue increased to 35.0% in 1997 from 33.5% in 1996 primarily as a result of the pay increase that went into effect in May 1997. Non-driving employee payroll expense decreased to 5.3% of revenue in 1997 from 5.4% in 1996. Health insurance, employer paid taxes, and workers' compensation decreased to 6.1% of revenue in 1997 from 6.8% in 1996. This was primarily attributed to reduced worker's compensation premiums negotiated in August 1997 with a fixed rate for a three-year period. Fuel, oil, and road expenses increased $9.5 million (17.3%), to $64.9 million in 1997 from $55.3 million in 1996. As a percentage of revenue, fuel, oil, and road expenses decreased to $21.8% in 1997 from 23.4% in 1996. The increase reflects the greater number of tractors in service in 1997. The decrease as a percentage of revenue was primarily a result of improving fuel prices during 1997. In addition to decreased fuel prices, the fuel expense was further offset by fuel surcharges charged to customers totaling $2.4 million in 1997 and $1.7 million in 1996. Revenue equipment rentals and purchased transportation increased $7.9 million (1336.8%), to $8.5 million in 1997 from $0.6 million in 1996. As a percentage of revenue, revenue equipment rentals and purchased transportation increased to 2.9% in 1997 from 0.2% in 1996. Revenue equipment rentals and purchased transportation historically had represented payments under operating leases or short term rentals of tractors and trailers. 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 had contracted with approximately 100 owner-operator at December 31, 1997. In the fourth quarter of 1997, the Company also entered into a sale and leaseback of 227 tractors, which will increase this expense in the future, while reducing depreciation and interest.(*) Repairs increased $1.6 million (37.1%), to $5.9 million in 1997 from $4.3 million in 1996. As a percentage of revenue, repairs increased 2.0% in 1997 from 1.8% in 1996. The increase was attributable to an increase in fleet size, a slight increase in fleet age, and to repairs made to improve the condition of equipment prior to sales and trades of older equipment acquired in the Bud Meyer transaction. Insurance, consisting primarily of premiums for liability, physical damage, and cargo damage insurance, and claims, increased $2.5 million (41.5%), to $8.7 million in 1997 from $6.1 million in 1996. As a percentage of revenue, insurance increased to 2.9% in 1997 from 2.6% in 1996. An increase in accident claims more than offset a reduction in insurance premiums per million dollars of revenue. General supplies and expenses, consisting primarily of headquarters and other terminal lease expense, driver recruiting expenses, communications and agent commissions, increased $3.5 million (26.9%), to $16.3 million in 1997 from $12.8 million in 1996. As a percentage of revenue, general supplies and expenses remained essentially constant at 5.5% in 1997 compared with 5.4% in 1996. (*) May contain "forward looking" statements. 11 Depreciation and amortization, consisting primarily of depreciation of revenue equipment, increased $4.3 million (19.6%), to $26.5 million in 1997 from $22.1 million in 1996. As a percentage of revenue, depreciation and amortization decreased to 8.9% in 1997 from 9.4% in 1996 as the Company utilized more owner operators, leased more revenue equipment, and realized an increase in revenue per tractor per week, which more efficiently spread this fixed cost over a larger revenue base. Amortization expense relates to deferred debt costs incurred and covenants not to compete from two 1995 asset acquisitions, as well as goodwill from two 1997 acquisitions. Interest expense increased $0.3 million (5.0%), to $6.3 million in 1997 from $6.0 million in 1996. As a percentage of revenue, interest expense decreased to 2.1% in 1997 from 2.5% in 1996. Lower average debt balances more than offset slightly higher average interest rates (7.2% in 1997 compared with 7.0% in 1996) contributed to improving this expense item. As a result of the foregoing, the Company's pretax margin improved to 7.3% in 1997 from 6.0% in 1996. The Company's effective tax rate was 37.2% in 1997 and 36.2% in 1996. As a result of the factors described above, net income increased $4.7 million (52.6%), to $13.7 million in 1997 (4.6% of revenue) from $9.0 million in 1996 (3.8% of revenue). Liquidity and capital resources The growth of the Company's business has required significant investments in new revenue equipment. The Company historically has financed its revenue equipment requirements with borrowings under a line of credit, cash flows from operations, long-term operating leases, and a small portion with borrowings under installment notes payable to commercial lending institutions and equipment manufacturers. The Company's primary sources of liquidity at December 31, 1998 were funds provided by operations, borrowings under its primary credit agreement, which had maximum available borrowing of $100.0 million at December 31, 1998 (the "Credit Agreement") and the proceeds from a stock offering that 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 1998 were net income increased by depreciation and amortization, and deferred income taxes. The most significant use 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 growth in the business. The Company's number of days sales in accounts receivable increased from 43 days in 1997 to 48 days in 1998. Net cash provided by operating activities was $39.9 million in 1998 and $45.2 million in 1997. The 1998 decrease resulted from higher receivables associated with a billing delay caused by the Company's imaging system (which has since been corrected).(*) Net cash used in investing activities was $59.1 million in 1998 and $27.6 million in 1997. Such amounts were used primarily to acquire additional revenue equipment as the Company expanded its operations. In addition, approximately $1.0 million represented the purchase price for the assets of Gouge Trucking, Inc. of which approximately $220,000 was allocated to goodwill and covenants-not-to-compete, and approximately $6.3 million represented the purchase price for the acquisition of SRT of which approximately $1.2 million was allocated to goodwill. The Company expects capital expenditures (primarily for revenue equipment), net of trade-ins, to be approximately $60 million in 1999 exclusive of acquisitions.(*) The Company sold 1,540,000 shares of Class A Common Stock and certain stockholders of the Company sold 960,000 shares in a public offering that closed in May 1998. The Company received net proceeds of $27.5 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. (*) May contain "forward looking" statements. 12 Net cash provided by financing activities was $19.5 million in 1998 and was related primarily to proceeds from the sale of Company shares as well borrowings under the Credit Agreement. This compared with net cash used in financing activities of $18.5 million in 1997. At December 31, 1998, the Company had outstanding debt of $86.3 million, primarily consisting of $54 million drawn under the Credit Agreement, $25 million in 10-year senior notes, $3.5 million in term equipment financing, $3 million interest bearing note to the former primary stockholder of SRT related to the acquisition and $0.8 million in notes related to non-compete agreements. Interest rates on this debt range 5.9% 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 net book value of revenue equipment or $55.0 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 .25% per annum is due on the daily unused portion of the Credit Agreement. The Company, including all subsidiaries, are parties to the Credit Agreement and related documents. 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 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 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 0.325% and 0.75% based on cash flow coverage. At December 31, 1998, the margin was .425%. The Company has entered into interest rate swap agreements that fixed the interest rate on $35 million of borrowing under the Credit Agreement at rates between 5.95% and 6.13% plus applicable margin. The swaps expire between February 26, 1999 and October 29, 1999. In December 1997, the Company engaged in a sale-and-leaseback transaction involving 199 of the Company's tractors that had been newly acquired or were awaiting delivery. The proceeds of the sale were used to reduce debt under the Credit Agreement. The Company entered into a three-year lease of the equipment, with a 5.15% implied interest rate and a residual value guaranteed by the Company at a level equal to the Company's salvage value on owned tractors. The Company's headquarters facility was completed in December 31, 1996. The cost of the approximately 75 acres and construction of the headquarters and shop buildings was approximately $15 million. The Company financed the land and improvements under a "build to suit" operating lease. The Credit Agreement, senior notes, and the headquarters and terminal lease agreement contain certain restrictions and covenants relating to, among other things, dividends, tangible net worth, cash flow, acquisitions and dispositions, and total indebtedness. All of these instruments are cross-defaulted. The Company was in compliance with the agreements at December 31, 1998. Inflation and Fuel Costs Most of the Company's operating expenses are inflation-sensitive, with inflation generally producing increased costs of operations. During the past three years, the most significant effects of inflation have been on revenue equipment prices and the compensation paid to the drivers. Innovations in equipment technology and comfort have resulted in higher tractor prices, and there has been an industry-wide increase in wages paid to attract and retain qualified drivers. The Company historically has limited the effects of inflation through increases in freight rates and certain cost control efforts. In addition to inflation, fluctuations in fuel prices can affect profitability. Fuel expense comprises a larger percentage of revenue for Covenant than many other carriers because of Covenant's long average length of haul. Most of the Company's contracts with customers contain fuel surcharge provisions. Although the Company historically has been able to pass through most long-term increases in fuel prices and taxes to customers in the form of surcharges and higher rates, shorter-term increases are not fully recovered. At December 31, 1998, approximately 28.3% of the total purchases of fuel by the Company were subject to hedging contracts. In March 1999, the percentage will decrease to approximately 20% and will be in effect for the remainder of 1999 unless further action is taken by the Company.(*) (*) May contain "forward looking" statements. 13 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. First quarter net income historically has been lower than net income in each of the other three quarters of the year because of the weather. The Company's equipment utilization typically improves substantially between May and October of each year because of the trucking industry's seasonal shortage of equipment on traffic originating in California and the Company's ability to satisfy some of that requirement. The seasonal shortage typically occurs between May and August because California produce carriers' equipment is fully utilized for produce during those months and does not compete for shipments hauled by the Company 's dry van operation. During September and October, business increases as a result of increased retail merchandise shipped in anticipation of the holidays.(*) The table below sets forth quarterly information reflecting the Company's equipment utilization (miles per tractor per period) during 1996, 1997 and 1998. The Company believes that equipment utilization more accurately demonstrates the seasonality of its business than changes in revenue, which are affected by the timing of deliveries of new revenue equipment. The results in 1998 also were affected by the acquisition of Bud Meyer and SRT, which operate primarily single driver fleets and thus generate fewer miles per tractor. Results of any one or more quarters are not necessarily indicative of annual results or continuing trends.
