-----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, SpYdOX7BStuZXfomko6nRGCCLwW2hIlN9cnecLwa3JGo9kRUZZAC+4vRegauGMjt E58D7xSWysN3AB33EogaIA== 0001008886-03-000161.txt : 20030811 0001008886-03-000161.hdr.sgml : 20030811 20030808191906 ACCESSION NUMBER: 0001008886-03-000161 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COVENANT TRANSPORT INC CENTRAL INDEX KEY: 0000928658 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 880320154 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24960 FILM NUMBER: 03832972 BUSINESS ADDRESS: STREET 1: 400 BIRMINGHAM HIGHWAY CITY: CHATTANOOGA STATE: TN ZIP: 37419 BUSINESS PHONE: 4238211212 MAIL ADDRESS: STREET 1: 400 BIRMINGHAM HIGHWAY CITY: CHATTANOOGA STATE: TN ZIP: 37419 10-Q 1 cvti10q.txt CVTI FORM 10-Q 2ND QTR 2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 0-24960 COVENANT TRANSPORT, INC. (Exact name of registrant as specified in its charter) Nevada 88-0320154 - ----------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 400 Birmingham Hwy. Chattanooga, TN 37419 37419 - ----------------------------------- ------------------------------------ (Address of principal executive (Zip Code) offices) 423-821-1212 (Registrant's telephone number, including area code) 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date (August 5, 2003). Class A Common Stock, $.01 par value: 12,108,173 shares Class B Common Stock, $.01 par value: 2,350,000 shares Page 1 PART I FINANCIAL INFORMATION Page Number Item 1. Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2003 (Unaudited) and December 31, 2002 3 Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2003 and 2002 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002 (Unaudited) 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures about Market Risk 23 Item 4. Controls and Procedures 24
PART II OTHER INFORMATION Page Number Item 1. Legal Proceedings 25 Items 2 and 3. Not applicable 25 Item 4. Submission of Matters to a Vote of Security Holders 25 Item 5. Not applicable 25 Item 6. Exhibits and reports on Form 8-K 25
Page 2 ITEM 1. FINANCIAL STATEMENTS COVENANT TRANSPORT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data) June 30, 2003 December 31, 2002 ASSETS (unaudited) ------ ---------------------- ---------------------- Current assets: Cash and cash equivalents $ 2,863 $ 42 Accounts receivable, net of allowance of $1,500 in 2003 and $1,800 in 2002 60,805 65,041 Drivers advances and other receivables 5,019 3,480 Inventory and supplies 3,373 3,226 Prepaid expenses 14,309 14,450 Deferred income taxes 11,109 11,105 Income taxes receivable 2,186 2,585 --------------------- ---------------------- Total current assets 99,664 99,929 Property and equipment, at cost 354,300 392,498 Less accumulated depreciation and amortization (140,772) (154,010) --------------------- ---------------------- Net property and equipment 213,527 238,488 Other assets 23,276 23,124 --------------------- ---------------------- Total assets $ 336,467 $ 361,541 ===================== ====================== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Current maturities of long-term debt - 43,000 Securitization facility 45,230 39,230 Accounts payable 13,594 6,921 Accrued expenses 18,975 17,220 Insurance and claims accrual 25,089 21,210 --------------------- ---------------------- Total current liabilities 102,888 127,581 Long-term debt, less current maturities 1,300 1,300 Deferred income taxes 51,572 57,072 --------------------- ---------------------- Total liabilities 155,760 185,953 Commitments and contingent liabilities Stockholders' equity: Class A common stock, $.01 par value; 20,000,000 shares authorized; 13,075,423 and 12,999,315 shares issued and 12,103,923 and 12,027,815 outstanding as of June 30, 2003 and December 31, 2002, respectively 131 130 Class B common stock, $.01 par value; 5,000,000 shares authorized; 2,350,000 shares issued and outstanding as of June 30, 2003 and December 31, 2002 24 24 Additional paid-in-capital 85,608 84,492 Treasury Stock at cost; 971,500 shares as of June 30, 2003 and December 31, 2002 (7,935) (7,935) Retained earnings 102,879 98,877 --------------------- ---------------------- Total stockholders' equity 180,707 175,588 --------------------- ---------------------- Total liabilities and stockholders' equity $ 336,467 $ 361,541 ===================== ======================
See accompanying notes to consolidated financial statements. Page 3 COVENANT TRANSPORT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (In thousands except per share data) Three months ended June 30, Six months ended June 30, (unaudited) (unaudited) --------------------------------- ----------------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Freight revenue $ 137,439 $ 138,840 $ 265,463 $ 267,860 Fuel surcharge and other accessorial revenue 8,503 5,472 18,354 8,671 --------------------------------- ------------------------------ Total revenue $ 145,942 $ 144,312 $ 283,817 $ 276,531 Operating expenses: Salaries, wages, and related expenses 55,662 58,576 109,472 114,332 Fuel expense 26,502 24,061 55,290 46,146 Operations and maintenance 10,290 10,264 20,284 19,127 Revenue equipment rentals and purchased transportation 16,562 14,855 31,380 29,657 Operating taxes and licenses 3,745 3,915 7,176 7,192 Insurance and claims 9,558 7,836 17,597 15,004 Communications and utilities 1,731 1,690 3,439 3,536 General supplies and expenses 3,826 3,637 6,999 7,148 Depreciation, amortization and impairment charge, including gains (losses) on disposition of equipment (1) 10,617 11,915 21,217 25,974 --------------------------------- ------------------------------ Total operating expenses 138,493 136,749 272,854 268,116 --------------------------------- ------------------------------ Operating income 7,449 7,563 10,963 8,415 Other (income) expenses: Interest expense 596 870 1,247 1,934 Interest income (25) (11) (63) (34) Other 61 434 46 211 Early extinguishment of debt (2) - - - 1,434 --------------------------------- ------------------------------ Other (income) expenses, net 632 1,293 1,230 3,545 --------------------------------- ------------------------------ Income before income taxes 6,817 6,270 9,733 4,870 Income tax expense 3,653 3,288 5,730 3,557 --------------------------------- ------------------------------ Net income $ 3,164 $ 2,982 $ 4,003 $ 1,313 ================================= ============================== Net income per share: Basic earnings per share: $ 0.22 $ 0.21 $ 0.28 $ 0.09 Diluted earnings per share: $ 0.22 $ 0.21 $ 0.27 $ 0.09 Weighted average shares outstanding 14,397 14,108 14,389 14,096 Weighted average shares outstanding adjusted for 14,664 14,399 14,637 14,380 assumed conversions (1) Includes a $3.3 million pre-tax impairment charge in the six month period ending June 30, 2002. (2) Reflects the reclassification of early extinguishment of debt due to the adoption of SFAS 145 in the six month period ending June 30, 2002. The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 4 COVENANT TRANSPORT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (In thousands) Six months ended June 30, (unaudited) -------------------------------------------- 2003 2002 ---- ---- Cash flows from operating activities: Net income $ 4,003 $ 1,313 Adjustments to reconcile net income to net cash provided by operating activities: Net provision for (reduction to) losses on accounts receivables (8) 600 Loss on early extinguishment of debt - 890 Depreciation, amortization and impairment of assets (1) 21,426 24,593 Provision for losses on guaranteed residuals - 324 Deferred income tax expense (benefit) (5,504) 602 (Gain)/loss on disposition of property and equipment (209) 1,381 Changes in operating assets and liabilities: Receivables and advances 2,704 (7,644) Prepaid expenses 141 2,583 Tire and parts inventory (147) 547 Accounts payable and accrued expenses 12,708 5,501 ------------------ ----------------- Net cash flows provided by operating activities 35,114 30,690 Cash flows from investing activities: Acquisition of property and equipment (28,324) (29,118) Proceeds from disposition of property and equipment 32,233 829 ------------------ ----------------- Net cash flows provided by (used in) investing activities 3,909 (28,289) Cash flows from financing activities: Checks in excess of bank balances - 3,368 Deferred costs (318) - Exercise of stock options 1,116 2,391 Proceeds from issuance of long-term debt 20,000 49,000 Repayments of long-term debt (57,000) (56,388) ------------------ ----------------- Net cash flows used in financing activities (36,202) (1,629) ------------------ ----------------- Net change in cash and cash equivalents 2,821 772 Cash and cash equivalents at beginning of period 42 383 ------------------ ----------------- Cash and cash equivalents at end of period $ 2,863 $ 1,155 ================== ================= (1) Includes a $3.3 million pre-tax impairment charge in the six month period ending June 30, 2002. The accompanying notes are an integral part of these consolidated financial statements.