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1996 35,067 38,462 38,989 38,036 1997 34,389 37,325 38,850 38,314 1998 34,828 35,796 36,455 36,813
Year 2000 The Year 2000 ("Y2K") issue concerns the inability of computer systems to recognize and process date-sensitive information after 1999 due to the use of only the last two digits to refer to a year. This problem could affect both information systems (software and hardware) and other equipment that relies on microprocessors. Management has completed a Company-wide evaluation of this impact on its computer systems, applications, and other date-sensitive equipment and has hired a nationally-recognized consulting firm to perform a status study of the Company's processes and activities related to the Company's Y2K project. All known remediation efforts and testing of systems/equipment are expected to be completed by July 30, 1999. The cost of the assessment and remediation efforts for the modifications and updates to existing software is estimated to be approximately $250,000. The Company is also in the process of monitoring the progress of material third parties, including shippers and suppliers, in their efforts to become Y2K compliant and expects this project to be completed by July 30, 1999. The Company's primary information technology systems ("IT Systems") include hardware and software for billing, dispatch, EDI, fueling, payroll, telephone, vehicle maintenance, inventory, and satellite communications systems. The majority of the Company's IT Systems are purchased from and maintained by third parties. A primary IT System designed by a third party is the satellite tracking system, which tracks equipment locations, provides dispatch and routing information, and allows in-cab communications with drivers. The Company's operating system that manages payroll, billing, and dispatch has been purchased from the supplier in March 1999 on a long term lease. The Company's financial reporting system is provided by a third party. The Company has been informed by the providers of these systems that they are Y2K compliant. Another significant IT System provided by a third party transmits payroll funds to drivers and allows drivers to purchase fuel and other items outside the Company's terminal locations. The Company has been informed by this provider that it expects to be Y2K compliant by June 1999. Although the Company believes it is Y2K compliant in its EDI applications, the Company has not completed its review of Y2K compliance of EDI applications of its shippers.(*) (*) May contain "forward looking" statements. 14 The Company has reviewed its risks associated with microprocessors embedded in facilities and equipment ("Non-IT Systems"). The primary Non-IT Systems includes microprocessors in tractor engines and other components, terminal facilities, satellite communications units, and telecommunications and other office equipment. The Company's assessment of its revenue equipment, satellite communications units, and office equipment Non-IT Systems has revealed low risk of material replacement requirements. Such equipment is relatively new and was designed to be Y2K compliant. The Company is continuing to assess its Non-IT Systems in its terminal facilities but believes that the risk of a service-interrupting failure in these systems is low.(*) The Company could be faced with severe consequences if Y2K issues are not identified and resolved in a timely manner by the Company and material third parties. The Company's primary risk relating to Y2K compliance is the possibility of service disruption from third-party suppliers of satellite communications, telephone, fueling, and financial services. A worst-case scenario would result in the short term inability of the Company to deliver freight for its shippers. This would result in lost revenues; however, the amount would be dependent on the length and nature of the disruption, which cannot be predicted or estimated. The Company is in the process of developing contingency plans in case business interruptions do occur. Management expects plans to be completed by June 30, 1999.(*) ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks from changes in (i) certain commodity prices and (ii) certain interest rates on its debts. Commodity Price Risk Prices and availability of all petroleum products are subject to political, economic, and market factors that are generally outside the Company's control. Accordingly, the price and availability of diesel fuel can be unpredictable. Because the Company's operations are dependent upon diesel fuel, significant increases in diesel fuel costs could materially and adversely affect the Company's results of operations and financial condition. For 1998, diesel fuel expenses represented 16.8% of the Company's total operating expenses. Based upon the Company's 1998 fuel consumption, a ten percent increase in the average annual price per gallon of diesel fuel would increase the Company's annual diesel fuel expense by $5.3 million before considering the effect of fuel hedging. The Company uses derivative instruments, including purchased commitments through supplier, to reduce a portion of its exposure to fuel price fluctuations. At December 31, 1998, the notional amount for purchased commitments during 1999 was 13.2 million gallons. Net unrealized losses were approximately $2.9 million. At December 28, 1998, the national average price of diesel fuel as provided by the U.S. Department of Energy was $0.986 per gallon. At December 31, 1998, a ten percent change in fuel prices would impact 1999 net unrealized losses by approximately $1.1 million. 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 0.75%. At December 31, 1998, the Company had drawn $54.0 million under the Credit Agreement. Approximately $19.0 million was subject to variable rates and the remaining $35.0 million was subject to interest rate swaps that fixed the interest rates at 5.95% and 6.13% plus applicable margin per annum. The swaps expire between February 26, 1999 and October 29, 1999. Assuming the December 31, 1998 variable rate borrowings, each one percentage point increase in LIBOR would increase the Company's pretax interest expense by $190,000. The Company does not trade in these derivatives with the objective of earning financial gains on price fluctuations, nor does it trade in these instruments when there are no underlying transaction related exposures. (*) May contain "forward looking" statements. 15 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's audited consolidated balance sheets, statements of income, cash flows, and stockholders' equity, and notes related thereto, are contained at Pages 21 to 32 of this report. The supplementary quarterly financial data follows:
Quarterly Financial Data: (In thousands except for share data amounts) Fourth Third Second First Quarter Quarter Quarter Quarter 1998 1998 1998 1998 ------- ------- ------- ------- Revenue $106,146 $95,566 $89,010 $79,824 Operating income 10,723 10,293 8,901 5,781 Income before taxes 9,185 8,910 7,358 4,320 Income taxes 3,582 3,463 2,799 1,645 Net income 5,603 5,447 4,559 2,675 Net income per share $ 0.38 $ 0.37 $ 0.32 $ 0.20 Fourth Third Second First Quarter Quarter Quarter Quarter 1997 1997 1997 1997 ------- ------- ------- ------- Revenue $ 89,905 $75,308 $70,060 $62,588 Operating income 8,837 7,888 7,118 4,282 Income before taxes 6,791 6,504 5,641 2,914 Income taxes 2,578 2,406 2,088 1,076 Net income 4,213 4,098 3,553 1,838 Net income per share $ 0.32 $ 0.31 $ 0.27 $ 0.14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No reports on Form 8-K have been filed within the twenty-four months prior to December 31, 1998, involving a change of accountants or disagreements on accounting and financial disclosure. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information respecting executive officers and directors set forth under the captions "Election of Directors Information Concerning Directors and Executive Officers" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" on Pages 2 to 3 and Page 12 of the Registrant's Proxy Statement for the 1999 annual meeting of stockholders, which will be filed with the Securities and Exchange Commission in accordance with Rule 14a-b promulgated under the Securities Exchange Act of 1934, as amended (the "Proxy Statement") is incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION The information respecting executive compensation set forth under the caption "Executive Compensation" on Pages 5 to 7 of the Proxy Statement is incorporated herein by reference; provided, that the "Compensation Committee Report on Executive Compensation" contained in the Proxy Statement is not incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information respecting security ownership of certain beneficial owners and management set forth under the caption "Security Ownership of Principal Stockholders and Management" on Pages 9 and 10 of the Proxy Statement is incorporated herein by reference. 16 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information respecting certain relationships and transactions of management set forth under the captions "Compensation Committee Interlocks and Insider Participation" and "Certain and Relationships and Related Transactions" on Page 4 of the Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements. The Company's audited consolidated financial statements are set forth at the following pages of this report: Report of Independent Accountants...........................................20 Consolidated Balance Sheets.................................................21 Consolidated Statements of Income...........................................22 Consolidated Statements of Stockholders' Equity.............................23 Consolidated Statements of Cash Flows.......................................24 Notes to Consolidated Financial Statements..................................25 2. Financial Statement Schedules. Financial statement schedules are not required because all required information is included in the financial statements. (b) Reports on Form 8-K There were no reports on Form 8-K filed during the fourth quarter ended December 31, 1998. (c) 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-AMRO Bank, N.V., Atlanta Agency. 10.15++++ Second Amendment to Credit Agreement and Waiver dated April 12, 1996. 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. 17 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. 10.22 Stock Purchase Agreement made and entered into as of October 5, 1998, by and among Covenant Transport, Inc., a Nevada corporation; Smith Charitable Remainder Trust; Southern Refrigerated Transport, Inc., an Arkansas corporation; Tony Smith Trucking, Inc., an Arkansas corporation; and Tony and Kathy Smith, husband and wife and residents of Arkansas. 21 List of subsidiaries. 23.1 Consent of PricewaterhouseCoopers LLP, independent accountants. 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. # Files 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. 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COVENANT TRANSPORT, INC. Date: March 26, 1999 By: /s/ Joey B. Hogan Joey B. Hogan Treasurer and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Position Date /s/ David R. Parker Chairman of the Board, President, and David R. Parker Chief Executive Officer (principal executive officer) March 26, 1999 /s/ Joey B. Hogan Treasurer and Chief Financial Officer Joey B. Hogan (principal financial and accounting officer) March 26, 1999 /s/ R. H. Lovin, Jr. R. H. Lovin, Jr. Director March 26, 1999 /s/ Michael W. Miller Michael W. Miller Director March 26, 1999 /s/ William T. Alt William T. Alt Director March 26, 1999 /s/ Robert E. Bosworth Robert E. Bosworth Director March 26, 1999 /s/ Hugh O. Maclellan, Jr. Hugh O. Maclellan, Jr. Director March 26, 1999 /s/ Mark A. Scudder Mark A. Scudder Director March 26, 1999 19 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Covenant Transport, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Covenant Transport, Inc. and its subsidiaries at December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Knoxville, Tennessee February 3, 1999 20
COVENANT TRANSPORT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1998 1997 1998 ---- ---- ASSETS ------ Current assets: Cash and cash equivalents $ 2,609,520 $ 2,926,135 Accounts receivable, net of allowance of $810,000 in 1997 and $1,064,788 in 1998 37,792,308 51,789,018 Drivers advances and other receivables 964,575 2,476,044 Tire and parts inventory 1,120,684 1,928,639 Prepaid expenses 3,773,556 5,324,921 Deferred income taxes 1,111,000 1,674,485 ------------ ------------ Total current assets 47,371,643 66,119,242 Property and equipment, at cost 228,931,936 282,358,419 Less accumulated depreciation and amortization 67,310,934 81,821,335 ----------- ------------ Net property and equipment 161,621,002 200,537,084 Other 6,263,491 6,302,525 ------------ ------------ Total assets $215,256,136 $272,958,851 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Current maturities of long-term debt 1,565,639 1,943,485 Accounts payable 5,328,346 3,485,098 Accrued expenses 9,073,554 12,913,953 Accrued income tax 724,815 1,404,172 ------------ ------------ Total current liabilities 19,746,708 Long-term debt, less current maturities 80,811,783 84,331,368 Deferred income taxes 22,155,000 27,358,848 ------------ ------------ Total liabilities 119,659,137 131,436,924 Stockholders' equity: Class A common stock, $.01 par value; 20,000,000 shares authorized; 11,010,250 and 12,560,250 shares issued and outstanding as of 1997 and 1998, respectively 110,103 125,603 Class B common stock, $.01 par value; 5,000,000 shares authorized; 2,350,000 shares issued and outstanding as of 1997 and 1998 23,500 23,500 Additional paid-in-capital 50,634,369 78,260,928 Retained earnings 44,829,027 63,111,896 ------------ ------------ Total stockholders' equity 95,596,999 141,521,927 ------------ ------------ Total liabilities and stockholders' equity $215,256,136 $272,958,851 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 21
COVENANT TRANSPORT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998 1996 1997 1998 ---- ---- ---- Revenue $236,266,945 $297,861,080 $370,545,721 Operating expenses: Salaries, wages, and related expenses 108,817,623 131,521,804 164,589,088 Fuel, oil, and road expenses 55,340,234 64,910,201 68,291,653 Revenue equipment rentals and purchased transportation 604,924 8,492,445 24,249,704 Repairs 4,293,141 5,884,881 8,366,205 Operating taxes and licenses 6,064,652 7,514,241 9,393,176 Insurance 6,114,526 8,655,465 10,369,687 General supplies and expenses 12,825,287 16,276,834 19,397,219 Depreciation and amortization, including gain on disposition of equipment 22,139,456 26,481,578 30,192,060 ------------ ------------ ------------ Total operating expenses 216,199,843 269,737,449 334,848,792 ------------ ------------ ------------ Operating income 20,067,102 28,123,631 35,696,929 Interest expense 5,987,148 6,273,324 5,924,486 ------------ ----------- ------------ Income before income taxes 14,079,954 21,850,307 29,772,443 Income tax expense 5,102,000 8,148,000 11,489,574 ------------ ------------ ------------ Net income $ 8,977,954 $ 13,702,307 $ 18,282,869 ============ ============ ============ Basic and diluted earnings per share: Net income $0.67 $1.03 $1.27 ============ ============ ============ Weighted average shares outstanding 13,350,000 13,360,000 14,393,000 Adjusted weighted average shares outstanding and assumed conversions outstanding 13,352,528 13,360,000 14,440,000 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 22
COVENANT TRANSPORT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, and 1998 Series I Class A Class B Additional Total Preferred Common Common Paid-In Retained Stockholders' Stock Stock Stock Capital Earnings Equity --------- --------- -------- --------- --------- -------- Balances at January 1, 1996 $ -- $110,000 $ 23,500 $50,469,596 $22,148,766 72,751,862 Net income -- -- -- -- 8,977,954 8,977,954 --------- --------- -------- ----------- ----------- ------------- Balances at December 31, 1996 -- 110,000 23,500 50,469,596 31,126,720 81,729,816 Exercise of employee stock options -- 103 -- 164,773 -- 164,876 Net income -- -- -- -- 13,702,307 13,702,307 --------- --------- -------- ----------- ---------- ------------- Balances at December 31, 1997 -- 110,103 23,500 50,634,369 44,829,027 95,596,999 Exercise of employee stock options -- 100 -- 156,650 -- 156,748 Secondary offering, net of offering expenses -- 15,400 -- 27,469,909 -- 27,485,311 Net income -- -- -- -- 18,282,869 18,282,869 --------- --------- -------- ----------- ----------- ------------- Balances at December 31, 1998 $ -- $ 125,603 $ 23,500 $78,260,928 $63,111,896 $ 141,521,927 ========= ========= ======== =========== =========== =============
The accompanying notes are an integral part of these consolidated financial statements. 23