Page 5 COVENANT TRANSPORT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Basis of Presentation The consolidated financial statements include the accounts of Covenant Transport, Inc., a Nevada holding company, and its wholly-owned subsidiaries ("Covenant" or the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. The financial statements have been prepared, without audit, in accordance with accounting principles generally accepted in the United States of America, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the accompanying financial statements include all adjustments which are necessary for a fair presentation of the results for the interim periods presented, such adjustments being of a normal recurring nature. Certain information and footnote disclosures have been condensed or omitted pursuant to such rules and regulations. The December 31, 2002 consolidated balance sheet was derived from the audited balance sheet of the Company for the year then ended. It is suggested that these consolidated financial statements and notes thereto be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 2002. Results of operations in interim periods are not necessarily indicative of results to be expected for a full year. Note 2. Basic and Diluted Earnings per Share The following table sets forth for the periods indicated the calculation of net earnings per share included in the Company's consolidated statements of operations: (in thousands except per share data) Three months ended Six months ended June 30, June 30, 2003 2002 2003 2002 ---- ---- ---- ---- Numerator: Net earnings $ 3,164 $ 2,982 $ 4,003 $ 1,313 Denominator: Denominator for basic earnings per share - weighted-average shares 14,397 14,108 14,389 14,096 Effect of dilutive securities: Employee stock options 267 291 248 284 ---------- ---------- ---------- ---------- Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 14,664 14,399 14,637 14,380 ========== ========== ========== ========== Net income per share: Basic earnings per share: $0.22 $0.21 $0.28 $0.09 Diluted earnings per share: $0.22 $0.21 $0.27 $0.09
Dilutive common stock options are included in the diluted EPS calculation using the treasury stock method. Employee stock options in the table above exclude 60,000 and 376,000 in the three months ended June 30, 2003 and 2002, respectively, and 63,000 and 378,000 in the six month periods ended June 30, 2003 and 2002, respectively, from the computation of diluted earnings per share because their effect would have been anti- Page 6 dilutive. At June 30, 2003, the Company had stock-based employee compensation plans. The Company accounts for the plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Under SFAS No. 123, fair value of options granted are estimated as of the date of grant using the Black-Scholes option pricing model and the following weighted average assumptions: risk-free interest rates ranging from 2.3% to 3.5%; expected life of 5 years; dividend rate of zero percent; and expected volatility of 52.8% for the 2003 periods, and 53.3% for the 2002 periods. Using these assumptions, the fair value of the employee stock options granted, net of the related tax effects, in the three months ending June 30, 2003 and 2002 periods are $0.4 million and $0.5 million respectively, and in the six months ending June 30, 2003 and 2002 periods are $1.0 million and $0.9 million, respectively, which would be amortized as compensation expense over the vesting period of the options. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. (in thousands except per share data) Three months ended Six months ended June 30, June 30, 2003 2002 2003 2002 ---- ---- ---- ---- Net income, as reported: $3,164 $2,982 $4,003 $1,313 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (438) (472) (977) (896) Pro forma net income 2,726 2,510 3,026 417 Basic earnings per share: As reported $0.22 $0.21 $0.28 $0.09 Pro forma $0.19 $0.18 $0.21 $0.03 Diluted earnings per share: As reported $0.22 $0.21 $0.27 $0.09 Pro forma $0.19 $0.17 $0.21 $0.03
Note 3. Income Taxes Income tax expense varies from the amount computed by applying the federal corporate income tax rate of 34% to income before income taxes primarily due to state income taxes, net of federal income tax effect, adjusted for permanent differences, the most significant of which is the effect of the per diem pay structure for drivers. Note 4. Goodwill and Other Intangible Assets Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, which requires the Company to evaluate goodwill and other intangible assets with indefinite useful lives for impairment on an annual basis, with any resulting impairment recorded as a cumulative effect of a change in accounting principle. Goodwill that was acquired in purchase business combinations completed before July 1, 2001, is no longer amortized after January 1, 2002. Furthermore, any goodwill that is acquired in a purchase business combination completed after June 30, 2001, is not amortized. During the second quarter of 2003 and 2002, the Company completed its evaluations of its goodwill for impairment and determined that there was no impairment. At June 30, 2003, the Company has $11.5 million of goodwill. Page 7 Note 5. Derivative Instruments and Other Comprehensive Income In 1998, the FASB issued SFAS No. 133 ("SFAS 133"), Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS Statement No. 133, an amendment of SFAS Statement No. 133, and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of SFAS Statement No. 133. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or in other comprehensive income, depending on whether a derivative is designated as part of a hedging relationship and, if it is, depending on the type of hedging relationship. The Company adopted SFAS No. 133 effective January 1, 2001 but had no instruments in place on that date. In 2001, the Company entered into two $10.0 million notional amount cancelable interest rate swap agreements to manage the risk of variability in cash flows associated with floating-rate debt. Due to the counter-parties' imbedded options to cancel, these derivatives did not qualify, and are not designated as hedging instruments under SFAS No. 133. Consequently, these derivatives are marked to fair value through earnings, in other expense in the accompanying statement of operations. At June 30, 2003 and June 30, 2002, the fair value of these interest rate swap agreements was a liability of $1.7 million and $0.9 million, respectively, which are included in accrued expenses on the consolidated balance sheet. During the third quarter of 2001, the Company entered into two heating oil commodity swap contracts to hedge its cash flow exposure to diesel fuel price fluctuations. These contracts were considered highly effective in offsetting changes in anticipated future cash flows and were designated as cash flow hedges under SFAS No. 133. At June 30, 2002 the cumulative fair value of these heating oil contracts was an asset of $0.2 million, which was recorded in accrued expenses with the offset to other comprehensive income, net of taxes. The contracts expired December 31, 2002. The derivative activity as reported in the Company's financial statements for the six months ended June 30, is summarized in the following: (in thousands) Six months ended June 30, 2003 2002 ---- ---- Net liability for derivatives at January 1, $ (1,645) $ (1,932) Gain (loss) on derivative instruments: Loss in value of derivative instruments that do not qualify as hedging instruments (61) (211) Gain on fuel hedge contracts that qualify as cash flow hedges - 1,403 ----------- ------------- Net liability for derivatives at June 30, $ (1,706) $ (740) =========== =============
The following is a summary of comprehensive income as of June 30: Six months ended June 30, (in thousands) 2003 2002 ---- ---- Net Income: $ 4,003 $ 1,313 Other comprehensive income: Gain on fuel hedge contracts that qualify as cash flow hedges - 1,403 Tax benefit - (533) ----------- ------------- Other comprehensive income: Unrealized gain on cash flow hedging derivatives, net of tax - 870 ----------- ------------- Comprehensive income $ 4,003 $ 2,183 =========== =============
Page 8 Note 6. Impairment of Equipment and Change in Estimated Useful Lives During 2001, the market value of used tractors was significantly below both historical levels and the carrying values on the Company's financial statements. The Company extended the trade cycle of its tractors from three years to four years during 2001, which delayed any significant disposals into 2002 and later years. The market for used tractors did not improve by the time the Company negotiated a tractor purchase and trade package with Freightliner Corporation for calendar years 2002 and 2003 covering the sale of model year 1998 through 2000 tractors and the purchase of an equal number of replacement units. The significant difference between the carrying values and the sale prices of the used tractors combined with the Company's less profitable results during 2001 caused the Company to test for asset impairment under SFAS No. 121, Accounting for the Impairment of Long Lived Assets and of Long Lived Assets to be disposed of. In the test, the Company measured the expected undiscounted future cash flows to be generated by the tractors over the remaining useful lives and the disposal value at the end of the useful life against the carrying values. The test indicated impairment and the Company recognized the pre-tax charges of approximately $15.4 million and $3.3 million in 2001 and 2002, respectively, to reflect an impairment in tractor values. The Company incurred a loss of approximately $324,000 on guaranteed residuals for leased tractors in the first quarter of 2002, which was recorded in revenue equipment rentals and purchased transportation in the accompanying statement of operations. The Company accrued this loss from January 1, 2002, to the date the tractors were purchased off lease in February 2002. The Company's approximately 1,400 model year 2001 tractors were not affected by the charge. The Company adjusted the depreciation rate of these model year 2001 tractors to approximate its recent experience with disposition values and expectation for future disposition values. The Company also increased the lease expense on its leased units since it expects to have a shortfall in its guaranteed residual values of approximately $1.4 million. The Company is recording its additional lease expense ratably over the remaining lease term. In June 2003, the Company entered into a trade-in agreement with an equipment manufacturer covering the model year 2001 tractors. Management believes the additional depreciation and lease expense will bring the carrying values of these tractors in line with the disposition values. These assumptions represent management's best estimate and actual values could differ by the time those tractors are scheduled for trade. Management estimates the impact of the change in the estimated useful lives and depreciation on the 2001 model year tractors to be approximately $1.5 million pre-tax or $.06 per share annually. Note 7. Long-term Debt and Securitization Facility Outstanding debt consisted of the following at June 30, 2003 and December 31, 2002: (in thousands) June 30, 2003 December 31, 2002 ---------------------- ---------------------- Borrowings under credit agreement $ - $ 43,000 Securitization Facility 45,230 39,230 Note payable to former SRT shareholder, bearing interest at 6.5% with interest payable quarterly 1,300 1,300 ---------------------- ---------------------- Total long-term debt 46,530 83,530 Less current maturities 45,230 82,230 ---------------------- ---------------------- Long-term debt, less current portion $ 1,300 $ 1,300 ====================== ======================
In December 2000, the Company entered into the Credit Agreement with a group of banks. The facility matures in December 2005. Borrowings under the Credit Agreement are based on the banks' base rate or LIBOR and accrue interest based on one, two, or three month LIBOR rates plus an applicable margin that is adjusted quarterly between 0.75% and 1.25% based on cash flow coverage. At June 30, 2003, the margin was 0.875%. The Credit Agreement is guaranteed by the Company and all of the Company's subsidiaries except CVTI Receivables Corp. and Volunteer Insurance Limited. Page 9 The Credit Agreement has a maximum borrowing limit of $100.0 million with an accordion feature which permits an increase up to a maximum borrowing limit of $140.0 million. Borrowings related to revenue equipment are limited to the lesser of 90% of net book value of revenue equipment or the maximum borrowing limit. Letters of credit are limited to an aggregate commitment of $50.0 million. The Credit Agreement includes a "security agreement" such that the Credit Agreement may be collateralized by virtually all assets of the Company if a covenant violation occurs. A commitment fee, that is adjusted quarterly between 0.15% and 0.25% per annum based on cash flow coverage, is due on the daily unused portion of the Credit Agreement. As of June 30, 2003, the Company had no borrowings under the Credit Agreement. In October 1995, the Company issued $25 million in ten-year senior notes to an insurance company. On March 15, 2002, the Company retired the remaining $20 million in senior notes with borrowings from the Credit Agreement and incurred a $0.9 million after-tax extraordinary item ($1.4 million pre-tax) to reflect the early extinguishment of this debt. Upon adoption of SFAS 145 in 2003, the Company reclassified the charge and it is no longer classified as an extraordinary item. At June 30, 2003 and December 31, 2002, the Company had unused letters of credit of approximately $17.9 and $19.2 million, respectively. In December 2000, the Company entered into a $62 million revolving accounts receivable securitization facility (the "Securitization Facility"). On a revolving basis, the Company sells its interests in its accounts receivable to CVTI Receivables Corp. ("CRC"), a wholly-owned bankruptcy-remote special purpose subsidiary incorporated in Nevada. CRC sells a percentage ownership in such receivables to an unrelated financial entity. The transaction does not meet the criteria for sale treatment under SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities and is reflected as a secured borrowing in the financial statements. The Company can receive up to $62 million of proceeds, subject to eligible receivables and will pay a service fee recorded as interest expense, as defined in the agreement. The Company will pay commercial paper interest rates plus an applicable margin of 0.41% per annum and a commitment fee of 0.10% per annum on the daily unused portion of the Facility. The Securitization Facility includes certain significant events that could cause amounts to be immediately due and payable in the event of certain ratios. The proceeds received are reflected as a current liability on the consolidated financial statements because the committed term, subject to annual renewals, is 364 days. As of June 30, 2003 and December 31, 2002, the Company had received $45.2 million and $39.2 million, respectively, in proceeds, with a weighted average interest rate of 1.2% and 1.5%, respectively. The Credit Agreement and Securitization Facility contain certain restrictions and covenants relating to, among other things, dividends, tangible net worth, cash flow, acquisitions and dispositions, and total indebtedness and are cross-defaulted. As of June 30, 2003, the Company was in compliance with the Credit Agreement and Securitization Facility. Note 8. Recent Accounting Pronouncements In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS 143 provides new guidance on the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. This pronouncement is effective January 1, 2003. The pronouncement did not have a material impact on the Company's consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS 145 amends existing guidance on reporting gains and losses on extinguishment of debt to prohibit the classification of the gain or loss as extraordinary, as the use of such extinguishments have become part of the risk management strategy of many companies. SFAS 145 also amends SFAS 13 to require sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of the Statement related to the rescission of Statement No. 4 is applied in fiscal years beginning after May 15, 2002. The provisions of the Page 10 Statement related to Statement No. 13 were effective for transactions occurring after May 15, 2002. The Company adopted SFAS 145 effective January 1, 2003, which resulted in the reclassification of the fiscal year 2002 loss on extinguishment of debt. In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. Interpretation No. 45 also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002, and are not expected to have a material effect on the Company's financial statements. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company has guarantees among the entities within its consolidated group, which are disclosed in the notes to these consolidated financial statements. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation/Transition and Disclosure, an amendment of FASB Statement No. 123. SFAS 148 amends SFAS 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years and interim periods ending after December 15, 2002 and are included in the notes to these consolidated financial statements. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 ("Interpretation 46"). Interpretation 46 addresses the consolidation by business enterprises of variable interest entities, as defined. Interpretation 46 applied immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. The Company is evaluating the impact of this interpretation on the Company's financial statements. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS 149 amended and clarified accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 149 amended SFAS 133 regarding implementation issues raised in relation to the application of the definition of a derivative, particularly regarding the meaning of an "underlying" and the characteristics of a derivative that contains financing components. The amendments set forth in SFAS 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. In particular, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in SFAS 133. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS 149 was effective for contracts entered into or modified after June 30, 2003. The Company does not anticipate this Statement will have any significant impact on the Company's financial condition or results of operations. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement was developed in response to concerns expressed about issuers' classification in the statement of financial position of certain financial instruments that have characteristics of both liabilities and equity, but that have been presented either entirely as equity or between the liabilities section and the equity section of the balance sheet. SFAS 150 was effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. SFAS 150 will have no effect on the Company's balance sheet presentation of its debt and equity financial instruments. Page 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The consolidated financial statements include the accounts of Covenant Transport, Inc., a Nevada holding company, and its wholly-owned subsidiaries. References in this report to "we," "us," "our," the "Company," and similar expressions refer to Covenant Transport, Inc. and its consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Except for the historical information contained herein, the discussion in this quarterly report contains forward-looking statements that involve risk, assumptions, and uncertainties that are difficult to predict. Statements that constitute forward-looking statements are usually identified by words such as "anticipates," "believes," "estimates," "projects," "expects," or similar expressions. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. The following factors, among others, could cause actual results to differ materially from those in forward-looking statements: excess capacity in the trucking industry; decreased demand for our services or loss of one or more or our major customers; surplus inventories; recessionary economic cycles and downturns in customers' business cycles; strikes or work stoppages; increases or rapid fluctuations in fuel prices, interest rates, fuel taxes, tolls, and license and registration fees; increases in the prices paid for new revenue equipment; the resale value of our used equipment and the price of new equipment; increases in compensation for and difficulty in attracting and retaining qualified drivers and owner-operators; increases in insurance premiums and deductible amounts or claims relating to accident, cargo, workers' compensation, health, and other matters; seasonal factors such as harsh weather conditions that increase operating costs; competition from trucking, rail, and intermodal competitors; regulatory requirements that increase costs or decrease efficiency; and the ability to identify acceptable acquisition candidates, consummate acquisitions, and integrate acquired operations. Readers should review and consider these factors along with the various disclosures we make in press releases, stockholder reports, and public filings, as well as the factors explained in greater detail in the Company's annual report on Form 10-K. We generate substantially all of our revenue by transporting freight for our customers. We also derive revenue from fuel surcharges, loading and unloading activities, equipment detention, and other accessorial services. Generally, we are paid by the mile or by the load for our services. The main factors that affect our revenue are the revenue per mile we receive from our customers, the percentage of miles for which we are compensated, and the numbers of miles we generate with our equipment. These factors relate, among other things, to the U.S. economy, inventory levels, the level of truck capacity in our markets, specific customer demand, the percentage of team-driven tractors in our fleet, and our average length of haul. Since 2000 we have held our fleet size relatively constant. An overcapacity of trucks in our fleet and the industry generally as the economy slowed has contributed to lower equipment utilization and pricing pressure since 2000. In addition to constraining fleet size, we reduced our number of two-person driver teams during 2002 and have since held the percentage relatively constant to better match the demand for expedited long-haul service. Our single driver fleets generally operate in shorter lengths of haul, generate fewer miles per tractor, and experience more non-revenue miles, but the additional expenses and lower productive miles are expected to be offset by generally higher revenue per loaded mile and the reduced employee expense of compensating only one driver. We expect operating statistics and expenses to shift with the mix of single and team operations. The trucking industry has experienced a significant increase in operating costs over the past three years. The main factors for the industry as well as for us have been an increased annual cost of tractors due to higher initial prices and lower used truck values, a higher overall cost of insurance and claims, and elevated fuel prices. Other than those categories, our expenses have remained relatively constant or have declined as a percentage of revenue. Looking forward, our profitability goal is to return to an operating ratio of approximately 90%. We expect this to require additional improvements in revenue per tractor per week to overcome expected additional cost increases of insurance and claims, new revenue equipment (discussed below), and other general increases in operating costs, as Page 12 well as to expand our margins. Because a large percentage of our costs are variable, changes in revenue per mile affect our profitability to a greater extent than changes in miles per tractor. At June 30, 2003, we operated approximately 3,623 tractors and 7,133 trailers. Of our tractors at June 30, 2003, approximately 2,379 were owned, 890 were financed under operating leases, and 354 were provided by owner-operators, who own and drive the tractors. Of our trailers at June 30, 2003, approximately 3,298 were owned and approximately 3,835 were financed under operating leases. Between 1999 and 2001, the market value of used equipment deteriorated. In recognition of this fact, we recognized pre-tax impairment charges of $15.4 million in the fourth quarter of 2001 and $3.3 million in the first quarter of 2002 in relation to the reduced value of our model year 1998 through 2000 tractors. In addition, we increased the depreciation rate/lease expense on our remaining tractors to reflect our expectations concerning market value at disposition. We estimate the impact of the change in the estimated useful lives and depreciation on the 2001 model year tractors to be approximately $1.5 million pre-tax or $.06 per share annually. In June 2003, the Company entered into a trade-in agreement with an equipment manufacturer covering the model year 2001 tractors. Management believes the additional depreciation and lease expense will bring the carrying values of these tractors in line with the disposition values. Our assumptions represent our best estimate, and actual values could differ by the time those tractors are scheduled for trade. Because of the adverse change from historical purchase prices and residual values, the annual expense per tractor on model year 2003 and 2004 tractors is expected to be higher than the annual expense on the model year 1999 and 2000 units being replaced. We believe the increase in depreciation expense was approximately one-half cent per mile pre-tax during 2002 and will grow to approximately one cent per mile pre-tax in 2003 as all of these new units are delivered. By the time the model year 2001 tractors are traded and the entire fleet is converted in 2004, we expect the total increase in expense to be approximately one and one-half cent pre-tax per mile versus the cost in 2001, excluding any effect of interest rates. The timing of these expenses could be affected if we change our tractor trade cycle to three years, which we are considering. If the tractors are leased instead of purchased, the references to increased depreciation would be reflected as additional lease expense. We finance a portion of our tractor and trailer fleet with off-balance sheet operating leases. These leases generally run for a period of three years for tractors and seven years for trailers. With our tractor trade cycle currently at approximately four years, we have been purchasing the leased tractors at the expiration of the lease term, although there is no commitment to purchase the tractors. The first trailer leases expire in 2005, and we have not determined whether to purchase trailers at the end of these leases. In April 2003, we entered into a sale-leaseback arrangement covering approximately 1,266 of our trailers. This arrangement is more fully described below. Owner-operators provide a tractor and a driver and are responsible for all operating expenses in exchange for a fixed payment per mile. We do not have the capital outlay of purchasing the tractor. The payments to owner-operators and the financing of equipment under operating leases are recorded in revenue equipment rentals and purchased transportation. Expenses associated with owned equipment, such as interest and depreciation, are not incurred, and for owner-operator tractors, driver compensation, fuel, and other expenses are not incurred. Because obtaining equipment from owner-operators and under operating leases effectively shifts financing expenses from interest to "above the line" operating expenses, we evaluate our efficiency using net margin rather than operating ratio. Freight revenue excludes $8.5 million and $5.5 million of fuel and accessorial surcharge revenue in the three months ending June 30, 2003 and 2002, respectively. In the six months ending June 30, 2003 and 2002, freight revenue excludes $18.4 million and $8.7 million of fuel and accessorial surcharge revenue, respectively. For comparison purposes in the table below, we use freight revenue when discussing changes as a percentage of revenue. We believe removing this sometimes volatile source of revenue affords a more consistent basis for comparing the results of operations from period to period. Page 13 The following table sets forth the percentage relationship of certain items to freight revenue: Three Months Ended Six Months Ended June 30, June 30, ------------------------------- ------------------------------- 2003 2002 2003 2002 ---------------- ------------- -------------- -------------- Freight revenue (1) 100.0% 100.0% 100.0% 100.0% Operating expenses: Salaries, wages, and related expenses (1) 39.4 40.9 40.0 41.5 Fuel expense (1) 14.6 15.0 15.6 15.6 Operations and maintenance (1) 7.1 7.0 7.3 6.8 Revenue equipment rentals and purchased transportation 12.0 10.7 11.8 11.1 Operating taxes and licenses 2.7 2.8 2.7 2.7 Insurance and claims 7.0 5.6 6.6 5.6 Communications and utilities 1.3 1.2 1.3 1.3 General supplies and expenses 2.8 2.6 2.6 2.7 Depreciation and amortization (2) 7.7 8.6 8.0 9.7 ---------------- ------------- -------------- -------------- Total operating expenses 94.6 94.6 95.9 96.9 ---------------- ------------- -------------- -------------- Operating income 5.4 5.4 4.1 3.1 Other (income) expense, net 0.4 0.9 0.4 1.3 ---------------- ------------- -------------- -------------- Income before income taxes 5.0 4.5 3.7 1.8 Income tax expense 2.7 2.4 2.2 1.3 ---------------- ------------- -------------- -------------- Net income 2.3% 2.1% 1.5% 0.5% ================ ============= ============== ============== (1) Freight revenue is total revenue less fuel surcharge and accessorial revenue. In this table, fuel surcharge and other accessorial revenue are shown netted against the appropriate expense category (Salaries, wages, and related expenses, $1.5 million and $1.8 million in the three months ending June 30, 2003, and 2002, respectively; Fuel expense, $6.5 million and $3.2 million in the three months ending June 30, 2003, and 2002, respectively; Operations and maintenance, $0.5 million in the three months ending June 30, 2003, and 2002. Salaries, wages, and related expenses, $3.3 million and $3.2 million in the six months ending June 30, 2003, and 2002, respectively; Fuel expense, $14.0 million and $4.5 million in the six months ending June 30, 2003, and 2002, respectively; Operations and maintenance, $1.0 million in the six months ending June 30, 2003, and 2002.) (2) Includes a $3.3 million pre-tax impairment charge or 1.2% of revenue in the six months ending June 30, 2002.