COVENANT TRANSPORT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998 1996 1997 1998 ----- ---- ---- Cash flows from operating activities: Net income $ 8,977,954 $ 13,702,307 $ 18,282,869 Adjustments to reconcile net income to net cash provided by operating activities: Provision for losses on receivables 407,655 457,665 455,953 Depreciation and amortization 22,781,481 27,363,501 32,074,888 Deferred income tax expense 4,050,000 4,354,000 4,146,233 Gain on disposition of property and equipment (642,025) (881,922) (1,882,829) Changes in operating assets and liabilities: Receivables and advances 3,010,662 (2,580,948) (12,554,211) Prepaid expenses (1,088,845) 200,113 (1,074,453) Tire and parts inventory (78,626) (155,794) (617,349) Accounts payable and accrued expenses 1,707,242 2,786,653 1,071,815 ------------ ----------- ------------ Net cash flows provided by operating activities 39,125,498 45,245,575 39,902,916 Cash flows from investing activities: Acquisition of property and equipment (49,142,303) (54,027,486) (80,302,553) Proceeds from disposition of property and equipment 10,219,276 32,023,244 27,760,409 Acquisition of intangibles -- (1,250,000) (220,000) Acquisition of business- Bud Meyer(1) -- (4,350,442) -- Acquisition of business- SRT(2) -- -- (6,295,405) ------------ ------------ ------------ Net cash flows from investing activities (38,923,027) (27,604,684) (59,057,549) Cash flows from financing activities: Proceeds from equity offering -- -- 27,485,311 Exercise of stock option -- 164,876 156,748 Proceeds from issuance of long-term debt 3,000,000 -- 84,000,000 Repayments of long-term debt (40,000) (18,563,513) (92,093,557) Deferred debt issuance cost (132,216) (124,277) (77,254) ------------ ------------ ------------ Net cash flows provided by/(used in) financing activities 2,827,784 (18,522,914) 19,471,248 ------------ ------------ ------------ Net change in cash and cash equivalents 3,030,255 (882,023) 316,615 Cash and cash equivalents at beginning of period 461,288 3,491,543 2,609,520 ============ ============ ============ Cash and cash equivalents at end of period $ 3,491,543 $ 2,609,520 $ 2,926,135 ============ ============ ============ Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 5,905,000 $ 6,147,050 $ 6,021,291 ============ =========== ============ Income taxes $ 795,000 $ 2,927,376 $ 5,675,225 ============ =========== ============
(1) Acquisition of business presented net of acquired cash of $347,688 and receivable from officer of acquired company of $501,870. (2) Acquisition of business presented net of acquired cash of $1,454,595 and a note payable to former shareholder of Southern Refrigerated Transport, Inc. and Tony Smith Trucking, Inc. in the amount of $3,000,000. The accompanying notes are an integral part of these consolidated financial statements. 24 COVENANT TRANSPORT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business - Covenant Transport, Inc. (the "Company") is a long-haul truckload carrier that offers premium transportation services, such as team and refrigerated services, to customers throughout the United States. Principles of Consolidation - The consolidated financial statements include the accounts of the Company, a holding company incorporated in the state of Nevada in 1994, and its wholly-owned operating subsidiaries, Covenant Transport, Inc., a Tennessee corporation, Bud Meyer Truck Lines, Inc., ("Bud Meyer") a Minnesota corporation, Southern Refrigerated Transport, Inc., an Arkansas corporation, Tony Smith Trucking, Inc. (Southern Refrigerated Transport, Inc. and Tony Smith Trucking, Inc. shall be referred to collectively as "SRT"), Covenant Leasing, Inc., a Nevada corporation, Covenant Acquisition Co., a Nevada corporation, and Intellectual Property Co., a Nevada Corporation. All significant intercompany balances and transactions have been eliminated in consolidation. Revenue Recognition - Revenue, drivers' wages and other direct operating expenses are recognized on the date shipments are delivered to the customer. Cash and Cash Equivalents - The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Tires and Parts Inventory - Tires on new revenue equipment are capitalized as a component of the related equipment cost when the vehicle is placed in service and recovered through depreciation over the life of the vehicle. Replacement tires and parts on hand at year end are recorded at the lower of cost or market with cost determined using the first-in, first-out method. Replacement tires are expensed when placed in service. Intangible Assets - The Company periodically evaluates the net realizability of the carrying amount of intangible assets. Non-compete agreements are amortized over the life of the agreement, deferred loan costs are amortized over the life of the loan and goodwill is amortized over periods ranging from 20 to 40 years. Property and Equipment - Depreciation is calculated on the straight-line method over the estimated useful lives of the assets. Revenue equipment is depreciated over five to seven years with salvage values ranging from 25% to 33 1/3%. In accordance with industry practices, gains or losses on disposal of revenue equipment are included in depreciation in the statements of income. Impairment of Long-Lived Assets - The Company ensures that long-lived assets to be disposed of are reported at the lower of the carrying amount or the fair market value less costs to sell. The Company evaluates the carrying value of long-lived assets for impairment losses by analyzing the operating performance and future cash flows for those assets. The Company adjusts the net book value of the underlying assets if the sum of expected cash flows is less than book value. Capital Structure - The shares of Class A and B Common Stock are substantially identical except that the Class B shares are entitled to two votes per share. The terms of any future issuances of preferred shares will be set by the Board of Directors. Insurance and Other Claims - Losses resulting from claims for personal injury, property damage, cargo loss and damage, and other sources are covered by insurance, subject to deductibles. Losses resulting from uninsured claims are recognized when such losses are known and estimable. Interest Rate Swaps - Interest rate swaps are entered into as a hedge against interest exposure of variable rate debt. The differences to be paid or received on swaps are included in interest expense. The fair value of the Company's interest rate swap agreements is based on dealer quotes. These values represent the amounts the Company would receive or pay to terminate the agreements taking into consideration current interest rates. 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. 25 Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. The statement established accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Company may engage in hedging activities using futures, forward contracts, options, and swaps to hedge the impact of market fluctuations on energy commodity prices and interest rates. The Company is currently assessing the effect, if any, on its financial statements of implementing SFAS No. 133. The Company will be required to adopt the standard in 2000.
2. OTHER ASSETS A summary of other assets as of December 31, 1997 and 1998 is as follows: 1997 1998 ---- ----- Covenants not to compete $ 1,575,000 $ 1,400,000 Deferred costs 614,812 692,193 Goodwill 2,488,832 3,842,441 Less accumulated amortization of intangibles (588,542) (950,409) Split dollar life insurance 556,877 608,553 Cash surrender value of life insurance 106,078 239,750 Other 1,510,434 469,997 ----------- ------------ $ 6,263,491 $ ,6,302,525 ============= ============ 3. PROPERTY AND EQUIPMENT A summary of property and equipment, at cost, as of December 31, 1997 and 1998 is as follows: 1997 1998 ---- ---- Revenue equipment $ 207,990,788 $256,766,668 Land and improvements 4,425,629 7,611,058 Buildings and leasehold improvements 3,135,866 2,641,786 Communications equipment 8,466,052 10,021,341 Other 4,913,601 5,317,566 ------------- ------------ $ 228,931,936 $282,358,419 ============= ============
26
4. LONG-TERM DEBT Long-term debt consists of the following at December 31, 1997 and 1998: 1997 1998 ---- ---- Borrowings under $100 million credit agreement $ 52,000,000 $ 54,000,000 10-year senior notes 25,000,000 25,000,000 Notes to unrelated individuals for non-compete agreements 1,060,000 810,000 Equipment and vehicle obligations with commercial lending institutions, with fixed interest 4,317,422 3,464,853 rates ranging from 5.9% to 10.8% at 1998 Note payable to former SRT shareholder interest bearing interest at 6.5% with interest payable quarterly -- 3,000,000 ------------- ------------- 82,377,422 86,274,853 Less current maturities 1,565,639 1,943,485 ------------- ------------- $ 80,811,783 $ 84,331,368 ============= =============
The Company is party to a credit agreement with a group of banks with maximum borrowings of $100 million with $25 million additional borrowing available upon satisfaction of certain criteria. Borrowings related to revenue equipment are limited to the lesser of 90% of the net book value of revenue equipment or $55 million. Working capital borrowings are limited to 85% of eligible accounts receivable. Letters of credit are limited to an aggregate commitment of $10 million. The credit agreement includes a "security agreement" such that the credit agreement may be collateralized by virtually all assets of the Company if a covenant violation occurs. A commitment fee that floats between 0.10% and 0.25% per annum based on a ratio of total debt to trailing cash flow coverage is due on the daily unused portion of the credit agreement. At December 31, 1998, the fee was 0.125% per annum. The credit agreement is guaranteed by Covenant Transport, Inc., a Nevada corporation, Bud Meyer Truck Lines, Inc., a Minnesota corporation, Southern Refrigerated Transport, Inc., an Arkansas corporation, Tony Smith Trucking, Inc., an Arkansas corporation, Covenant Leasing, Inc., a Nevada corporation, Covenant Acquisition Co., a Nevada corporation, and Intellectual Property Co., a Nevada Corporation. The credit agreement revolves for 1998 and 1999 and then has a term out in 2000. 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. The Company renewed the loan in December 1997 and anticipates renewing the line of credit on an annual basis. Borrowings under the credit agreement generally accrue interest based on one, two, or three month LIBOR rates plus an applicable margin that is adjusted quarterly between .325% and .75% based on a ratio of total debt to trailing cash flow coverage. At December 31, 1998, the margin was .425%. A $25 million interest rate swap agreement was completed in February 1997 that expires February 1999 at 6.125% plus the applicable margin. During October 1997 the Company entered into an interest swap agreement with a fixed interest rate on $10 million of the borrowing under the credit agreement at 5.95% plus the applicable margin for two years. The fair value of the two interest swap agreements was ($53,047) and ($39,191) at December 31, 1998. All remaining borrowings under the credit agreement are at one, two, or three month LIBOR. Senior notes with an insurance company are due October 2005. The term agreement requires payments for interest semi-annually in arrears with principal payments due in four equal annual installments beginning October 1, 2002. The notes are collateralized by all accounts of the Company. Interest accrues at 7.39% per annum. The credit agreement and senior note agreement subject the Company to certain restrictions and covenants related to, among others, dividends, tangible net worth, cash flow, acquisitions and dispositions, and total indebtedness. 27
Maturities of long term debt at December 31, 1998 are as follows: 1999 $ 1,943,485 2000 $ 55,249,307 2001 $ 904,354 2002 $ 177,707 2003 $ --
5. RELATED PARTY TRANSACTIONS Transactions involving related parties not otherwise disclosed herein are as follows: During 1997 and 1998, the Company sold certain of its used tractors and trailers to corporations owned by related parties for an aggregate of approximately $1,161,000 in 1997 and $768,000 in 1998. In all cases, the Company received amounts equal to, or in excess of, the trade-in amounts guaranteed by the tractor manufacturer or fair values listed in industry trailer publications. In June 1997 the Company obtained a promissory note in the amount of $480,000 from a related party. The principal and related interest at the rate of 7% was paid in full in May 1998. The Company also contracted with a related party for airplane services in the amount of $262,940 during 1998.
6. LEASES The Company has operating lease commitments for office and terminal properties, revenue equipment, exclusive of owner/operator rentals, computer and office equipment, and month-to-month equipment rentals, summarized for the following fiscal years: 1999 $ 9,851,221 2000 $ 8,559,603 2001 $ 3,934,513 2002 $ 1,021,833 2003 $ 1,021,833
Rental expense is summarized as follows for each of the three years ended December 31: 1996 1997 1998 ---- ---- ---- Revenue equipment rentals $ 338,283 $ 1,618,973 $ 5,640,365 Owner/operator rentals -- 6,860,853 18,166,671 Terminal rentals 606,424 1,503,523 1,277,164 Other equipment rentals 505,062 1,181,589 1,289,497 ----------- ----------- ----------- $ 1,449,769 $11,164,938 $26,373,697 =========== =========== ===========
During April 1996, the Company entered into an agreement to lease its headquarters and terminal in Chattanooga under an operating lease. The lease provides for rental payments to be variable based upon LIBOR interest rates for five years. The Company entered into an agreement with the lessor to fix the rental payments from January 1997 until July 2000 at approximately $77,000 per month. Covenant leased property in Chattanooga, Tennessee from the principal stockholder of the Company. Effective July 1, 1997, the monthly rental was approximately $15,000 per month. The Company also leased a property at Greer, South Carolina for annual rent of $12,000 from the principal stockholder. Effective June 1998, these two leases were terminated by the principal stockholder without any penalties or additional payments coming due. Included in terminal rentals are payments of $237,664, $224,172, and $78,905 for the years ended December 31, 1996, 1997, and 1998, respectively, to the principal stockholder of the Company. 28
7. INCOME TAX EXPENSE Income tax expense for the years ended December 31, 1996, 1997, and 1998 is comprised of: 1996 1997 1998 ---- ---- ---- Federal, current $ 795,000 $3,940,000 $ 5,076,047 Federal, deferred 3,984,000 3,531,000 4,196,206 State, current 257,000 263,000 1,773,164 State, deferred 66,000 414,000 444,157 ---------- ---------- ---------- $5,102,000 $8,148,000 $11,489,574 ========== ========== =========== 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, 1996, 1997 and 1998 as follows: 1996 1997 1998 ---- ---- ---- Computed "expected" income tax expense $4,928,000 $7,648,000 $10,420,000 Adjustments in income taxes resulting from: State income taxes, net of federal income tax effect 183,000 440,000 944,574 Permanent differences and other, net (9,000) 60,000 125,000 ---------- --------- ----------- Actual income tax expense $5,102,000 $8,148,000 $11,489,574 ========== ========== ===========
The temporary differences and the approximate tax effects that give rise to the Company's net deferred tax liability at December 31, 1997 and 1998 are as follows:
1997 1998 ---- ---- Deferred tax assets: Accounts receivable $ 292,000 $ 181,436 Accrued expenses 1,111,000 1,674,485 Loss carryforwards 3,595,000 0 Alternative minimum tax credits 5,473,000 4,778,446 Investment tax credits 82,000 82,000 carryforward Intangible assets 126,000 221,513 ----------- ----------- 10,679,000 6,937,880 Deferred tax liability: Depreciation 31,723,000 32,622,243 ----------- ----------- Net deferred tax liability 21,044,000 25,684,363 Portion reflected as current asset 1,111,000 1,674,485 =========== =========== Deferred tax liability $22,155,000 $27,358,848 =========== ===========
The Company has available for federal income tax purposes an investment tax credit carryforward of $82,000, which expires in 2001. 29 8. CONTINGENCIES AND COMMITMENTS The Company, in the normal course of business, is involved in certain legal matters for which it carries liability insurance. It is management's belief that the losses, if any, from these lawsuits will not have a materially adverse impact on the financial condition, operations, or cash flows of the Company. Financial risks which potentially subject the Company to concentrations of credit risk consist of deposits in banks in excess of the Federal Deposit Insurance Corporation limits. The Company's sales are generally made on account without collateral. Repayment terms vary based on certain conditions. The Company maintains reserves which management believes are adequate to provide for potential credit losses. The majority of the Company's customer base spans the United States. The Company monitors these risks and believes the risk of incurring material losses is remote. The Company has entered into minimum purchase agreements for the purchase of diesel fuel. Price is determined on a quarterly basis based on the weighted average cost over the previous quarter. The agreements expire in 1999.
9. EARNINGS PER SHARE The following table sets forth for the periods indicated the calculation of net earnings per share included in the Company's Consolidated Statement of Income: 1996 1997 1998 ---- ---- ---- Numerator: Net Income $ 8,977,954 $13,702,307 $18,282,869 Denominator: Denominator for basic earnings per share - weighted-average shares 13,350,000 13,360,000 14,393,000 Effect of dilutive securities: Employee stock options 2,528 -- 47,000 =========== =========== ========== Denominator for diluted earnings per share - adjusted weighted-average shares and assumed 13,352,528 13,360,000 14,440,000 conversions ========== =========== ========== Basic earnings per share: $ 0.67 $ 1.03 $ 1.27 =========== =========== ========== Diluted earnings per share $ 0.67 $ 1.03 $ 1.27 =========== =========== ==========
10. 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 $464,000, $538,000, and $873,000 in 1996, 1997, and 1998, respectively, to the profit sharing and savings plan. 11. INCENTIVE STOCK PLAN The Company has two employee stock plans. Awards may be in the form of incentive stock awards or other forms. The Company has reserved 859,750 shares of Class A Common Stock for distribution at the discretion of the Board of Directors. During October 1994, the Company granted options to purchase 122,500 shares which are exercisable at the fair market value on the date of grant ($16.50) and vest at varying dates through October 1999. During June 1996, the Company 30 granted options to purchase 267,500 shares which are exercisable at the fair market value on the date of grant ($15.50) and vest at varying dates through June 2001. During 1997 the Company granted options to purchase 149,000 shares which are exercisable at the fair market value on the date of the grant (weighted average of $16.43) and vest at varying dates through December 2002. During 1998 the Company granted options to purchase 298,250 shares which are exercisable at the fair market value on the date of the grant (weighted average of $12.21) and vest at varying dates through November 2003. The options expire 10 years from the date of grant. The following table details the activity of the incentive stock option plan:
1996 1997 1998 ---- ---- ---- Balance January 1 117,000 383,250 501,500 Granted 267,500 149,000 298,250 Exercised -- (10,250) (10,000) Canceled (1,250) (20,500) (20,000) ---------- -------- -------- Balance December 31 338,250 501,500 769,750 ---------- -------- -------- Exercisable December 31 82,500 151,000 212,800
For the year ended December 31,1997, 10,250 options were exercised at an average price of $16.09. For the year ended December 31,1998, 10,000 options were exercised at an average price of $15.68. As of December 31,1998, the Company has 769,750 options outstanding with exercise prices which range from $10.38 to $19.06 with an average price of $14.56 and average remaining life of 8 years. The average exercise price of options exercisable at December 31, 1996, 1997, and 1998 was $16.50, $15.98, and $15.90, respectively. 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. The Company adopted SFAS No. 123 for disclosure purposes only in 1996. 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 rate of 5.5%, for 1995 to 1997 grants and 5.0% for 1998 grants; expected life of 5 years; dividend rate of zero percent; and expected volatility of 18.5% for 1995, 1996 and 1997 and 42.0% for 1998. Using these assumptions, the fair value of the employee stock options granted in 1997 and 1998 is $600,000 and $1.2 million, respectively, which would be amortized as compensation expense over the vesting period of the options. Had compensation cost been determined in accordance with SFAS No. 123, utilizing the assumptions detailed above, the Company's net income and net income per share would have been reduced to the following pro forma amounts for the years ended December 31, 1997 and 1998:
1997 1998 ---- ---- Net Income: As reported $13,702,307 $18,282,869 Pro forma 13,402,696 17,736,350 Net income per share: As reported $ 1.03 $ 1.27 Pro forma 1.00 1.23
12. BUSINESS COMBINATIONS In October 1997 the Company purchased all of the outstanding stock of Bud Meyer. The acquisition of Bud Meyer has been accounted for under the purchase method of accounting. Accordingly, the operating results of Bud Meyer have been included in the consolidated operating results since the date of acquisition. The purchase price of $5,200,000, net of cash received of $347,688 and a receivable from an officer of Bud Meyer to the acquired company of $501,870 has been allocated to the net assets acquired based on appraised fair values at the date of acquisition. 31 In August 1997, the Company purchased certain intangible assets of Trans-Roads, Inc. for $2,250,000, of which $1,000,000 will be paid out over the next five years. In October 1998 the Company purchased all of the outstanding stock of SRT. The acquisition of SRT has been accounted for under the purchase method of accounting. Accordingly, the operating results of SRT have been included in the consolidated operating results since the date of acquisition. The purchase price of $10,750,000, net of cash received of $1,454,595 and note payable in the amount of $3 million to a former shareholder of SRT has been allocated to the net assets acquired based on appraised fair values at the date of acquisition as follows: Property and equipment $ 15,929,256 Current assets 3,222,351 Goodwill 1,233,609 Accounts payable and accrued (1,604,693) expenses Deferred taxes (494,130) Notes payable (11,990,988) ============== $ 6,295,405 ============== The unaudited pro forma operating data for the Company, assuming the acquisition of Bud Meyer occurred January 1, 1996 and assuming the acquisition of SRT occurred January 1,1997.
1996 1997 1998 ---- ---- ---- (unaudited) (unaudited) (unaudited) Revenues $281,269,621 $356,918,523 $390,978,491 Net Income 9,531,607 13,991,530 18,745,805 Net earnings per share Basic and diluted $ 0.71 $ 1.05 $ 1.30
The unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the acquisitions been consummated as of the above date, nor are they indicative of future operating results. In August 1998, the Company purchased certain assets of Gouge Trucking, Inc. for $1,047,405, of which $100,000 will be paid out over the next year. 32 EX-10.22 2 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made and entered into as of October 5, 1998, by and among Covenant Transport, Inc., a Nevada corporation ("Buyer"); the Smith Charitable Remainder Trust (the "Selling Stockholder"); Southern Refrigerated Transport, Inc., an Arkansas corporation ("Southern"); Tony Smith Trucking, Inc., an Arkansas corporation ("Smith Trucking"); and Tony and Kathy Smith, husband and wife and residents of Arkansas (the "Smiths"). RECITALS 1. The Selling Stockholder owns all of the issued and outstanding capital stock of Southern and Smith Trucking, consisting of 300 shares and 1,000 shares of Common Stock, respectively, $1.00 par value per share (together, the "Common Stock"). 2. The Selling Stockholder proposes to sell and Buyer proposes to purchase the Common Stock. 3. The parties desire that the transaction be accomplished as stated herein, in accordance with their respective representations, warranties, and agreements, subject to the conditions contained herein. AGREEMENTS NOW, THEREFORE, in consideration of the covenants, representations, warranties, and agreements herein contained, and for other good and valuable consideration, the parties agree as follows: ARTICLE I Definitions For the purposes of this Agreement, unless otherwise provided, the following terms, when capitalized, shall have the meanings ascribed to them below: 1.1 "Affiliate" means any person or entity controlling, controlled by, or under common control with another person or entity, as well as the following: all officers, directors, and persons owning 10% or more of the equity interests of an entity. 1.2 "Authority" means each and every federal, state, local, and foreign judicial, governmental, quasi-governmental, or regulatory agency, official, or department; every arbitrator, mediator, and other similar official; and every other entity to whose jurisdiction or decision making authority a party has submitted. 1.3 "Benefit Plans" means all contracts, plans, arrangements, policies, and understandings providing for any compensation or benefit other than base wages or salaries that are maintained by Southern or Smith Trucking or affect either of their employees or independent contractors, regardless of whether defined as an "employee benefit plan" under ERISA or subject to any provision of ERISA, including, without limitation: all pension, profit-sharing, retirement, thrift, 401(K), ESOP, and other similar plans and arrangements (defined benefit and defined contribution); all health and welfare, disability, insurance (including self-insurance), workers' compensation, supplemental unemployment, severance, vacation, and similar plans and arrangements; and all bonus, stock option, incentive compensation, stock appreciation rights, phantom stock, overtime guaranty, employment contract, employee handbook, and other similar plans or arrangements. 1.4 "Closing" and "Closing Date" have the meanings set forth in Section 3.1 hereof. 1.5 "Code" means the Internal Revenue Code of 1986, as amended, or any successor federal tax law. 1.6 "Contract" means any mortgage, indenture, agreement, contract, commitment, lease, plan, license, permit, insurance policy or binder, authorization, or other instrument, document, or understanding, oral or written. 1.7 "Environmental Laws" has the meaning ascribed in Section 4.3(u). 1.8 "GAAP" means generally accepted accounting principles, consistently applied throughout all periods, provided, that interim, unaudited financial statements lack footnotes and other presentation items. 1.9 "Historical Financial Statements" has the meaning ascribed to it in Section 4.3(f). 1.10 "IRS Proceeding" has the meaning ascribed in Section 6.6. 1.11 "IRS Claims" has the meaning ascribed in Section 6.6. 1.12 "Judgment" means any judgment, order, writ, injunction, decree, or award by any Authority, as well as all settlements of actions or claims. 1.13 "Law" means any constitution, statute, Judgment, law, ordinance, rule, regulation, or other pronouncement by any Authority (including, without limitation, the following types: environmental, energy, safety, health, zoning, antidiscrimination, antitrust, employment, transportation, Tax, and employee benefit (including ERISA)). 1.14 "Lien" means any mortgage, lien, pledge, security interest, mechanics or materialmens' or similar lien, conditional sale agreement, charge, claim, right, condition, restriction, or other encumbrance or defect of title of any nature whatsoever (including, without limitation, any assessment, charge, or other type of notice which is levied or given by any Authority and for which a lien could be filed). 1.15 "Loss" and "Losses" have the meanings ascribed to them in Section 6.1. 1.16 "Note" has the meaning ascribed in Section 3.3. 1.17 "Permits" has the meaning ascribed in Section 4.3(t). 1.18 "Proceeding" means any action, suit, litigation, arbitration, investigation, hearing, notice of violation, order, claim, citation, charge, demand, complaint, review, or penalty assessment, in each case whether formal or informal, administrative, civil or criminal, at law or in equity, and whether or not in front of any Authority. 1.19 "Real Estate" means the real estate and improvements thereon, and all rights and appurtenances thereto, currently owned or leased by Southern or Smith Trucking, all as legally described on Exhibit A. 1.20 "Rights" means all patents, trademarks, copyrights, franchises, licenses, permits, easements, computer software programs, rights (including, without limitation, rights to trade secrets and proprietary information and know-how), certificates, approvals, and other authorizations including those issued by or filed with any Authority, and any applications for any of the foregoing. 1.21 "Taxes" shall mean all taxes, charges, fees, levies, or other assessments of whatever kind or nature, including, without limitation, all net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, withholding, payroll, employment, excise, estimated, severance, stamp, occupancy, or property taxes, customs duties, fees, assessments, or charges of any kind whatsoever (together with any interest and any penalties, additions to tax, or additional amounts) imposed by any Authority. ARTICLE II Stock Purchase and Sale 2.1 Transfer of Common Stock. Subject to the terms and conditions of this Agreement, at the Closing, the Selling Stockholder shall sell, convey, transfer, assign, and deliver to Buyer, and Buyer shall acquire, 100% of the issued and outstanding Common Stock free and clear of all Liens. 2.2 Purchase Price. In consideration for the transfer of the Common Stock, Buyer agrees to pay to the Selling Stockholder at Closing, Ten Million Seven Hundred Fifty Thousand Dollars ($10,750,000) (the "Purchase "Price"). ARTICLE III Closing 3.1 Date. The closing of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of Carroll & Associates located at 650 South Shackleford, Suite 224, Little Rock, Arkansas 72211. Contemporaneously with the execution hereof, all actions taken or required to be taken pursuant to this Article III shall be deemed to have occurred contemporaneously, and no individual action shall have been taken until all are completed. The date hereof shall be the "Closing Date." 3.2 Delivery of Certificates and Other Agreements. At the Closing, the Selling Stockholder shall deliver to Buyer certificates representing all shares of Common Stock, duly endorsed (or accompanied by duly executed stock powers). The Release, Employment Agreement, Stock Option Agreement, Note, and each other document required to be executed in connection with this Agreement shall be duly executed and delivered by the parties thereto. 3.3 Delivery of Purchase Price. At the Closing, the Buyer shall deliver (i) Seven Million Seven Hundred Fifty Thousand Dollars ($7,750,000) to the Selling Stockholder by wire transfer of immediately available funds and (ii) a non-negotiable promissory note payable to the Selling Stockholder in the principal amount of Three Million Dollars ($3,000,000) in the form of Exhibit B attached hereto (the "Note"). 3.4 Opinion of Counsel. Counsel for Southern, Smith Trucking, the Smiths, and the Selling Stockholder shall deliver to Buyer written opinions, dated as of the Closing Date, in substantially the forms attached as Exhibits C-1 and C-2. 3.5 Opinion of Counsel. Counsel for Buyer shall deliver to the Selling Stockholder its written opinion, dated as of the Closing Date, in substantially the form attached as Exhibit D. ARTICLE IV Representations and Warranties 4.1 General Statement. The parties hereto represent and warrant to each other that the statements contained in this Article IV are correct and complete as of the Closing Date. The survival of all such representations and warranties shall be in accordance with Section 7.2 hereof. Copies of all documents referenced in the Schedules shall be attached thereto or delivered separately. 