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2003 TO THREE MONTHS ENDED JUNE 30, 2002 For the quarter ending June 30, 2003, revenue increased $1.6 million (1.1%), to $145.9 million, from $144.3 million in the 2002 period. Freight revenue excludes $8.5 million of fuel and accessorial surcharge revenue in the 2003 period and $5.5 million in the 2002 period. For comparison purposes in the discussion below, we use freight revenue when discussing changes as a percentage of revenue. We believe removing this sometimes volatile source of revenue affords a more consistent basis for comparing the results of operations from period to period. Freight revenue (total revenue less fuel surcharge and accessorial revenue) decreased $1.4 million (1.0%), to $137.4 million in the three months ended June 30, 2003, from $138.8 million in the same period of 2002. Our freight revenue was affected by a 2.5% decrease in miles per tractor and an increase in non revenue miles, which were partially offset by a 2.3% increase in rate per loaded mile. Revenue per tractor per week decreased to $2,850 in the 2003 period from $2,887 in the 2002 period. Weighted average tractors increased to 3,699 in the 2003 period from 3,688 in the 2002 period. Due to a weak freight environment, we have elected to constrain the size of our tractor fleet until fleet production and profitability improve. Page 14 Salaries, wages, and related expenses, net of accessorial revenue of $1.5 million in the 2003 period and $1.8 million in the 2002 period, decreased $2.7 million (4.7%), to $54.2 million in the 2003 period, from $56.8 million in the 2002 period. As a percentage of freight revenue, salaries, wages, and related expenses decreased to 39.4% in the 2003 period, from 40.9% in the 2002 period. The decrease was largely attributable to our utilizing a larger percentage of single-driver tractors, with only one driver per tractor to be compensated and implementing changes in our pay structure. Our payroll expense for employees other than over the road drivers increased to 7.2% of freight revenue in the 2003 period from 6.9% of freight revenue in the 2002 period due to growth in headcount and a larger number of local drivers in the dedicated fleet. Health insurance, employer paid taxes, workers' compensation, and other employee benefits decreased to 5.6% of freight revenue in the 2003 period from 6.7% of freight revenue in the 2002 period, partially due to paying lower taxes due to lower payroll amounts and improving claims experience in the Company's health insurance plan. Fuel expense, net of fuel surcharge revenue of $6.5 million in the 2003 period and $3.2 million in the 2002 period, decreased $0.8 million (3.9%), to $20.0 million in the 2003 period, from $20.9 million in the 2002 period. As a percentage of freight revenue, net fuel expense decreased to 14.6% in the 2003 period from 15.0% in the 2002 period. Fuel prices averaged approximately $0.13 per gallon higher in the 2003 period compared to the 2002 period which resulted in approximately $2.4 million additional fuel expense. However, fuel surcharges amounted to $0.058 per loaded mile in the 2003 period compared to $0.028 per loaded mile in the 2002 period, which more than offset the increased fuel expense with approximately $3.3 million more fuel surcharges in the 2003 period as compared to the 2002 period. Fuel costs may be affected in the future by volume purchase commitments, the collectibility of fuel surcharges, and lower fuel mileage due to government mandated emissions standards that were effective October 1, 2002, and will result in less fuel efficient engines. We did not have any fuel hedging contracts at June 30, 2003. Operations and maintenance, net of accessorial revenue of $0.5 million in the 2003 period and 2002 periods, consisting primarily of vehicle maintenance, repairs and driver recruitment expenses, remained essentially constant at $9.8 million in the 2003 period and 2002 periods. As a percentage of freight revenue, operations and maintenance remained essentially constant at 7.1% in the 2003 period and 7.0% in the 2002 period. Revenue equipment rentals and purchased transportation increased $1.7 million (11.3%), to $16.6 million in the 2003 period, from $14.9 million in the 2002 period. As a percentage of freight revenue, revenue equipment rentals and purchased transportation expense increased to 12.0% in the 2003 period from 10.7% in the 2002 period. The owner-operators fleet remained essentially constant at an average of 354 units in the 2003 period compared to an average of 350 units in the 2002 period. Over the past several of years, it has become more difficult to retain owner-operators due to the challenging operating conditions. Owner-operators are independent contractors, who provide a tractor and driver and cover all of their operating expenses in exchange for a fixed payment per mile. Accordingly, expenses such as driver salaries, fuel, repairs, depreciation, and interest normally associated with Company-owned equipment are consolidated in revenue equipment rentals and purchased transportation when owner-operators are utilized. The revenue equipment rental expense increased $1.7 million (39.7%), to $6.0 million in the 2003 period, from $4.3 million in the 2002 period. As of June 30, 2003, we had financed approximately 890 tractors and 3,835 trailers under operating leases as compared to 636 tractors and 2,564 trailers under operating leases as of June 30, 2002. On April 14, 2003, we engaged in a sale-leaseback transaction involving approximately 1,266 dry van trailers. We sold the trailers to a finance company for approximately $15.5 million in cash and leased the trailers back under three year walk away leases. The resulting gain will be amortized over the life of the lease. We will no longer recognize depreciation and interest expense with respect to these trailers. Operating taxes and licenses decreased $0.2 million (4.3%), to $3.7 million in the 2003 period, from $3.9 million in the 2002 period. As a percentage of freight revenue, operating taxes and licenses remained essentially constant at 2.7% in the 2003 period and 2.8% in the 2002 period. Insurance and claims, consisting primarily of premiums and deductible amounts for liability, physical damage, and cargo damage insurance and claims, increased $1.7 million (22.0%), to $9.6 million in the 2003 period from $7.8 million in the 2002 period. As a percentage of freight revenue, insurance and claims increased to 7.0% in the 2003 period from 5.6% in the 2002 period. The increase is a result of an industry-wide increase in insurance rates, which we addressed by adopting an insurance program with significantly higher deductible exposure, and unfavorable accident experience. The retention level for our primary insurance layer increased from $250,000 in 2001 to $500,000 in March of 2002, to $1.0 million in November of 2002, and to $2.0 million on March 1, 2003. We also Page 15 have a $2.0 million self-insured layer between $5.0 million and $7.0 million per occurrence. Our insurance program for liability, physical damage, and cargo damage involves self-insurance with varying risk retention levels. Claims in excess of these risk retention levels are covered by insurance in amounts which management considers adequate. We accrue the estimated cost of the uninsured portion of pending claims. These accruals are based on management's evaluation of the nature and severity of the claim and estimates of future claims development based on historical trends. Insurance and claims expense will vary based on the frequency and severity of claims, the premium expense, and the level of self-insured retention. Because of higher self-insured retentions, our future expenses of insurance and claims may be higher or more volatile than in historical periods. Communications and utilities expense remained essentially constant at $1.7 million in the 2003 and 2002 periods. As a percentage of freight revenue, communications and utilities remained essentially constant at 1.3% in the 2003 period as compared to 1.2% in the 2002 period. General supplies and expenses, consisting primarily of headquarters and other terminal facilities expenses, increased $0.2 million (5.2%), to $3.8 million in the 2003 period, from $3.6 million in the 2002 period. As a percentage of freight revenue, general supplies and expenses increased to 2.8% in the 2003 period from 2.6% in the 2002 period. Depreciation and amortization, consisting primarily of depreciation of revenue equipment, decreased $1.3 million (10.9%), to $10.6 million in the 2003 period from $11.9 million in the 2002 period. As a percentage of freight revenue, depreciation and amortization decreased to 7.7% in the 2003 period from 8.6% in the 2002 period. The decrease is the result of the April 2003 sale-leaseback transaction involving our trailers and improvement from the sale of equipment partially offset by increased depreciation expense on our 2001 tractors and our new tractors. The sale-leaseback transaction involved approximately 1,266 dry van trailers as discussed in the revenue equipment rentals and purchased transportation section. We sold the trailers to a finance company for approximately $15.5 million in cash and leased the trailers back under three year walk away leases. Our revenue equipment rental expense is expected to increase in the future to reflect this transaction and we will no longer recognize depreciation and interest expense with respect to these trailers. In April 2003, we also entered into an agreement with a finance company to sell approximately 2,585 dry van trailers and to lease an additional 3,600 model year 2004 dry van trailers over the next 12 months. We will sell the trailers, which consist of model year 1991 to model year 1997 dry van trailers, to the finance company for approximately $20.5 million in cash and will lease the additional 3,600 dry van trailers back under seven year walk away leases. Depending on the delivery schedule of the trade equipment, we will recognize either additional depreciation expense or losses on the disposal of equipment up to approximately $2.0 million. The monthly cost of the lease payments will be higher than the cost of the depreciation and interest expense; however there will be no residual risk of loss at disposition. We expect our annual cost of tractor and trailer ownership and/or leasing to increase in future periods. The increase is expected to result from a combination of higher initial prices of new equipment, lower resale values for used equipment, and increased depreciation/lease payments on some of our existing equipment over their remaining lives in order to better match expected book values or lease residual values with market values at the equipment disposal date. To the extent equipment is leased under operating leases, the amounts will be reflected in revenue equipment rentals and purchased transportation. To the extent equipment is owned or obtained under capitalized leases; the amounts will be reflected as depreciation expense and interest expense. Those expense items will fluctuate with changes in the percentage of our equipment obtained under operating leases versus owned and under capitalized leases. Depreciation and amortization expense is net of any gain or loss on the disposal of tractors and trailers. Loss on the disposal of tractors and trailers was approximately $25,000 in the 2003 period compared to a loss of $0.8 million in the 2002 period. Amortization expense relates to deferred debt costs incurred and covenants not to compete from five acquisitions. Goodwill amortization ceased beginning January 1, 2002, in accordance with SFAS No. 142, and we evaluate goodwill and certain intangibles for impairment, annually. During the second quarter of 2003 and 2002, we tested our goodwill for impairment and found no impairment. Other expense, net, decreased $0.7 million (51.1%), to $0.6 million in the 2003 period, from $1.3 million in the 2002 period. As a percentage of freight revenue, other expense decreased to 0.4% in the 2003 period from 0.9% in the 2002 period. Included in the other expense category are interest expense, interest income, pre-tax non-cash gains related to the accounting for interest rate derivatives under SFAS No. 133 which amounted to approximately $81,000 in the 2003 period and approximately $0.4 million in the 2002 period. Page 16 Our income tax expense was $3.7 million and $3.3 million in the 2003 and 2002 periods, respectively. The effective tax rate is different from the expected combined tax rate due to permanent differences related to a per diem pay structure implemented in 2001. Due to the nondeductible effect of per diem, our tax rate will fluctuate in future periods as income fluctuates. Primarily as a result of the factors described above, net income increased $0.2 million (6.1%), to $3.2 million in the 2003 period (2.3% of revenue), from $3.0 million in the 2002 period (2.1% of revenue). As a result of the foregoing, our net margin increased to 2.3% in the 2003 period from 2.1% in the 2002 period. COMPARISON OF SIX MONTHS ENDED JUNE 30, 2003 TO