4.2 Representations and Warranties of Buyer. Buyer represents and warrants to the Selling Stockholder, that: (a) Corporate Status. Buyer is a corporation, duly organized, validly existing, and in good standing under the laws of the State of Nevada, with all requisite power and authority to carry on its business. (b) Authority. Buyer has full right, power, and authority to execute and deliver this Agreement and to consummate and perform the transactions contemplated hereby. The execution and delivery of this Agreement and every other Contract contemplated hereunder by Buyer and the consummation and performance of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate and other proceedings. This Agreement has been duly executed and delivered by Buyer and constitutes the legal, valid, and binding obligation of Buyer, enforceable against Buyer in accordance with its terms. (c) Validity of Contemplated Transaction. The execution and delivery of this Agreement by Buyer does not, and the performance of this Agreement by Buyer will not (i) violate or conflict with any existing Law or any Judgment which is applicable to Buyer or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any person the right to accelerate, terminate, modify, or cancel, or require any notice under the articles of incorporation or other charter documents, bylaws, or any securities of Buyer or any Contract to which Buyer is a party or by which it is otherwise bound. No authorization, approval, or consent of, and no registration, filing, or notice to any Authority or any other party to any Contract is required in connection with the execution, delivery, and performance of this Agreement by Buyer. (d) Brokers or Finders. Buyer and its officers and agents have incurred no obligation or liability, contingent or otherwise, for brokerage or finders' fees or agents' commissions or other similar payment in connection with this Agreement. 4.3 Representations and Warranties of the Smiths and the Selling Stockholder. The Selling Stockholder and the Smiths, jointly and severally, represent and warrant to Buyer that: (a) Corporate Status. Southern and Smith Trucking are corporations, duly organized, validly existing, and in good standing under the laws of the State of Arkansas, each with all requisite power, authority, and Permits to carry on its business as it has been and is now being conducted and to own, lease, and operate its properties used in connection therewith. Except as set forth on Schedule 4.3(a), Southern and Smith Trucking are duly qualified to do business and are in good standing as foreign corporations in each jurisdiction where the character of their properties or the nature of their businesses requires them to be so qualified. Southern and Smith Trucking conduct their businesses only under their own names. Southern and Smith Trucking have no subsidiaries and no entities affiliated through common ownership or otherwise that conduct any business related to that which they conduct. (b) Capitalization. The entire authorized capital stock of Southern consists of 10,000 shares of common stock, of which 300 shares are issued and outstanding and owned by the Selling Stockholder. The entire authorized capital stock of Smith Trucking consists of 1,000 shares of common stock, of which 1,000 shares are issued and outstanding and owned by the Selling Stockholder. Neither Southern nor Smith Trucking has any stockholders or issued and outstanding stock, whether voting or non-voting, common or preferred, other than the Selling Stockholder and the aforesaid shares owned by the Selling Stockholder. The Selling Stockholder is the record and beneficial owner of the Common Stock, free and clear of all Liens. All of such shares have been duly authorized and validly issued, are fully paid and non-assessable, and are free of all adverse claims. None of the Common Stock was issued in violation of the Securities Act of 1933 or any other Law. There are no outstanding or authorized (i) options, warrants, purchase rights, subscription rights, conversion rights, exchange rights, or other Contracts or commitments that could require Southern or Smith Trucking (or any successor, parent, or acquiror of Southern or Smith Trucking) to issue, sell, or otherwise cause to become outstanding any capital stock or other securities or obligations; (ii) stock appreciation, phantom stock, profit participation, or similar rights; or (iii) voting trusts, proxies, rights of first refusal, registration rights, transfer restrictions, or other Contracts relating to the capital stock or other securities or obligations of Southern or Smith Trucking. (c) Officers; Directors; Bank Accounts; Powers of Attorney. Schedule 4.3(c) lists all directors and officers of Southern and Smith Trucking; all bank accounts, lock boxes, safe deposit boxes, and borrowing authority of Southern and Smith Trucking, specifying with respect to each, the name and address of the bank or other financial institution and the account number and all persons having signing authority or authority to withdraw therefrom or thereon; and all persons having power of attorney, authority as an agent, or other authority to act on behalf of Southern or Smith Trucking. (d) Authority. Southern, Smith Trucking, and the Selling Stockholder, as appropriate, have full right, power, and authority to execute and deliver this Agreement and every other Contract contemplated hereunder and to consummate and perform the transactions contemplated hereby. The execution and delivery of this Agreement and every other Contract contemplated hereunder by Southern, Smith Trucking, and the Selling Stockholder and the consummation and performance of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate and other proceedings. This Agreement has been duly executed and delivered by Southern, Smith Trucking, the Smiths, and the Selling Stockholder and constitutes the legal, valid, and binding obligation of each, enforceable against each, in accordance with its terms. The Selling Stockholder is a validly formed trust and the only trustees of the Selling Stockholder, the Smiths, have full right, power, and authority to execute and deliver this Agreement and every other Contract contemplated hereunder and to consummate and perform the transactions contemplated hereby. (e) Validity of Contemplated Transactions. The execution and delivery of this Agreement and every other Contract contemplated hereby by Southern, Smith Trucking, the Smiths, and the Selling Stockholder do not, and the performance of this Agreement and every other Contract contemplated hereby by Southern, Smith Trucking, the Smiths, and the Selling Stockholder will not, (i) violate or conflict with any existing Law or any Judgment which is applicable to Southern, Smith Trucking, the Smiths, or the Selling Stockholder; (ii) conflict with, result in a breach of, constitute a default under, result in acceleration of, create in any person the right to accelerate, terminate, modify, or cancel, or require any notice under the articles of incorporation or other charter documents, bylaws, or any securities of Southern or Smith Trucking or any Contract to which Southern, Smith Trucking, the Smiths, or the Selling Stockholder is a party or by which any is otherwise bound; or (iii) violate or conflict with the trust documents applicable to the Selling Stockholder. No authorization, approval, or consent of, and no registration, filing, or notice to any Authority or other party to any Contract is required in connection with the execution, delivery, and performance of this Agreement by Southern, Smith Trucking, the Smiths, or the Selling Stockholder. (f) Financial Statements; Accounts Receivable. (i) Southern and Smith Trucking have delivered to Buyer the annual financial statements (including balance sheets and statements of income, cash flows, and retained earnings) of Southern at and for the period ended June 30, 1996, 1997, and 1998 and of Smith Trucking at and for the period ended December 31, 1995, 1996, and 1997, and the associated accountants review reports, as well as the internal financial statements of each company at and for the period ended July 31, 1998 (collectively, the "Historical Financial Statements"). The Historical Financial Statements and all notes thereto are true, correct, and complete, have been prepared in accordance with GAAP, consistently applied, present fairly the financial condition and results of operations, changes in stockholder's equity and cash flows of Southern and Smith Trucking at and for all periods reflected therein, and are consistent with the books and records of Southern and Smith Trucking, which books and records are correct and complete. Copies of the Historical Financial Statements are attached as Schedule 4.3(f). (ii) All accounts receivable of whatever nature of Southern and Smith Trucking represent valid obligations arising from sales actually made or services actually performed in the ordinary course of business. All accounts receivable are collectible net of the reserves shown on the companies' balance sheets. There is no contest, claim, or right of set-off, other than returns in the ordinary course of business, under any Contract with any obligor of an accounts receivable relating to the amount or validity of such accounts receivable. (g) Absence of Undisclosed Liabilities. Southern and Smith Trucking have no liabilities or obligations, accrued or unaccrued, contingent or absolute, liquidated or unliquidated, and whether due or to become due, except for (i) liabilities that are reflected and adequately accrued on the face of the July 31, 1998 balance sheet of each included in the Historical Financial Statements, (ii) liabilities arising in the ordinary course of business since such date (none of which arises from or relates to any breach of contract or warranty, tort, infringement, or violation of Law, or would have to be disclosed on any Schedule to this Agreement), and (iii) in connection with the IRS Proceedings. (h) Absence of Changes or Events. Except as disclosed on Schedule 4.3(h), since June 30, 1998, there has not been any adverse change in the business, operations, results of operations, or future prospects of Southern or Smith Trucking. Without limiting the generality of the foregoing, since that date, except as disclosed on Schedule 4.3(h), neither Southern nor Smith Trucking has: (i) declared, set aside, or paid any dividend or made any other distribution or payment in respect of its capital stock; redeemed, purchased, or otherwise acquired any of its capital stock; issued any capital stock or other securities; granted any stock option or right to purchase shares of capital stock or any other securities of Southern or Smith Trucking; issued any security convertible into capital stock; or granted any registration rights concerning its securities; (ii) discharged or satisfied any Lien or paid any material liabilities, other than in the ordinary course of business consistent with past practice, or failed to pay or discharge any liabilities when due; (iii) sold, assigned, or transferred or agreed to sell, assign, or transfer any of its assets or any interest therein; (iv) created, incurred, assumed, or guaranteed any indebtedness for money borrowed or any other indebtedness or obligation of any nature (absolute or contingent), or mortgaged, pledged, or subjected to any Lien, any of its assets; (v) acquired any substantial assets, properties, securities, or interests of another person; (vi) reduced or canceled any amounts owed to it (except for the debt forgiven under Section 5.8); (vii) settled any claims against it; (viii) granted or entered into any agreement or policy with any employee that grants severance or termination pay, increases compensation, increases benefits under any current Benefit Plan, or creates any continuing employment relationship; (ix) experienced any labor unrest or union organizing activity; (x) suffered any adverse change in its business; (xi) changed any of the accounting principles which it follows or the methods of applying such principles; (xii) amended, terminated, or entered into any Contract other than in the ordinary course of business, consistent with past practice; (xiii) suffered to its assets any damage, destruction, or loss, whether or not covered by insurance; (xiv) amended its articles of incorporation or bylaws or made any changes in its authorized or issued capital stock or other securities; (xv) directly or indirectly engaged in any transaction, arrangement, or Contract with any officer, director, partner, shareholder, or other insider or affiliate; (xvi) entered into any transactions outside the ordinary course of business; or (xvii) agreed, whether orally or in writing, to do any of the foregoing. (i) Asset Schedule. Schedule 4.3(i) sets forth all material assets owned by Southern and Smith Trucking together with the cost, depreciated book value, and tax basis thereof. All of such assets are reflected on the balance sheet included in Southern or Smith Trucking's most recent Historical Financial Statements. (j) Title and Condition of Assets. All of Southern's and Smith Trucking's owned and leased assets are in good repair and condition and adequate for the ordinary course of operation of Southern's and Smith Trucking's respective business as presently conducted, and all leased assets are in compliance with any applicable lease provisions. All inventory is usable and not obsolete. Neither Southern, Smith Trucking, the Smiths, nor the Selling Stockholder has received notice from any Authority of a Proceeding in the nature of condemnation or eminent domain relating to any of the property which Southern or Smith Trucking owns, leases, or utilizes in its operations, including the Real Estate. Except as set forth on Schedule 4.3(j), each of Southern and Smith Trucking possesses good and marketable title to all of its owned assets and a valid leasehold interest in all leased assets, free and clear of all Liens, except Liens for current taxes not yet due and payable. Each of Southern and Smith Trucking does not use any assets in its businesses other than assets owned by it or assets leased under valid and continuing leases that are identified on Schedule 4.3(o). There are no developments affecting any of Southern's or Smith Trucking's properties or assets, owned or leased, that might materially detract from the value of such property or assets, interfere with any present or intended use of such property or assets, or adversely affect the marketability of such property or assets. All buildings, plants, and structures owned or used by Southern or Smith Trucking lie wholly within the boundaries of the Real Estate and do not encroach upon the property of, or otherwise conflict with the property rights of, any other third party. The buildings, plants, structures, and equipment owned or used by Southern or Smith Trucking are structurally