SIX MONTHS ENDED JUNE 30, 2002 For the six months ending June 30, 2003, revenue increased $7.3 million (2.6%), to $283.8 million, from $276.5 million in the 2002 period. Freight revenue excludes $18.4 million of fuel and accessorial surcharge revenue in the 2003 period and $8.7 million in the 2002 period. For comparison purposes in the discussion below, we use freight revenue when discussing changes as a percentage of revenue. We believe removing this sometimes volatile source of revenue affords a more consistent basis for comparing the results of operations from period to period. Freight revenue (total revenue less fuel surcharge and accessorial revenue) decreased $2.4 million (0.9%), to $265.5 million in the six months ended June 30, 2003, from $267.9 million in the same period of 2002. Our freight revenue was affected by a 2.4% decrease in miles per tractor and an increase in non revenue miles, which were partially offset by a 2.5% increase in rate per loaded mile. Revenue per tractor per week decreased to $2,764 in the 2003 period from $2,784 in the 2002 period. Weighted average tractors increased to 3,706 in the 2003 period from 3,700 in the 2002 period. Due to a weak freight environment, we have elected to constrain the size of our tractor fleet until fleet production and profitability improve. Salaries, wages, and related expenses, net of accessorial revenue of $3.3 million in the 2003 period and $3.2 million in the 2002 period, decreased $5.0 million (4.5%), to $106.2 million in the 2003 period, from $111.1 million in the 2002 period. As a percentage of freight revenue, salaries, wages, and related expenses decreased to 40.0% in the 2003 period, from 41.5% in the 2002 period. The decrease was largely attributable to our utilizing a larger percentage of single-driver tractors, with only one driver per tractor to be compensated and implementing changes in our pay structure. Our payroll expense for employees other than over the road drivers increased to 7.3% of freight revenue in the 2003 period from 7.0% of freight revenue in the 2002 period due to growth in headcount and a larger number of local drivers in the dedicated fleet. Health insurance, employer paid taxes, workers' compensation, and other employee benefits decreased to 6.2% of freight revenue in the 2003 period from 6.8% of freight revenue in the 2002 period, partially due to paying lower taxes due to lower payroll amounts and improving claims experience in the Company's health insurance plan. Fuel expense, net of fuel surcharge revenue of $14.0 million in the 2003 period and $4.5 million in the 2002 period, decreased $0.4 million (0.8%), to $41.3 million in the 2003 period, from $41.7 million in the 2002 period. As a percentage of freight revenue, net fuel expense remained essentially constant at 15.6% in the 2003 and 2002 periods. Fuel prices have on average been higher in the 2003 period as compared to the 2002 period which resulted in approximately $9.1 million additional fuel expense. However, fuel surcharges amounted to $0.065 per loaded mile in the 2003 period compared to $0.020 per loaded mile in the 2002 period, which more than offset the increased fuel expense with approximately $9.5 million more fuel surcharges in the 2003 period as compared to the 2002 period. Fuel costs may be affected in the future by volume purchase commitments, the collectibility of fuel surcharges, and lower fuel mileage due to government mandated emissions standards that were effective October 1, 2002, and will result in less fuel efficient engines. We did not have any fuel hedging contracts at June 30, 2003. Operations and maintenance, net of accessorial revenue of $1.0 million in the 2003 period and 2002 periods, consisting primarily of vehicle maintenance, repairs and driver recruitment expenses, increased $1.1 million (6.3%), to $19.3 million in the 2003 period, from $18.2 million in the 2002 period. As a percentage of freight revenue, operations and maintenance increased to 7.3% in the 2003 period from 6.8% in the 2002 period. We extended the trade cycle on our tractor fleet from three years to four years, which has resulted in an increase in the number of required repairs. Page 17 Revenue equipment rentals and purchased transportation increased $1.7 million (5.6%), to $31.4 million in the 2003 period, from $29.7 million in the 2002 period. As a percentage of freight revenue, revenue equipment rentals and purchased transportation expense increased to 11.8% in the 2003 period from 11.1% in the 2002 period. The owner-operators fleet remained essentially constant at an average of 354 units in the 2003 period compared to an average of 348 units in the 2002 period. Over the past several years, it has become more difficult to retain owner-operators due to the challenging operating conditions. Owner-operators are independent contractors, who provide a tractor and driver and cover all of their operating expenses in exchange for a fixed payment per mile. Accordingly, expenses such as driver salaries, fuel, repairs, depreciation, and interest normally associated with Company-owned equipment are consolidated in revenue equipment rentals and purchased transportation when owner-operators are utilized. The revenue equipment rental expense increased $1.7 million (17.5%), to $11.1 million in the 2003 period, from $9.5 million in the 2002 period. As of June 30, 2003, we had financed approximately 890 tractors and 3,835 trailers under operating leases as compared to 636 tractors and 2,564 trailers under operating leases as of June 30, 2002. On April 14, 2003, we engaged in a sale-leaseback transaction involving approximately 1,266 dry van trailers. We sold the trailers to a finance company for approximately $15.5 million in cash and leased the trailers back under three year walk away leases. Our revenue equipment rental expense is expected to increase in the future to reflect this transaction. We will no longer recognize depreciation and interest expense with respect to these trailers. Operating taxes and licenses remained essentially constant at $7.2 million in the 2003 and 2002 periods. As a percentage of freight revenue, operating taxes and licenses remained essentially constant at 2.7% in the 2003 and 2002 periods. Insurance and claims, consisting primarily of premiums and deductible amounts for liability, physical damage, and cargo damage insurance and claims, increased $2.6 million (17.3%), to $17.6 million in the 2003 period from $15.0 million in the 2002 period. As a percentage of freight revenue, insurance and claims increased to 6.6% in the 2003 period from 5.6% in the 2002 period. The increase is a result of an industry-wide increase in insurance rates, which we addressed by adopting an insurance program with significantly higher deductible exposure, and unfavorable accident experience. The retention level for our primary insurance layer increased from $250,000 in 2001 to $500,000 in March of 2002, to $1.0 million in November of 2002, and to $2.0 million on March 1, 2003. We also have a $2.0 million self-insured layer between $5.0 million and $7.0 million per occurrence. Our insurance program for liability, physical damage, and cargo damage involves self-insurance with varying risk retention levels. Claims in excess of these risk retention levels are covered by insurance in amounts which management considers adequate. We accrue the estimated cost of the uninsured portion of pending claims. These accruals are based on management's evaluation of the nature and severity of the claim and estimates of future claims development based on historical trends. Insurance and claims expense will vary based on the frequency and severity of claims, the premium expense, and the level of self-insured retention. Because of higher self-insured retentions, our future expenses of insurance and claims may be higher or more volatile than in historical periods. Communications and utilities expense remained essentially constant at $3.4 million in the 2003 period and $3.5 million in the 2002 period. As a percentage of freight revenue, communications and utilities remained essentially constant at 1.3% in the 2003 and 2002 periods. General supplies and expenses, consisting primarily of headquarters and other terminal facilities expenses, decreased $0.1 million (2.1%), to $7.0 million in the 2003 period, from $7.1 million in the 2002 period. As a percentage of freight revenue, general supplies and expenses remained essentially constant at 2.6% in the 2003 period and 2.7% in the 2002 period. Depreciation, amortization and impairment charge, consisting primarily of depreciation of revenue equipment, decreased $4.8 million (18.3%), to $21.2 million in the 2003 period from $26.0 million in the 2002 period. As a percentage of freight revenue, depreciation and amortization decreased to 8.0% in the 2003 period from 9.7% in the 2002 period. The decrease in part resulted because we did not have an impairment charge in the 2003 period, as we did in the 2003 period. In addition, we executed the April 2003 sale-leaseback transaction, and improved the results of our sale of equipment. These factors were partially offset by increased depreciation expense on our 2001 tractors and on our new tractors. In the 2002 period, we recognized a pre-tax charge of approximately $3.3 million to reflect an impairment in tractor values. See "Impairment of Equipment and Change in Estimated Useful Lives," in Note 6 to the Consolidated Financial Statements, for additional information. In April 2003, we entered into a sale-leaseback transaction which involved approximately 1,266 dry van trailers as discussed in the revenue equipment rentals and Page 18 purchased transportation section. We sold the trailers to a finance company for approximately $15.5 million in cash and leased the trailers back under three year walk away leases. Our revenue equipment rental expense is expected to increase in the future to reflect this transaction and we will no longer recognize depreciation and interest expense with respect to these trailers. We expect our annual cost of tractor and trailer ownership and/or leasing to increase in future periods. The increase is expected to result from a combination of higher initial prices of new equipment, lower resale values for used equipment, and increased depreciation/lease payments on some of our existing equipment over their remaining lives in order to better match expected book values or lease residual values with market values at the equipment disposal date. To the extent equipment is leased under operating leases, the amounts will be reflected in revenue equipment rentals and purchased transportation. To the extent equipment is owned or obtained under capitalized leases; the amounts will be reflected as depreciation expense and interest expense. Those expense items will fluctuate with changes in the percentage of our equipment obtained under operating leases versus owned and under capitalized leases. Depreciation and amortization expense is net of any gain or loss on the disposal of tractors and trailers. Gain on the disposal of tractors and trailers was approximately $0.2 million in the 2003 period compared to a loss of $1.4 million in the 2002 period. Amortization expense relates to deferred debt costs incurred and covenants not to compete from five acquisitions. Goodwill amortization ceased beginning January 1, 2002, in accordance with SFAS No. 142, and we evaluate goodwill and certain intangibles for impairment, annually. During the second quarter of 2003 and 2002, we tested our goodwill for impairment and found no impairment. Other expense, net, decreased $2.3 million (65.3%), to $1.2 million in the 2003 period, from $3.5 million in the 2002 period. As a percentage of freight revenue, other expense decreased to 0.4% in the 2003 period from 1.3% in the 2002 period. Included in the other expense category are interest expense, interest income, pre-tax non-cash gains related to the accounting for interest rate derivatives under SFAS No. 133 which amounted to approximately $60,000 in the 2003 period and approximately $0.2 million in the 2002 period and an early extinguishment of debt charge. During the first quarter of 2002, we prepaid the remaining $20 million in previously outstanding 7.39% ten year, private placement notes with borrowings from the Credit Agreement. In conjunction with the prepayment of the borrowings, we recognized an approximate $1.4 million pre-tax charge to reflect the early extinguishment of debt. The losses related to the write off of debt issuance and other deferred financing costs and a premium paid on the retirement of the notes. Upon adoption of SFAS 145 in 2003, we reclassified the charge and it is no longer classified as an extraordinary item. Our income tax expense was $5.7 million and $3.6 million in the 2003 and 2002 periods, respectively. The effective tax rate is different from the expected combined tax rate due to permanent differences related to a per diem pay structure implemented in 2001. Due to the nondeductible effect of per diem, our tax rate will fluctuate in future periods as income fluctuates. Primarily as a result of the factors described above, net income increased $2.7 million (204.9%), to $4.0 million in the 2003 period (1.5% of revenue), from $1.3 million in the 2002 period (0.5% of revenue). As a result of the foregoing, our net margin increased to 1.5% in the 2003 period from 0.5% in the 2002 period. LIQUIDITY AND CAPITAL RESOURCES Historically our growth has required significant capital investments. We historically have financed our expansion requirements with borrowings under a line of credit, cash flows from operations and long-term operating leases. Our primary sources of liquidity at June 30, 2003, were funds provided by operations, proceeds under the Securitization Facility (as defined below), borrowings under our primary credit agreement, which had maximum available borrowing of $100.0 million at June 30, 2003 (the "Credit Agreement"), the April 2003 sale-leaseback transaction, and operating leases of revenue equipment. We believe our sources of liquidity are adequate to meet our current and projected needs for at least the next twelve months. Net cash provided by operating activities was $35.1 million in the 2003 period and $30.7 million in the 2002 period. Our primary sources of cash flow from operations in the 2003 period were net income and depreciation and amortization. Depreciation and amortization in the 2002 period included a $3.3 million pre-tax impairment charge. Net cash provided by investing activities was $3.9 million in the 2003 period and was derived from the sale of revenue equipment. The cash used in the 2002 period, $28.3 