sound, are in good operating condition and repair, and are adequate for the uses to which they are being put, and none of such buildings, plants, structures, or equipment is in need of maintenance or repairs except for ordinary, routine maintenance and repairs that are not material in nature or cost. The buildings, plants, structures, and equipment owned or used by each of Southern and Smith Trucking are sufficient for the continued conduct of the respective businesses of Southern and Smith Trucking after the Closing Date in substantially the same manner as conducted prior to the Closing Date. (k) Additional Warranties Concerning Tractors and Trailers. All tractors and trailers operated by Southern and Smith Trucking are in good operating condition and repair, do not require any engine, drive train, or other mechanical system repair, meet all Department of Transportation requirements, and have been maintained in compliance with all applicable manufacturers' specifications and warranties. All tractors and trailers have been operated at all times in compliance with applicable leases or other financing documents. All leased tractors and trailers satisfy the "turn-in" requirements under applicable leases such that there would not be any penalty, reconditioning fee, or other amount owed if such leased tractors and trailers were returned at the Closing Date. Each leased tractor (and if applicable, leased trailers) has been operated within the mileage allowance of the applicable lease, prorated for the portion of the lease period that has expired. All tractors and trailers that are owned or covered by leases without specific return requirements have no major damage. On a fleetwide basis, all tractors and trailers have averages of at least 50% wear remaining on tires and brakes. There are no late fees, penalties, or other amounts owing under any tractor or trailer lease or other financing document, other than any current month payment that is not yet due. (l) Tax Matters. With respect to Taxes: (i) Southern and Smith Trucking have filed, within the time and in the manner prescribed by law, all returns, declarations, reports, estimates, information returns, and statements (the "Returns") required to be filed under applicable Laws, and all such Returns are true, correct, and complete. Southern and Smith Trucking have within the time and in the manner prescribed by Law, paid all Taxes that are due and payable with respect to each. Southern and Smith Trucking have established on the most recent balance sheet included in the Historical Financial Statements reserves, charges, and accruals that are adequate for the payment of all Taxes not yet due and payable that are attributable to periods ending on such date. There are no Liens for Taxes upon the assets of Southern or Smith Trucking except for Liens for Taxes not yet due and payable. (ii) Except in connection with the IRS Proceeding (as hereinafter defined), none of the Returns of Southern or Smith Trucking is presently under audit by any Authority nor has a deficiency for any Taxes been proposed, asserted, or assessed against Southern or Smith Trucking. Except in connection with the IRS Proceeding (as hereinafter defined), there are no outstanding waivers or comparable consents regarding the application of the statute of limitations with respect to any Tax or Return that have been given by or on behalf of Southern or Smith Trucking. (iii) Southern and Smith Trucking and, if applicable, their agents and contracted service providers, have complied in all respects with all applicable Laws relating to the payment and withholding of Taxes and have, within the time and in the manner prescribed by applicable Law, withheld, collected, and paid over to the proper governmental authorities all amounts required to be so withheld, collected, and paid over under all applicable Laws. (m) Litigation. Except as set forth in Schedule 4.3(m), there is no Proceeding pending or threatened against Southern or Smith Trucking. Neither Southern, Smith Trucking, nor the Selling Stockholder has reason to believe that any Proceeding may be brought or threatened against Southern, Smith Trucking, or the Selling Stockholder. (n) Insurance; Bonds. Schedule 4.3(n) contains a list of, and Buyer has been furnished true and complete copies of, all insurance policies and fidelity bonds covering Southern's and Smith Trucking's assets, business, properties, operations, employees, officers, and directors, and other matters for which Southern and Smith Trucking carry insurance. Schedules 4.3(n) describes any self-insurance arrangement by or affecting Southern and Smith Trucking, including any reserves established thereunder, covering the period since January 1, 1991. Except as set forth in Schedule 4.3(n), there is no claim by any insured pending under any of such policies or bonds as to which coverage has been questioned, denied, or disputed by the underwriters of such policies or bonds. All premiums payable under all such policies and bonds have been paid, and Southern and Smith Trucking are otherwise in full compliance with the terms and conditions of all such policies and bonds. As to all claims that might be covered by such policies or bonds, Southern and Smith Trucking have promptly and within any prescribed time period notified the insuring or bonding party in the proper manner. Such policies of insurance and bonds (or other policies and bonds providing substantially similar insurance coverage) have been in effect continuously since January 1, 1991, and remain in full force and effect. Such policies of insurance and bonds are of the type and in amounts customarily carried by persons conducting similar businesses and do not exclude coverage for punitive damages. Except as set forth in Schedule 4.3(n), neither Southern, Smith Trucking, the Smiths, nor the Selling Stockholder knows of any threatened termination of, or premium increase with respect to, any of such policies or bonds. Except for claims listed on Schedule 4.3(m), neither Southern nor Smith Trucking has given notice to the insurer of any claims that may be insured thereby. (o) Material Contracts. Schedule 4.3(o) contains a list of all material Contracts to which Southern or Smith Trucking is a party, including but not limited to: any Contract that is not by its terms cancelable on notice of not longer than 30 days without liability or penalties, or which, if performed, would involve the payment by Southern or Smith Trucking of more than $25,000; any Contract restricting or limiting Southern or Smith Trucking from carrying on its business or competing in any line of business; any Contract involving a joint venture, partnership, or other profit or loss sharing arrangement; any Contract with the Selling Stockholder, the Smiths, or any Affiliate; any Contract relating to indebtedness for borrowed money, deferred purchase price of property, or the guaranty of the obligations of any person; any Contract concerning leased assets used by Southern or Smith Trucking; any Contract respecting Rights, Real Estate, or employees; any power of attorney or similar instrument; and any other Contract not made in the ordinary course of business. Each Contract disclosed in any Schedule or required to be disclosed pursuant to this Section 4.3(o) is a valid and binding agreement of the parties thereto, is in full force and effect, no party thereto is in default thereunder, and there exists no condition that with notice or lapse of time or both would constitute a default thereunder. (p) Employee Benefit Plans and Arrangements. Schedule 4.3(p) identifies each of Southern's and Smith Trucking's Benefit Plans, copies of which, amended to date, have been furnished to Buyer. No Benefit Plan is a multi-employer or a defined benefit plan. Neither Southern, Smith Trucking, any Affiliate, nor any predecessor of either has ever been a party to or sponsored a multi-employer or defined benefit plan. Southern, Smith Trucking, and all Benefit Plan fiduciaries have fully complied with their obligations with respect to all Benefit Plans. There has been no prohibited transaction with respect to any Benefit Plan. Each Benefit Plan that is intended to be qualified under Section 401(a) of the Code is so qualified and has been since inception. Each trust created under any Benefit Plan is exempt from tax under Section 501(a) of the Code and has been exempt from tax since creation. Southern and Smith Trucking have received determination letters from the Internal Revenue Service for each such Benefit Plan at inception and after each amendment. Each Benefit Plan has been maintained in compliance with its terms and all applicable Laws. There has not been any event that would threaten the tax-qualified status of any Benefit Plan. All payments and contributions due or accrued under each Benefit Plan, determined in accordance with the terms of such plans and prior funding and accrual practices, have been paid or are reflected as a liability on the most recent balance sheets contained in the Historical Financial Statements. The "plan year" of each Benefit Plan is the calendar year. Southern and Smith Trucking have no current or projected liability with respect to post-employment or post-retirement welfare benefits for former or retired employees. (q) Employees; Independent Contractors. Neither Southern nor Smith Trucking is a party to any collective bargaining agreement relating to its employees, nor does any such agreement determine the terms and conditions of employment of any employee. There are no agreements, plans, or policies which would give rise to any severance, termination, change-in-control, or other similar payment to Southern's or Smith Trucking's employees as a result of the consummation of the transactions contemplated hereunder. Neither Southern nor Smith Trucking has any employment agreements with employees. Both Southern and Smith Trucking maintain files on all employee and independent contractor truck drivers. Each employee and independent contractor driver of Southern and Smith Trucking meets all DOT requirements, and all driver files contain all required materials. All independent contractors providing equipment and/or services to Southern or Smith Trucking have been retained under valid contracts and qualify for independent contractor status under existing Internal Revenue Service rules and interpretations. A copy of the form of contract used for any independent contractor operators of rolling stock has been delivered to Buyer. Neither Southern nor Smith Trucking has taken action in respect of its employees that would require notice or create liability under the Worker Adjustment and Retraining Notification Act, and neither Southern nor Smith Trucking has present plans to take such action. (r) Safety Rating. Southern has received and maintained a "satisfactory" safety rating from the DOT. There is no investigation, audit, or other proceeding pending or threatened by the DOT. Neither Southern nor Smith Trucking requires or permits any violation of the safety fitness regulations or other DOT rules or regulations. Both Southern and Smith Trucking regularly and strictly enforce applicable hours in service and other DOT requirements. (s) Rights. All Rights owned, licensed, or otherwise used by Southern or Smith Trucking are listed on Schedule 4.3(s). Each of Southern and Smith Trucking owns or uses such Rights under valid license in the operation of their business. Southern's and Smith Trucking's interest in each of such Rights, to the extent possible, has been registered under applicable state and federal Laws. Neither Southern nor Smith Trucking has interfered with, infringed upon, misappropriated, or otherwise come into conflict with any Rights of third parties. Neither Southern nor Smith Trucking has received any charge, complaint, demand, or notice alleging any such interference, infringement, misappropriation, violation, or conflict (including any claim that Southern or Smith Trucking must license or refrain from using any Rights of third parties). (t) Compliance With Laws; Permits. Except for the IRS Proceedings, each of Southern and Smith Trucking has owned, leased, and used all of its properties and assets, and has conducted its business, in compliance in all respects with all applicable Laws. Except for the IRS Proceedings, neither Southern, Smith Trucking, the Smiths, nor the Selling Stockholder has been charged with any violation of Law. No Proceeding is pending or threatened by any Authority with respect to any violation of Law by Southern, Smith Trucking, the Smiths, or the Selling Stockholder. No Judgment is unsatisfied against Southern, Smith Trucking, the Smiths, or the Selling Stockholder. Neither Southern, Smith Trucking, the Smiths, nor the Selling Stockholder is subject to any stipulation, order, consent, or decree arising from an action before any Authority. Each of Southern and Smith Trucking possesses all permits, licenses, franchises, and other approvals of Authorities (collectively, "Permits") required to operate its business, such Permits are in full force and effect, any applications for renewal have been duly filed on a timely basis, no Proceeding is pending or threatened to revoke or limit any Permit, and each is operating in compliance with all Permits. (u) Environment, Health, and Safety. (i) Each of Southern, Smith Trucking, their Affiliates, and any predecessors of each have complied with all Laws concerning pollution or protection of the environment, public health and safety, and employee health and safety, including Laws relating to emissions, discharges, releases, or threatened release of pollutants, contaminants, or chemical, industrial, hazardous, or toxic materials or wastes (including petroleum and any fraction or derivative thereof) into ambient air, surface water, ground water or lands or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or hauling of such substances (collectively, "Environmental Laws"). No Proceeding has been filed or commenced against Southern, Smith Trucking, their Affiliates, or any predecessor of each alleging any failure to comply with any Environmental Laws. Without limiting the generality of the preceding sentence, each of Southern, Smith Trucking, their Affiliates and any predecessors of each has obtained and been in compliance with all of the terms and conditions of all Permits which are required under, and has complied with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules, and timetables which are contained in, all Environmental Laws. (ii) Neither Southern nor Smith Trucking has any liability (and neither Southern, Smith Trucking, their Affiliates, nor any predecessor of each has handled or disposed of any substance, arranged for the disposal of any substance, exposed any employee or other individual to any substance or condition, or owned, operated, or used any property or facility in any manner that could form the basis for any present or future Proceeding against Southern or Smith Trucking giving rise to any liability) for damage to any site, location, or body of water (surface or subsurface), for any illness of, or personal injury to, any employee or other individual, or for any reason under any Environmental Law. (iii) All properties and equipment used in the business of Southern, Smith Trucking, their Affiliates, and any predecessors of each have been free of asbestos, PCB's, methylene chloride, trichloroethylene, 1,2-transdichloroethylene, dioxins, dibenzofurans, and other extremely hazardous substances as defined by any Law. (iv) Any fuel or other storage tanks located at properties presently or previously owned or used by Southern or Smith Trucking in its business, including the Real Estate, comply in all respects with applicable Laws, do not leak, are registered with the appropriate state agency (and all required actions in connection therewith have been taken) in the manner permitting Southern or Smith Trucking to take advantage of any state liability limitation, insurance, or similar program relating to fuel storage tanks, and such tanks are not scheduled for removal in the next five years. (v) Both Southern and Smith Trucking have delivered to Buyer true and complete copies and results of any reports, studies, analyses, tests, or monitoring concerning Southern or Smith Trucking or any property owned or used by Southern or Smith Trucking concerning compliance with Environmental Laws. (v) Disclosure. The representations and warranties of Southern, Smith Trucking, the Smiths, and the Selling Stockholder contained in this Agreement and the contents of every document delivered in connection herewith, do not contain any untrue statement of a material fact and do not omit to state any fact necessary to make any statement herein or therein not misleading or necessary to a correct presentation of all material aspects of Southern or Smith Trucking's business and the matters contemplated under this Agreement. (w) Brokers or Finders. Except any fee owed to Wayne Carroll, which shall be borne by the Smiths, none of Southern, Smith Trucking, the Smiths, the Selling Stockholder, or their agents has incurred any obligation or liability, contingent or otherwise, for brokerage or finders' fees or agents' commissions or other similar payments in connection with this Agreement. (x) Prepayment of Indebtedness. All indebtedness of Southern and Smith Trucking and all capitalized and operating leases may be prepaid at any time without penalty. ARTICLE V Covenants and Agreements 5.1 Approvals and Consents. Each party to this Agreement shall use its best efforts to obtain (and assist the other in obtaining), as soon as reasonably practicable, all Permits, authorizations, consents, and waivers from third parties or Authorities necessary to consummate this Agreement and the transactions contemplated hereby or thereby. 5.2 Release of the Smiths. From and after the Closing the Buyer shall either repay all indebtedness of Southern and Smith Trucking to third-parties that is reflected on the most recent balance sheets included in the Historical Financial Statements that the Smiths have personally guaranteed or indemnify the Smiths against any liability under such guaranties, including any attorney fees and expenses incurred by the Smiths in responding to or defending claims made under such guaranties. 5.3 Notification. Each party shall give prompt written notice to the others of any development causing a breach of any of his, her, or its own representations and warranties or that would prevent the fulfillment of any of his, her, or its covenants or agreements contained in this Agreement or any document contemplated hereby. 5.4 Stockholder Liability. Anything to the contrary notwithstanding, at the Closing Southern and Smith Trucking shall (i) forgive in full all obligations (including interest) owed to them by the Smiths up to a maximum of $320,000 (aggregating the forgiveness of both companies); and (ii) present evidence of the amount and form of such forgiveness to Buyer. It is understood by the parties that such forgiveness shall in no way be construed as a breach of the representations, warranties, comments, or agreements contained herein. In addition, the Smiths and the Selling Stockholder shall execute a full and final waiver and release of any and all claims against Southern and Smith Trucking in substantially the form attached hereto as Exhibit E (the "Release"). 5.5 Non-Competition. (a) The parties have negotiated the non-competition provisions of this Agreement as an integral part of the transaction. The Purchase Price is substantially higher than the net book value of Southern and Smith Trucking, resulting in substantial "goodwill" being paid by Buyer for the ongoing prospects of Southern's and Smith Trucking's business. The Smiths acknowledge that the Buyer is willing to pay the Purchase Price and proceed with the transaction because of Southern's and Smith Trucking's customer relationships, growth potential, and other prospects, and that such prospects would be severely and irreparably harmed by competition from the Smiths. The Smiths further acknowledge that the Buyer would not have entered into this Agreement without the non-competition provisions contained herein. The Smiths willingly agree to the non-competition provisions of Section 5.5(b) hereof as consideration for the Purchase Price and agree that the non-competition provisions are reasonable and are necessary to induce the Buyer to enter into this Agreement. If the Smiths violate any of the non-competition provisions of Section 5.5, the Buyer shall be entitled to damages in the amount by which the Purchase Price exceeds combined stockholder=s equity of Southern and Smith Trucking as reflected on the July 31, 1998 balance sheets included in the Historical Financial Statements. The Smiths agree that the measure of damages set forth herein is appropriate and fair. (b) For a period of three years following the later of Closing or Tony Smith's final day of employment with Buyer or an Affiliate, the Smiths agree that they will not, directly or indirectly, (i) except in the course of Tony Smith's employment with Buyer or an Affiliate, engage or invest in, own, manage, operate, finance, control, or participate in the ownership, management, operation, financing, or control of, be employed by, associated with, or in any manner connected with, lend their name or any similar name to, lend their credit to or render services or advice to, any Competitive Business that engages in business in the United States; provided, however, that the Smiths may purchase or otherwise acquire up to (but not more than) one percent as an aggregate of all such purchases and acquisitions made by the Smiths of any class of securities of any enterprise (but without otherwise participating in the activities of such enterprise) if such securities are listed on any national or regional securities exchange or have been registered under Section 12(g) of the Securities Exchange Act of 1934; (ii) whether for their own account or for the account of any other person, at any time after the Closing solicit business of the same or similar type being carried on by Buyer or any Affiliate, from any person that is or was a customer of Southern, Smith Trucking, Buyer, or any Affiliate, whether or not they had personal contact with such person during and by reason of Mr. Smith's employment with Southern, Smith Trucking, Buyer, or an Affiliate; (iii) whether for their own account or the account of any other person at any time after Closing solicit, employ, or otherwise engage as an employee, independent contractor, or otherwise, any person who is or was an employee of Southern, Smith Trucking, Buyer, or an Affiliate, or in any manner induce or attempt to induce any employee of Southern, Smith Trucking, Buyer, or an Affiliate to terminate his or her employment with Southern, Smith Trucking, Buyer, or an Affiliate; or at any time interfere with Southern's or Smith Trucking's relationship with any person, including any person who at any time was an employee, contractor, supplier, or customer of Southern, Smith Trucking, Buyer, or an Affiliate; or (iv) at any time after Closing, disparage Southern, Smith Trucking, Buyer, or any Affiliate, or any of their shareholders, directors, officers, employees, or agents. (c) For purposes of this Agreement, "Competitive Business" shall mean the interstate and/or intrastate transportation of freight, including truckload and less-than-truckload carriage, intermodal service, and brokerage, logistics, agent, consolidation, or other freight-related operations. Competitive Business shall include, but not be limited to, dry van, temperature-controlled van, and flatbed operations. (d) If any covenant in Section 5.5 is held to be unreasonable, arbitrary, or against public policy, such covenant will be considered to be divisible with respect to scope, time, and geographic area, and such lesser scope, time, or geographic area, or all of them, as a court of competent jurisdiction may determine to be reasonable, not arbitrary, and not against public policy, will be effective, binding, and enforceable against the Smiths. (e) The Smiths acknowledge that the injury that would be suffered by Buyer as a result of a breach of the provisions of this Section 5.5 would be irreparable and that even the award of monetary damages specified in Section 5.5(a) for such breach would be an inadequate remedy. Consequently, the Buyer shall have the right, in addition to any other rights it may have, to obtain injunctive relief to restrain any breach or threatened breach or otherwise to specifically enforce any provision of this Agreement, and Buyer shall not be obligated to post bond or other security in seeking such relief. 5.6 Selling Stockholder Access. From and after the Closing, Buyer shall provide the Smiths and the Selling Stockholder with access to the pre-Closing books and records of Southern and Smith Trucking as are necessary in the preparation of tax returns or other valid purposes. 5.7 Tony Smith Employment. In accordance with the Employment Agreement attached hereto as Exhibit F (the "Employment Agreement"), Tony Smith shall be employed as President of Southern at the salary rate of $200,000 annually, plus a retention bonus of $120,000 annually, an annual bonus based upon the profitability of Southern and Buyer, and benefits provided other employees of Buyer's operating subsidiary, Covenant Transport, Inc., a Tennessee corporation. Such salary shall be payable on the same frequency as wage payments made to other employees and bonuses shall be made annually at the same time as bonuses to other employees. In accordance with the Stock Option Agreement attached hereto as Exhibit G, Buyer shall grant Tony Smith an option to purchase 20,000 shares of Buyer's Class A common stock with terms customary to Buyer's option holders. ARTICLE VI Indemnification 6.1 Indemnification by the Selling Stockholder. The Selling Stockholder hereby indemnifies, defends, and holds harmless Buyer together with (as applicable) its Affiliates, successors, heirs, assigns, employees, and agents from and against any and all claims, causes of action, suits, Judgments, Taxes, losses, Proceedings, damages, fines, penalties, deficiencies, obligations, costs, and expenses, including without limitation reasonable expenses of investigation and reasonable attorneys' and other experts' fees and expenses (individually, a "Loss" and collectively, "Losses") arising out of or otherwise in respect of (a) any misrepresentation or inaccuracy in, or breach of, any representation, warranty, covenant, or agreement of Southern, Smith Trucking, the Smiths, or the Selling Stockholder contained in this Agreement or any other Contract executed in connection herewith; and (b) any act, omission, event, or circumstance occurring prior to Closing and relating to Southern, Smith Trucking, the Smiths, or the Selling Stockholder. 6.2 Indemnification by Buyer. Buyer hereby indemnifies, defends, and holds the Selling Stockholder harmless from and against all Losses arising out of or otherwise in respect of any misrepresentation or inaccuracy in, or breach of, any representation, warranty, covenant, or agreement of Buyer contained in this Agreement or any other Contract executed in connection herewith. 6.3 Indemnification Procedures. A party seeking indemnification under Section 6.1 or Section 6.2 (the "Indemnified Party") agrees to give prompt written notice to the party against whom indemnification is sought (the "Indemnifying Party") of the assertion or commencement of any third-party claim or Proceeding in respect of which indemnification may be sought. Subject to Section 6.6, the Indemnifying Party, at its expense, may assume the defense of any such claim or Proceeding and take all steps to settle or defeat any such claim or Proceeding, and to employ counsel to contest the same. The Indemnifying Party shall reasonably consider the advice of the Indemnified Party as to the defense of such claims or Proceedings. The Indemnified Party shall have the right to participate at its own expense in such defense, but the control of such claim or Proceeding shall remain with the Indemnifying Party. The Indemnified Party shall provide all reasonable cooperation in connection with any such defense. If an Indemnifying Party elects not to undertake the defense of a tendered claim or Proceeding or does not do so in a timely fashion, the Indemnified Party shall be entitled to control the defense or settlement of such claim or Proceeding and shall be entitled to indemnity with respect thereto. 6.4 Right to Indemnification Not Affected By Knowledge. The right to indemnification, payment for Losses, or other remedy based on any representations, warranties, covenants, and obligations will not be affected by disclosure on any Schedule or by any investigation conducted with respect to, or any knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement, with respect to the accuracy or inaccuracy of or compliance with, any such representation, warranty, covenant, or obligation. The waiver of any condition based on the accuracy of any representation or warranty, or on the performance of or compliance with any covenant or obligation, will not affect the right to indemnification, payment for Losses, or other remedy based on such representations, warranties, covenants, and obligations. 6.5 Right of Set-Off. Upon notice to the Selling Stockholder specifying in reasonable detail the basis for such set-off, Buyer may set off any amount to which it may be entitled under this Article VI against amounts otherwise payable under the Note. The exercise of such right of set-off by Buyer in good faith, whether or not ultimately determined to be justified, will not constitute an event of default under the Note. Neither the exercise of nor the failure to exercise such right of set-off or to give a notice of Loss will constitute an election of remedies or limit Buyer in any manner in the enforcement of any other remedies that may be available to it and the Note amount shall not serve as a limit on the Selling Stockholder=s liability for Losses hereunder. 6.6 IRS Indemnification. (a) Southern and Smith Trucking have each received a notice of deficiency from the Internal Revenue Service and are the subject of proceedings initiated by the Internal Revenue Service with respect to the 1992 and 1993 tax returns filed by them (the "IRS Proceedings"). In addition to any other indemnification hereunder, the Selling Stockholder hereby agrees to indemnify, defend, and hold harmless Buyer, Smith Trucking, Southern, and their Affiliates, agents, employees, officers, directors, shareholders, successors, heirs, and assigns against any and all Losses arising from or in any manner connected with the IRS Proceeding and any other claims made by the Internal Revenue Service arising out of or otherwise in respect of (a) any tax return filed by Southern or Smith Trucking prior to the date of Closing or (b) any event or transaction by Southern or Smith Trucking prior to the Closing (together, "IRS Claims"). (b) Anything to the contrary notwithstanding, the indemnification procedures for IRS Claims shall be as set forth in this Section 6.6: (i) In reference to any IRS Claims other than the IRS Proceeding, Buyer shall assume control of any such IRS Claims and coordinate the defense or settlement thereof; provided that Buyer shall reasonably consider the advice and wishes of the Smiths and the Selling Stockholder, and the Smiths and the Selling Stockholder shall provide reasonable cooperation in connection with such defense or settlement. (ii) In connection with the IRS Proceedings only, the Selling Stockholder shall take primary responsibility for negotiating, defending, and settling the IRS Proceeding. The Selling Stockholder shall keep the Buyer fully informed of all aspects of the IRS Proceedings, shall invite the Buyer to participate in all meetings, conferences, and discussions with representatives of the IRS, shall have the Buyer copied on all correspondence and filings, and shall direct all representatives to give Buyer full and complete access to any desired information. Buyer shall be consulted and must consent to any settlement of the IRS Proceedings; provided that such consent shall not be withheld unless in Buyer's good faith judgment the settlement would significantly compromise the position of Buyer or its other subsidiaries in another case involving the IRS or the settlement would involve more than the payment of civil damages. In the event the IRS Proceedings go to litigation, the Buyer shall be entitled to approve all litigation strategies, and the Selling Stockholder shall not take any position inconsistent with the positions of Buyer's other subsidiaries. Richard Hatfield shall continue to serve as counsel in the IRS Proceedings unless Buyer becomes substantially and justifiably dissatisfied with such services, in which case replacement counsel shall be retained. All fees and expenses incurred in connection with such defense shall be deemed "Losses" and be paid by the Selling Stockholder in accordance with Section 6.6(a); provided, that the fees and expenses of Price Waterhouse Coopers (or any successor or replacement CPA firm) ("Coopers' Fees") shall be borne as follows: (A) From the date hereof through settlement discussions currently scheduled, all Coopers' Fees shall be borne by Buyer and not be subject to indemnification by the Selling Stockholder; (B) From the date (if any) a decision is made to litigate the IRS Proceedings, all Coopers' Fees on topics applicable both to the IRS Proceedings and to proceedings involving Buyer or its other subsidiaries shall be borne by Buyer and not be subject to indemnification by the Selling Stockholder; and (C) From the date (if any) a decision is made to litigate the IRS Proceedings, all Coopers' Fees relating specifically to the IRS Proceedings shall be borne by the Selling Stockholder and Buyer shall be entitled to indemnification therefor. (iii) In connection with all IRS Claims other than the IRS Proceedings, all Losses, including all Coopers= Fees and all fees and expenses of other advisors shall be the responsibility of the Selling Stockholder and Buyer shall be entitled to indemnification therefor. 6.7 Smith Guaranty. As additional security for the Selling Stockholder's indemnification obligations, the Smiths hereby unconditionally guaranty and agree to pay, perform, and discharge the obligations of the Selling Stockholder under this Article VI subject to the monetary limitation contained in Section 9 of the Employment Agreement. The Smiths agree that the Buyer may collect on such guarantee by offsetting any Losses against payments due under the Employment Agreement as stated therein. To the extent the Smiths perform under this Section or otherwise become liable to Buyer in connection with this Agreement, they shall not be entitled to indemnification by Buyer, Smith Trucking, Southern, or any other subsidiary or Affiliate of Buyer under applicable state laws or under such companies' respective articles, bylaws or other charter documents or corporate resolutions or agreements with such corporations relating to indemnification of officers, directors and others for corporate actions. Any such rights are hereby waived. Notwithstanding anything to the contrary, the Smiths, jointly and severally, shall be primarily liable for any violation by them of Section 5.5 hereof. ARTICLE VII Miscellaneous 7.1 Costs and Expenses; Fees. Each party shall be solely responsible for and bear all of its own respective expenses incurred at any time in connection with pursuing or consummating the Agreement and the transactions contemplated by the Agreement, including, but not limited to, fees and expenses of business brokers, legal counsel, accountants, and other facilitators and advisors. 7.2 Survival of Representations, Warranties, Covenants, and Agreements. The covenants, agreements, representations, and warranties of the Smiths and the Selling Stockholder contained in this Agreement or in any document delivered or in connection herewith shall survive the Closing for a period of three years. Anything to the contrary notwithstanding, (a) covenants, agreements, representations, and warranties of the Smiths and the Selling Stockholder relating to tax, environmental, and employee benefit plan matters shall survive until the expiration of the applicable statutes of limitation and (b) the obligations of the Smiths under Section 5.5 shall survive for the period specified therein. Except for Buyer's obligations under Sections 5.6 and 5.7, the covenants, agreements, representations, and warranties of Buyer contained in this Agreement or in any document delivered in connection herewith shall terminate at the Closing. 7.3 Complete Agreement, etc.. All Exhibits and Schedules referred to herein are intended to be and hereby are specifically made a part of this Agreement. This Agreement sets forth the entire understanding of the parties hereto with respect to the transactions contemplated hereby, and any and all previous agreements and understandings between or among the parties regarding the subject matter hereof, whether written or oral, are superseded by this Agreement. It shall not be amended or modified except by written instrument duly executed by each of the parties hereto. 7.4 Assignment and Binding Effect. This Agreement shall not be assigned prior to the Closing by any party hereto without the prior written consent of the other parties and any assignment without consent shall be void; provided, that Buyer may assign its rights hereunder to any subsidiary. Subject to the foregoing, all of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the successors and assigns of any party. Nothing expressed or referred to in this Agreement will be construed to give any person other than the parties to this Agreement any legal or equitable right, remedy, or claim under or with respect to this Agreement or any provision of this Agreement. This Agreement and all of its provisions and conditions are for the sole and exclusive benefit of the parties to this Agreement and their successors and assigns. 7.5 Waiver. Any term or provision of this Agreement may be waived at any time by the party entitled to the benefit thereof by a written instrument duly executed by such party. 7.6 Time. Time is of the essence in connection with this Agreement and each and every provision hereof. Any extension of time granted for the performance of any duty under this Agreement shall not be considered an extension of time for the performance of any other duty under this Agreement. 7.7 Notices. Any notice, request, demand, waiver, consent, approval, or other communication which is required or permitted hereunder shall be in writing and shall be deemed given only if delivered personally (including by nationally recognized overnight courier service) or sent by telegram or by certified mail, postage prepaid, and sent by telecopier as follows: If to Buyer, to: David R. Parker Covenant Transport, Inc. 400 Birmingham Highway Chattanooga, TN 37419 (423) 821-1212 Telephone (423) 821-5442 Fax With a required copy to: Mark A. Scudder Scudder Law Firm, P.C. 411 S. 13th Street, Suite 200 Lincoln, Nebraska 68508 (402) 435-3223 Telephone (402) 435-4239 Fax If to the Smiths or the Selling Tony Smith Stockholder, to: P.O. Box 459 Ashdown, AR 71822 (501) 898-3337 Telephone (870) 989-5765 Fax With a required copy to: Connie Carroll, Esq. 650 S. Shackleford, Suite 224 Little Rock, AR 72211 (501) 223-2402 Telephone (501) 224-6254 Fax or to such other address as the addressee shall have specified in a notice duly given to the sender as provided herein. Such notice, request, demand, waiver, consent, approval, or other communication shall be deemed to have been given as of the date so personally delivered, telegraphed, or deposited in the mail and telecopied. 7.8 Cooperation. Subject to the terms and conditions herein provided, the parties hereto shall use their best efforts to take, or cause to be taken, such action, to execute and deliver, or cause to be executed and delivered, such additional documents and instruments and to do, or cause to be done, all things necessary, proper, or advisable under the provisions of this Agreement and under applicable law to consummate and make effective the transactions contemplated by this Agreement. 7.9 Governing Law. This Agreement shall be governed by and interpreted and enforced in accordance with the laws of the State of Tennessee, without regard to conflict-of-law principles. 7.10 Headings, Gender, and Person. All section headings contained in this Agreement are for convenience and reference only, do not form a part of this Agreement and shall not affect in any way the meaning or interpretation of this Agreement. Words used herein, regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine, or neuter, as the context requires. Any reference to a "person" herein shall include an individual, firm, corporation, partnership, trust, governmental authority, or any other entity. 7.11 Severability. Any provision of this Agreement that is invalid or unenforceable in any jurisdiction shall be ineffective to the extent of such invalidity or unenforceability without invalidating or rendering unenforceable the remaining provisions hereof, and any such invalidity or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 7.12 Counterparts. This Agreement may be executed in any number of counterparts and any party hereto may execute any such counterpart, each of which when executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument. This Agreement shall become binding when one or more counterparts taken together shall have been executed and delivered by the parties. It shall not be necessary in making proof of this Agreement or any counterpart hereof to produce or account for any of the other counterparts. 7.13 Public Announcements. Buyer shall be entitled to issue a press release announcing the execution of this Agreement and basic information concerning Southern and Smith Trucking and the proposed transaction. Buyer shall submit the press release to the Smiths in advance and shall make such changes as may be reasonably requested; provided, that Buyer shall not be required to make changes contrary to the advice of its securities counsel. * * * * * * * * * * * Signature Page Follows * * * * * * * * * * * * * * * Signature Page to the Stock Purchase Agreement among Covenant Transport, Inc., Smith Charitable Remainder Trust, Southern Refrigerated Transport, Inc., Tony Smith Trucking, Inc., and the Smiths IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on the date first written. COVENANT TRANSPORT, INC. SOUTHERN REFRIGERATED TRANSPORT, a Nevada corporation INC. an Arkansas corporation By: /s/ David R. Parker By: /s/ Tony Smith David R. Parker, President Tony Smith, President TONY SMITH TRUCKING, INC. an Arkansas corporation By: /s/ Tony Smith /s/ Kathy Smith Tony Smith, President Kathy Smith, Individually /s/ Tony Smith Tony Smith, Individually SMITH CHARITABLE REMAINDER TRUST By: /s/ Tony Smith Tony Smith, Trustee By: /s/ Kathy Smith Kathy Smith, Trustee Exhibit List to Stock Purchase Agreement Exhibit A - Real Estate Exhibit B - Note Exhibit C-1 - Opinion of Harrington, Miller & Neihouse Exhibit C-2 - Opinion of Connie Carroll Exhibit D - Opinion of Scudder Law Firm, P.C. Exhibit E - Release Exhibit F - Employment Agreement Exhibit G - Stock Option Agreement Schedule list to Stock Purchase Agreement Schedule 4.3(a) - Corporate Status Schedule 4.3(c) - Directors and Officers, Bank Accounts, Etc. Schedule 4.3(f) - Historical Financial Statements Schedule 4.3(h) Absence of Changes or Events Schedule 4.3(i) - Asset Schedule Schedule 4.3(j) - Title and Condition of Assets Schedule 4.3(m) Litigation Schedule 4.3(n) - Insurance; Bonds Schedule 4.3(o) Material Contracts Schedule 4.3(p) - Employee Benefit Plans Schedule 4.3(s) - Rights EX-21 3 LIST OF SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT Bud Meyer Truck Lines, Inc., a Minnesota corporation Covenant Acquisition Co., a Nevada corporation Covenant Leasing, Inc., a Nevada corporation Covenant Transport, Inc., a Tennessee corporation Intellectual Property Co., a Nevada corporation Southern Refrigerated Transport, Inc., an Arkansas corporation Tony Smith Trucking, Inc., an Arkansas corporation EX-23.1 4 CONSENT OF INDEPENDENT ACCOUNTANTS. CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Covenant Transport, Inc. on Form S-8 (File Nos. 33-88686 and 333-67599) of our report dated February 3, 1999, on our audits of the consolidated financial statements of Covenant Transport, Inc. as of December 31, 1997 and 1998, and for each of the years in the three-year period ended December 31, 1998, which report is included in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Knoxville, Tennessee March 26, 1999 EX-27 5 FDS --
5 1000 US Dollars 12-MOS DEC-31-1998 JAN-1-1998 DEC-31-1998 1.0 2926 0 54265 1065 1929 66119 282358 81821 272959 19747 0 0 0 126 24 272959 0 370546 0 334849 0 0 5924 29772 11490 18283 0 0 0 18283 1.27 1.27
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