million, related to the financing of tractors, which were Page 19 previously financed through operating leases, using proceeds from the Credit Agreement. Anticipated capital expenditures are expected to increase in 2003 as the Company has agreed to purchase and trade a significant number of tractors and trailers. We expect capital expenditures, primarily for revenue equipment (net of trade-ins), to be approximately $50.0 million in 2003, exclusive of acquisitions, if we remain on a four-year trade cycle for tractors. The reduction from the first quarter estimate of $80.0 million is primarily due to the deferral of purchasing 100 new tractors and entering into operating leases. If we change our trade cycle back to three years, our capital expenditures could increase significantly. Net cash used in financing activities was $36.2 million in the 2003 period, and $1.6 million in the 2002 period. During the six month period ended June 30, 2003, we reduced outstanding balance sheet debt by $37.0 million. Approximately $15.5 million of this reduction was from proceeds of the April 2003 sale-leaseback transaction. At June 30, 2003, we had outstanding debt of $46.5 million, primarily consisting of $45.2 million in the Securitization Facility and a $1.3 million interest bearing note to the former primary stockholder of SRT. Interest rates on this debt range from 1.2% to 6.5%. During the first quarter of 2002, we prepaid the remaining $20.0 million in previously outstanding 7.39% ten year private placement notes with borrowings from the Credit Agreement. In conjunction with the prepayment of the borrowings, we recognized an approximate $0.9 million after-tax extraordinary item to reflect the early extinguishment of debt. Upon adoption of SFAS 145 in 2003, we reclassified the charge and it is no longer classified as an extraordinary item. In December 2000, we entered into the Credit Agreement with a group of banks, which expires in December, 2005. Borrowings under the Credit Agreement are based on the banks' base rate or LIBOR and accrue interest based on one, two, or three month LIBOR rates plus an applicable margin that is adjusted quarterly between 0.75% and 1.25% based on cash flow coverage. At June 30, 2003, the margin was 0.875%. The Credit Agreement is guaranteed by the Company and all of the Company's subsidiaries except CVTI Receivables Corp. and Volunteer Insurance Limited. At December 31, 2002, the Credit Agreement had a maximum borrowing limit of $120.0 million. When the facility was extended in February 2003, the borrowing limit was reduced to $100.0 million with an accordion feature which permits an increase up to a borrowing limit of $140.0 million. Borrowings related to revenue equipment are limited to the lesser of 90% of net book value of revenue equipment or the maximum borrowing limit. Letters of credit were limited to an aggregate commitment of $20.0 million at December 31, 2002, and were increased to a limit of $50.0 million in February 2003. The Credit Agreement includes a "security agreement" such that the Credit Agreement may be collateralized by virtually all of our assets if a covenant violation occurs. A commitment fee, that is adjusted quarterly between 0.15% and 0.25% per annum based on cash flow coverage, is due on the daily unused portion of the Credit Agreement. As of June 30, 2003, we had no borrowings under the Credit Agreement. In December 2000, we entered into a $62 million revolving accounts receivable securitization facility (the "Securitization Facility"). On a revolving basis, we sell our interests in our accounts receivable to CRC, a wholly-owned bankruptcy-remote special purpose subsidiary incorporated in Nevada. CRC sells a percentage ownership in such receivables to an unrelated financial entity. We can receive up to $62 million of proceeds, subject to eligible receivables and will pay a service fee recorded as interest expense, based on commercial paper interest rates plus an applicable margin of 0.41% per annum and a commitment fee of 0.10% per annum on the daily unused portion of the Facility. The net proceeds under the Securitization Facility are required to be shown as a current liability because the term, subject to annual renewals, is 364 days. As of June 30, 2003, there were $45.2 million in proceeds received. The transaction did not meet the criteria for sale treatment under Financial Accounting Standard No. 140 and is reflected as a secured borrowing in the financial statements. The Credit Agreement and Securitization Facility contain certain restrictions and covenants relating to, among other things, dividends, tangible net worth, cash flow, acquisitions and dispositions, and total indebtedness. All of these agreements are cross-defaulted. The Company is in compliance with these agreements as of June 30, 2003. Contractual Obligations and Commitments - In April 2003, we engaged in a sale-leaseback transaction involving approximately 1,266 dry van trailers. We sold the trailers to a finance company for approximately $15.5 million in cash and leased the trailers back under three year walk away leases. The resulting gain was approximately $0.3 Page 20 million and will be amortized over the life of the lease. The monthly cost of the lease payments will be higher than the cost of the depreciation and interest expense; however there will be no residual risk of loss at disposition. In April 2003, we also entered into an agreement with a finance company to sell approximately 2,585 dry van trailers and to lease an additional 3,600 model year 2004 dry van trailers over the next 12 months. We will sell the trailers, which consist of model year 1991 to model year 1997 dry van trailers, to the finance company for approximately $20.5 million in cash and will lease the additional 3,600 dry van trailers back under seven year walk away leases. Depending on the delivery schedule of the trade equipment, we will recognize either additional depreciation expense or losses on the disposal of equipment up to approximately $2.0 million. The monthly cost of the lease payments will be higher than the cost of the depreciation and interest expense; however there will be no residual risk of loss at disposition. We had commitments outstanding related to equipment, debt obligations, and diesel fuel purchases as of January 1, 2003. These purchases are expected to be financed by debt, proceeds from sales of existing equipment, and cash flows from operations. We have the option to cancel commitments relating to equipment with 60 days notice. The following table sets forth our contractual cash obligations and commitments as of January 1, 2003. Payments Due By Period There- (in thousands) Total 2003 2004 2005 2006 2007 after ----------- ----------- ----------- ------------ ----------- ----------- ------------ Long Term Debt $ 1,300 $ - $ 1,300 $ - $ - $ - $ - Short Term Debt (1) 82,230 82,230 - - - - - Operating Leases 62,308 21,017 12,502 10,852 6,823 4,665 6,449 Lease residual value guarantees 56,802 25,699 - 9,910 3,553 5,590 12,050 Purchase Obligations: Diesel fuel (2) 52,477 48,020 4,457 - - - - Equipment (3) 85,986 85,986 - - - - - ----------- ----------- ----------- ------------ ----------- ----------- ------------ Total Contractual Cash Obligations $341,103 $262,952 $18,259 $20,762 $10,376 $10,255 $18,499 =========== =========== =========== ============ =========== =========== ============ (1) In the 2003 period, approximately $39 million of this amount represents proceeds drawn under our Securitization Facility. The net proceeds under the Securitization Facility are required to be shown as a current liability because the term, subject to annual renewals, is 364 days. We expect the Securitization Facility to be renewed in 2003. (2) This amount represents volume purchase commitments for the 2003 period through our truck stop network. We estimate that this amount represents approximately one-half of our fuel needs for the 2003 period. (3) Amount reflects gross purchase price of obligations if all leased equipment is purchased.
CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make decisions based upon estimates, assumptions, and factors we consider as relevant to the circumstances. Such decisions include the selection of applicable accounting principles and the use of judgment in their application, the results of which impact reported amounts and disclosures. Changes in future economic conditions or other business circumstances may affect the outcomes of our estimates and assumptions. Accordingly, actual results could differ from those anticipated. A summary of the significant accounting policies Page 21 followed in preparation of the financial statements is contained in Note 1 of the financial statements contained in the Company's annual report on Form 10-K. Other footnotes describe various elements of the financial statements and the assumptions on which specific amounts were determined. Our critical accounting policies include the following: Property and Equipment - Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. We depreciate revenue equipment over five to eight years with salvage values ranging from 25% to 48%. We continually evaluate the salvage value, useful life, and annual depreciation of tractors and trailers based on the current market environment and on our recent experience with disposition values. Any change could result in greater or lesser annual expense in the future. Gains or losses on disposal of revenue equipment are included in depreciation in the statements of income. Impairment of Long-Lived Assets - We evaluate the carrying value of long-lived assets by analyzing the operating performance and future cash flows for those assets, whenever events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. We adjust the carrying value of the underlying assets if the sum of the expected cash flows is less than the carrying value. Impairment can be impacted by our projection of future cash flows, the level of cash flows and salvage values, the methods of estimation used for determining fair values and the impact of guaranteed residuals. Insurance and Other Claims - Our insurance program for liability, property damage, and cargo loss and damage, involves self- insurance with high risk retention levels. We have increased the self-insured retention portion of our insurance coverage from $12,500 for each claim in 2000 to $1.0 million plus an additional layer from $4.0 million to $7.0 million for each claim at November 2002. Effective March 2003, we increased our primary coverage to $5.0 million with a $2.0 million retention level, plus an additional layer from $5.0 million to $7.0 million for each claim. We accrue the estimated cost of the uninsured portion of pending claims. These accruals are based on our evaluation of the nature and severity of the claim and estimates of future claims development based on historical trends. The rapid and substantial increase in our self-insured retention makes these estimates an important accounting judgment. Insurance and claims expense will vary based on the frequency and severity of claims, the premium expense and the lack of self-insured retention. From 1999 to present, we carried excess coverage in amounts that have ranged from $15.0 million to $49.0 million in addition to our primary insurance coverage. On July 15, 2002, we received a binder for $48.0 million of excess insurance coverage over our $2.0 million primary layer. Subsequently, we were forced to seek replacement coverage after the insurance agent retained the premium and failed to produce proof of insurance coverage. If one or more claims from the period July to November 2002 exceeded $2.0 million in amount, we would be required to accrue for the potential or actual loss and our financial condition and results of operations could be materially and adversely affected. We are not aware of any such claims at this time. At December 31, 2002, we maintained a workers' compensation plan and a group medical plan for our employees with a deductible amount of $500,000 for each workers' compensation claim and a deductible amount of $225,000 for each group medical claim. In the first quarter of 2003, we adopted a workers' compensation plan with a self-insured retention level of $1.0 million per occurrence and renewed our group medical plan with a deductible amount of $250,000. Lease Accounting - We lease a significant portion of our tractor and trailer fleet using operating leases. Substantially all of the leases have residual value guarantees under which we must insure that the lessor receives a negotiated amount for the equipment at the expiration of the lease. In accordance with SFAS No. 13, Accounting for Leases, the rental expense under these leases is reflected as an operating expense under "revenue equipment rentals and purchased transportation." To the extent the expected value at the lease termination date is lower than the residual value guarantee; we accrue for the difference over the remaining lease term. The estimated values at lease termination involve management judgments. Operating leases are carried off balance sheet in accordance with SFAS No. 13. Page 22 INFLATION AND FUEL COSTS Most of our operating expenses are inflation-sensitive, with inflation generally producing increased costs of operations. During the past three years, the most significant effects of inflation have been on revenue equipment prices and the compensation paid to the drivers. Innovations in equipment technology and comfort have resulted in higher tractor prices, and there has been an industry-wide increase in wages paid to attract and retain qualified drivers. We historically have limited the effects of inflation through increases in freight rates and certain cost control efforts. In addition to inflation, fluctuations in fuel prices can affect profitability. Fuel expense comprises a larger percentage of revenue for us than many other carriers because of our long average length of haul. Most of our contracts with customers contain fuel surcharge provisions. Although we historically have been able to pass through most long-term increases in fuel prices and taxes to customers in the form of surcharges and higher rates, increases usually are not fully recovered. Fuel prices have remained high throughout most of 2000, 2001, and 2002, which has increased our cost of operating. The elevated level of fuel prices has continued into 2003. SEASONALITY In the trucking industry, revenue generally decreases as customers reduce shipments during the winter holiday season and as inclement weather impedes operations. At the same time, operating expenses generally increase, with fuel efficiency declining because of engine idling and weather creating more equipment repairs. For the reasons stated, first quarter net income historically has been lower than net income in each of the other three quarters of the year. Our equipment utilization typically improves substantially between May and October of each year because of the trucking industry's seasonal shortage of equipment on traffic originating in California and our ability to satisfy some of that requirement. The seasonal shortage typically occurs between May and August because California produce carriers' equipment is fully utilized for produce during those months and does not compete for shipments hauled by our dry van operation. During September and October, business increases as a result of increased retail merchandise shipped in anticipation of the holidays. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks from changes in (i) certain commodity prices and (ii) certain interest rates on its debt. COMMODITY PRICE RISK Prices and availability of all petroleum products are subject to political, economic, and market factors that are generally outside our control. Because our operations are dependent upon diesel fuel, significant increases in diesel fuel costs could materially and adversely affect our results of operations and financial condition. Historically, we have been able to recover a portion of long-term fuel price increases from customers in the form of fuel surcharges. The price and availability of diesel fuel can be unpredictable as well as the extent to which fuel surcharges could be collected to offset such increases. For the six months ending June 30, 2003, diesel fuel expenses net of fuel surcharge represented 15.1% of our total operating expenses and 15.6% of freight revenue. At June 30, 2003, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations. We do not trade in derivatives with the objective of earning financial gains on price fluctuations, on a speculative basis, nor do we trade in these instruments when there are no underlying related exposures. INTEREST RATE RISK The Credit Agreement, provided there has been no default, carries a maximum variable interest rate of LIBOR for the corresponding period plus 1.25%. During the first quarter of 2001, we entered into two $10 million notional amount interest rate swap agreements to manage the risk of variability in cash flows associated with floating-rate debt. The swaps expire January 2006 and March 2006. These derivatives are not designated as hedging instruments under SFAS No. 133 and consequently are marked to fair value through earnings, in other expense in the accompanying statement of operations. At June 30, 2003, the fair value of these interest rate swap agreements was a Page 23 liability of $1.7 million. At June 30, 2003, we had no borrowings under the Credit Agreement and therefore no outstanding debt subject to variable rates. An increase or decrease in LIBOR would not impact our pre-tax interest expense. We do not trade in derivatives with the objective of earning financial gains on price fluctuations, on a speculative basis, nor do we trade in these instruments when there are no underlying related exposures. ITEM 4. CONTROLS AND PROCEDURES As required by Rule 13a-15 under the Exchange Act, the Company has carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this report. This evaluation was carried out under the supervision and with the participation of the Company's management, including its Chief Executive Officer and its Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our controls and procedures were effective as of the end of the period covered by this report. There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected or that are reasonably likely to materially affect the Company's internal control over financial reporting. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Company's reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company's Chief Executive Officer as appropriate, to allow timely decisions regarding disclosures. The Company has confidence in its internal controls and procedures. Nevertheless, the Company's management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure procedures and controls or our internal controls will prevent all errors or intentional fraud. An internal control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Page 24 PART II OTHER INFORMATION Item 1. Legal Proceedings. None Items 2 and 3. Not applicable Item 4. Submission of Matters to Vote of Security Holders. The Annual Meeting of Stockholders of Covenant Transport, Inc. was held on May 22, 2003, for the purpose of (a) electing eight directors for one-year terms, (b) ratification of the selection of KPMG LLP as independent public accountants for the Company for 2003, and (c) approving the Company's 2003 Incentive Stock Plan. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934, and there was no solicitation in opposition to management's nominees. Each of management's nominees for director as listed in the Proxy Statement was elected. The voting tabulation on the election of directors was as follows: Shares Voted Shares Voted Shares Voted "FOR" "AGAINST" "ABSTAIN" David R. Parker 13,740,740 - 1,683,710 Michael W. Miller 13,740,680 - 1,683,770 Mark A. Scudder 13,759,596 - 1,664,854 William T. Alt 13,742,180 - 1,682,270 Hugh O. Maclellan, Jr. 13,759,796 - 1,664,654 Robert E. Bosworth 13,759,796 - 1,664,654 Bradley A. Moline 13,869,967 - 1,554,483 Niel B. Nielson 15,234,106 - 190,344
The voting tabulation on the selection of accountants was "FOR" 13,855,505; "AGAINST" 7,830,505; and "ABSTAIN"164. The voting tabulation approving the Company's 2003 Incentive Stock Plan was "FOR" 12,783,028, "AGAINST" 2,115,957, "ABSTAIN" 16,011 and "DELIVERED NOT VOTED" 509,454. Item 5. Not applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Reference Description 3.1 (1) Restated Articles of Incorporation 3.2 (1) Amended Bylaws dated September 27, 1994. 4.1 (1) Restated Articles of Incorporation 4.2 (1) Amended Bylaws dated September 27, 1994. 10.1 # Amendment No. 3 to Credit Agreement dated June 11, 2003, among Covenant Asset Management, Inc., Covenant Transport, Inc., Bank of America, N.A., and each other financial institution which is a party to the Credit Agreement. 10.2 (2) Covenant Transport, Inc. 2003 Incentive Stock Plan, filed as Appendix B. 10.3 # Consolidating Amendment No. 1 to Loan Agreement effective May 2, 2003, among CVTI Receivables Corp., Covenant Transport, Inc., Three Pillars Funding Corporation, and SunTrust Capital Markets, Inc., (formerly SunTrust Equitable Securities Corporation). Page 25 31.1 # Certification of David R. Parker pursuant to Securities Exchange Act Rules 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 # Certification of Joey B. Hogan pursuant to Securities Exchange Act Rules 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 # Certification of David R. Parker and Joey B. Hogan pursuant to Securities Exchange Act Rules 13a-14(b) or 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code. - ----------------------------------------------------------------------------------------------------------------------------------- References: (1) Incorporated by reference from Form S-1, Registration No. 33-82978, effective October 28, 1994. (2) Schedule 14A, filed April 16, 2003. # Filed herewith.
(b) A Form 8-K was filed on April 23, 2003 to report information regarding the Company's press release announcing its first quarter financial and operating results. Page 26 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COVENANT TRANSPORT, INC. Date: August 8, 2003 /s/ Joey B. Hogan ----------------- Joey B. Hogan Senior Vice President and Chief Financial Officer, in his capacity as such and on behalf of the issuer. EX-10 3 amnd3cragt.txt EX 10.1 AMENDMENT NO. 3 TO CREDIT AGREEMENT AMENDMENT NO. 3 TO CREDIT AGREEMENT THIS AMENDMENT NO. 3 TO CREDIT AGREEMENT (this "Amendment"), dated and effective as of the 11th day of June, 2003, is made by and among: COVENANT ASSET MANAGEMENT, INC., a Nevada corporation (the "Borrower"); COVENANT TRANSPORT, INC., a Nevada corporation and the owner of 100% of the issued and outstanding common stock of the Borrower (the "Parent"); BANK OF AMERICA, N.A., a national banking association organized and existing under the laws of the United States, in its capacity as a Lender ("Bank of America"), and each other financial institution which is a party to the Credit Agreement (as defined below) and has executed and delivered a signature page hereto (hereinafter such financial institutions may be referred to individually as a "Lender" or collectively as the "Lenders"); and BANK OF AMERICA, N.A., a national banking association organized and existing under the laws of the United States, in its capacity as agent for the Lenders (in such capacity, the "Agent"). W I T N E S S E T H: WHEREAS, the Borrower, the Parent, the Lenders and the Agent are parties to that certain Credit Agreement dated as of December 13, 2000 (as amended by that certain Amendment No. 1 to Credit Agreement dated as of August 28, 2001 ("Amendment No.1"), and by that certain Amendment No. 2 to Credit Agreement dated as of February 26, 2003 ("Amendment No. 2"), and as further amended, restated, supplemented or otherwise modified, the "Credit Agreement"), pursuant to which the Lenders agreed to make available to the Borrower a revolving credit facility including (i) a letter of credit subfacility for the issuance of standby and commercial letters of credit and (ii) a swing line subfacility; and WHEREAS, the Borrower desires to enter into a proposed trailer transaction that has been negotiated with Transport International Pool ("TIP"), a subsidiary of General Electric Capital Corporation (the "TIP Transaction"), that includes the following: (i) the sale of 2,585 dry van trailers to TIP for approximately $20.5 million and the subsequental rental of such trailers from TIP until physical delivery of such trailers to TIP, (ii) the sale and leaseback of 1,266 dry van trailers to TIP for $15.6 million, and (iii) the lease of 3,600 new trailers from TIP; and the Lenders and Agent desire to permit the TIP Transaction; NOW, THEREFORE, in consideration of the mutual covenants and the fulfillment of the conditions set forth herein, the parties hereto do hereby agree as follows: 1. Definitions. All capitalized terms used herein without definition shall have the meanings set forth in the Credit Agreement. 2. Amendment to the Credit Agreement. (a) Section 10.5(d) of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "(d) Transfers of assets necessary to give effect to merger or consolidation transactions permitted by Section 10.7 or to sale and leaseback transactions permitted by Section 10.13, and" (b) Section 2.1(f)(i)(ii) of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "(ii) no increase in or added Revolving Credit Commitments pursuant to this Section 2.1(f) shall result in the Total Revolving Credit Commitment exceeding $140,000,000," 3. Waiver and Consent. Subject to the terms and conditions hereof, the Required Lenders hereby consent to the following: (a) the Required Lenders hereby waive the requirements of Section 10.13 of the Credit Agreement with respect to the TIP Transaction. This is a one-time waiver only with respect to the TIP Transaction, and shall in no way serve to waive any obligations of the Borrower, other than as expressly set forth above, including but not limited to all future obligations to comply with Section 10.13 and all other provisions of the Credit Agreement. 4. Conditions to Effectiveness. As a condition to the effectiveness of this Amendment the Borrower shall cause the following to be delivered to the Agent: (a) Six (6) original counterparts of this Amendment executed by the Borrower, the Parent, the Guarantors and each Required Lender; 5. Guarantors. Each of the Guarantors has joined in the execution of this Amendment for the purpose of consenting to the amendment and to the waiver and consent contained herein, and reaffirming its guaranty of the Obligations pursuant to the terms of the Parent Guaranty Agreement and the Subsidiary Guaranty Agreement. 6. Representations and Warranties. The Borrower and Parent hereby certify that: (a) The representations and warranties made by Borrower and Parent in Article VIII of the Credit Agreement are true on and as of the date hereof except that (i) the financial statements referred to in Section 8.6 shall be those most recently furnished to the Agent pursuant to Section 9.1, and (ii) the proviso at the end of Section 8.1(b) is no longer applicable, as CTI is now qualified to transact business in the State of Ohio; (b) There has been no material adverse change in the condition, financial or otherwise, of the Borrower, the Parent, or their Subsidiaries, taken as a whole, since the date of the most recent financial reports of the Parent and its Subsidiaries received by the Agent and each Lender under Section 9.1 thereof; and 2 (c) No event has occurred and no condition exists which, upon the consummation of the transaction contemplated hereby, constitutes a Default or an Event of Default on the part of the Borrower or the Parent under the Credit Agreement, the Notes or any other Loan Document either immediately or with the lapse of time or the giving of notice, or both. 7. Entire Agreement. This Amendment, together with Credit Agreement, and other Loan Documents, sets forth the entire understanding and agreement of the parties hereto in relation to the subject matter hereof and supersedes any prior negotiations and agreements among the parties relative to such subject matter. No promise, condition, representation or warranty, express or implied, not herein set forth shall bind any party hereto, and not one of them has relied on any such promise, condition, representation or warranty. Each of the parties hereto acknowledges that, except as otherwise expressly stated in the Credit Agreement, and other Loan Documents, no representations, warranties or commitments, express or implied, have been made by any party to the other. None of the terms or conditions of this Amendment may be changed, modified, waived or canceled orally or otherwise, except as permitted pursuant to Section 13.6 of the Credit Agreement. 8. Full Force and Effect of Agreement. Except as hereby specifically amended, modified or supplemented, and as previously amended, modified and supplemented by Amendment No.1 and by Amendment No. 2, the Credit Agreement and all other Loan Documents are hereby confirmed and ratified in all respects by each party hereto and shall be and remain in full force and effect according to their respective terms. 9. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. 10. Governing Law. This Amendment shall in all respects be governed by, and construed in accordance with, the laws of the State of Tennessee. 11. Enforceability. Should any one or more of the provisions of this Amendment be determined to be illegal or unenforceable as to one or more of the parties hereto, all other provisions nevertheless shall remain effective and binding on the parties hereto. 12. References. All references in any of the Loan Documents to the "Credit Agreement" shall mean the Credit Agreement as amended by this Amendment and Amendment No.1. 13. Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the Borrower, the Parent, the Lenders, the Agent and their respective successors, assigns and legal representatives; provided, however, that neither the Borrower nor the Parent, without the prior consent of the Lenders, may assign any rights, powers, duties or obligations hereunder. 14. Expenses. Borrower agrees to pay to the Agent all reasonable out-of-pocket expenses (including reasonable legal fees and expenses of special counsel to the Agent) incurred or arising in connection with the negotiation and preparation of this Amendment. 3 [Remainder of page intentionally left blank.] 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their duly authorized officers, all as of the day and year first above written. BORROWER: COVENANT ASSET MANAGEMENT, INC. By: /s/ Joey B. Hogan ---------------------------------- Name: Joey B. Hogan -------------------------------- Title: Senior VP/CFO ------------------------------- PARENT: COVENANT TRANSPORT, INC., a Nevada corporation By: /s/ Joey B. Hogan ---------------------------------- Name: Joey B. Hogan -------------------------------- Title: Senior VP/CFO ------------------------------- GUARANTORS: COVENANT TRANSPORT, INC., a Nevada corporation HAROLD IVES TRUCKING CO. TERMINAL TRUCK BROKER, INC. COVENANT.COM, INC. CIP, INC. SOUTHERN REFRIGERATED TRANSPORT, INC. TONY SMITH TRUCKING, INC. COVENANT TRANSPORT, INC., a Tennessee corporation By: /s/ Joey B. Hogan ---------------------------------- Name: Joey B. Hogan -------------------------------- Title: Senior VP/CFO ------------------------------- AMENDMENT NO. 3 TO CREDIT AGREEMENT Signature Page 1 of 2 AGENT: BANK OF AMERICA, N.A. By: /s/ Laura B. Schmuck -------------------------------------------- Name: Laura B. Schmuck ------------------------------------------ Title: Agency Officer, Assistant Vice President ----------------------------------------- LENDERS: BANK OF AMERICA, N.A. By: /s/ John M. Hall -------------------------------------------- Name: John M. Hall ------------------------------------------ Title: Senior Vice President ----------------------------------------- FLEET NATIONAL BANK By: /s/ Christopher E. Leath -------------------------------------------- Name: Christopher Leath ------------------------------------------ Title: Vice President ----------------------------------------- SUNTRUST BANK By: /s/ William H. Crawford -------------------------------------------- Name: William H. Crawford ------------------------------------------ Title: Director ----------------------------------------- BRANCH BANKING AND TRUST COMPANY By: /s/ R. Andrew Beam -------------------------------------------- Name: R. Andrew Beam ------------------------------------------ Title: Senior VP ----------------------------------------- AMENDMENT NO. 3 TO CREDIT AGREEMENT Signature Page 2 of 2 EX-10 4 consamendno1.txt EX 10.3 CONSOLIDATING AMEND NO. 1 TO LOAN AGMT --------------- EXECUTION COPY --------------- CONSOLIDATING AMENDMENT NO. 1 TO LOAN AGREEMENT THIS CONSOLIDATING AMENDMENT NO. 1 TO LOAN AGREEMENT, executed on August 7, 2003 to be effective as of May 2, 2003 (this "Amendment"), is entered into by and among CVTI RECEIVABLES CORP., as borrower ("CVTI"), COVENANT TRANSPORT, INC., as master servicer ("Covenant"), THREE PILLARS FUNDING CORPORATION, as lender ("Three Pillars") and SUNTRUST CAPITAL MARKETS, INC. (formerly SunTrust Equitable Securities Corporation), as administrator ("Administrator"). This Amendment consolidates, amends, and restates in full each of Amendment No. 1 to Loan Agreement, dated December 11, 2001, Amendment No. 3 to Loan Agreement, dated December 10, 2002, and Amendment No. 4 to Loan Agreement, dated May 2, 2003 (collectively the "Prior Amendments"). Capitalized terms used and not otherwise defined herein are used as defined in the Agreement (as defined below and amended hereby). WHEREAS, the parties hereto have entered into that certain Loan Agreement, dated as of December 12, 2000 (the "Agreement"); WHEREAS, the parties previously executed the Prior Amendments to the Agreement to amend certain provisions of the Agreement; WHEREAS, the parties now wish to consolidate, amend, and restate in full each of the Prior Amendments; NOW THEREFORE, in consideration of the premises and the other mutual covenants contained herein, the parties hereto agree as follows: SECTION 1. Amendments to the Agreement. The Agreement is hereby amended as follows: (a) The definition of "Scheduled Commitment Termination Date" in Section 1.1 of the Agreement was amended and restated in Amendment No. 1 to Loan Agreement to be extended to December 10, 2002, and is hereby amended and restated, effective December 10, 2002, to read in its entirety as follows: Scheduled Commitment Termination Date: December 9, 2003. (b) The definition of "Stated Maturity Date" in Section 1.1 of the Agreement is hereby amended and restated, effective December 10, 2002, to read in its entirety as follows: Stated Maturity Date: December 9, 2003; provided, however, that such date may be accelerated pursuant to Section 10.3. (c) Schedule V to the Agreement is hereby replaced in its entirety, effective December 10, 2002, with Schedule V hereto. (d) Section 9.1(e)(v) of the Agreement is hereby amended and restated in its entirety, effective May 2, 2003, to read as follows: (v) Collateral Review. As soon as possible, and in any event within sixty (60) days after the end of each calendar year, a report of the independent certified public accountants of Covenant Nevada (each such report, a "Collateral Review") which satisfies the requirements set forth on Schedule V; provided, however, upon the request of the Administrator, a Collateral Review shall be delivered on a semi-annual basis. (e) Section II(d) of Schedule V of the Agreement is hereby amended and restated in its entirety, effective May 2, 2003, to read as follows: (d) the reports shall be delivered within sixty (60) days after the end of each calendar year following the Closing Date and at such other times as the Administrator may request pursuant to Section 9.1(e)(v) of the Agreement; SECTION 2. Effect of Amendment. Except as modified and expressly amended by this Amendment, the Agreement is in all respects ratified and confirmed, and all the terms, provisions and conditions thereof shall be and remain in full force and effect. On and after the effective date hereof, all references in the Agreement to "this Agreement," "hereto," "hereof," "hereunder," or words of like import refer to the Agreement as amended by this Amendment. SECTION 3. Binding Effect. This Amendment shall be binding upon and inure to the benefit of the parties to the Agreement and their successors and permitted assigns. This Amendment shall be effective as of May 2, 2003, or such earlier dates as provided for herein, upon the execution and delivery of a counterpart hereto by each of the parties hereto (such time being the "Effective Time"). Each of the Prior Amendments shall have no force or effect from and after the Effective Time. SECTION 4. Governing Law. This Amendment will be governed by and construed in accordance with the laws of the State of New York. SECTION 5. Execution in Counterparts; Severability. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original, and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page by facsimile shall be effective as delivery of a manually executed counterpart of this Amendment. In case any provision in or obligation under this Amendment shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the -2- remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. [Remainder of Page Intentionally Left Blank] -3- IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. THREE PILLARS: THREE PILLARS FUNDING CORPORATION, as Lender By: /s/ Evelyn Echevarria ------------------------------------------ Name: Evelyn Echevarria ---------------------------------------- Title: Vice President --------------------------------------- THE BORROWER: CVTI RECEIVABLES CORP. By: /s/ Joey B. Hogan ------------------------------------------ Name: Joey B. Hogan ---------------------------------------- Title: Treasurer and Chief Financial Officer --------------------------------------- THE ADMINISTRATOR: SUNTRUST CAPITAL MARKETS, INC. By: /s/ James R. Bennison ------------------------------------------ Name: James R. Bennison ---------------------------------------- Title: Managing Director --------------------------------------- THE MASTER SERVICER: COVENANT TRANSPORT, INC., a Nevada holding corporation By: /s/ Joey B. Hogan ------------------------------------------ Name: Joey B. Hogan ---------------------------------------- Title: Executive Vice President and Chief --------------------------------------- Financial Officer --------------------------------------- Schedule V Collateral Review Requirements I. Initial Report of Independent Accountants (a) the report shall be titled the "Initial Report of Independent Accountants on Agreed Upon Procedures"; (b) the report shall be addressed to Covenant Transport, Inc., as Master Servicer and to SunTrust Equitable Securities Corporation as Administrator: Tim Mueller SunTrust Equitable Securities Corp. Mail Code 3950 303 Peachtree Street, 24th Floor Atlanta, GA 30308 (c) the agreed upon procedures shall be performed by PricewaterhouseCoopers LLP as engaged by the Master Servicer; (d) the report shall be delivered on April 15, 2001; and (e) the agreed upon procedures shall entail the selection of a non-systematic sample of 100 invoices from the receivable schedule delivered by Borrower pursuant to the initial funding performance of the following: (i) agree invoice information including: customer name and receivables balance to information on the report generated by the receivable servicing system; (ii) determine that credit terms are indicated on the invoice and do not exceed 30 days; and (iii)determine that the Originators' computer records have been marked or stamped indicating that the Receivable has been sold to CVTI Receivables Corp. II. Reports of Independent Accountants (a) the report shall be titled "Report of Independent Accountants on Agreed Upon Procedures"; (b) the report shall be addressed as detailed in item I above; (c) the agreed upon procedures shall be performed by PricewaterhouseCoopers LLP; (d) the reports shall be delivered within 60 days after each semi-annual period following this transaction's Closing Date; and (e) the agreed upon procedures shall consist of the following: (i) agree the data on lines 1 through 6 and 8 through 13 from three (3) non- systematically selected Monthly Reports as shown in Exhibit C for the most recent semi-annual period to the information contained in system reports and accounting records used in the compilation of those Monthly Reports; (ii) request personnel responsible for the credit and/or finance function at Covenant Transport, Inc. to (a) identify whether or not any customers with balances included as Receivables are in bankruptcy; and (b) provide a list of the names of such customers. For any such identified customers, compare the balance of such Receivables contained in the system reports used in the compilation of those Monthly Reports with amounts contained in lines 16 and 17 of the Monthly Reports in item (i) above and report any differences; (iii)verify the mathematical accuracy of the Accounts Receivable information and Aging Report in the Monthly Reports in item (i) above; (iv) non-systematically select a sample of 100 invoices from the receivable schedule delivered by Borrower pursuant to the subsequent fundings during the most recent semi-annual period and perform the following: (a) agree invoice information including: customer name and receivables balance to information on a report generated by the receivables servicing system and agree that except for those invoices processed through Electronic Data Interchange (EDI) terms are as indicated on the invoice and do not exceed 30 days; (b) determine that the Originators' computer records have been marked or stamped to indicate that the Receivable has been sold to CVTI Receivables Corp.; (c) for invoices for which payments have been received verify that the Collection was sent by wire transfer to a Collection Account or by check to a Lock-Box and deposited into a Collection Account. EX-31 5 parkercert.txt EX 31.1 PARKER CERTIFICATION CERTIFICATIONS I, David R. Parker, certify that: 1. I have reviewed this quarterly report on Form 10-Q for the quarterly period ended June 30, 2003, of Covenant Transport, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures for the registrant and we have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and c. disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 8, 2003 /s/ David R. Parker -------------------------------------------- David R. Parker Chief Executive Officer EX-31 6 hogancert.txt EX 31.2 HOGAN CERTIFICATION CERTIFICATION I, Joey B. Hogan, certify that: 1. I have reviewed this quarterly report on Form 10-Q for the quarterly period ended June 30, 2003, of Covenant Transport, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures for the registrant and we have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and c. disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 8, 2003 /s/ Joey B. Hogan -------------------------------------------- Joey B. Hogan Chief Financial Officer EX-32 7 parkerhogancertif.txt EX 32 PARKER AND HOGAN CERTIFICATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Covenant Transport, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best knowledge of the undersigned: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906 has been provided to Covenant Transport, Inc. and will be retained by Covenant Transport, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. Date: August 8, 2003 /s/ David R. Parker ------------------------------------ David R. Parker Chief Executive Officer /s/ Joey B. Hogan ------------------------------------ Joey B. Hogan Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----