SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549-1004 ----------------------------------------------------- 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 March 31, 1997 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-24960 Covenant Transport, Inc. (Exact name of registrant as specified in its charter) Nevada 88-0320154 (State or other jurisdiction of (I.R.S. employer identification number) incorporation or organization) 400 Birmingham Hwy. Chattanooga, TN 37419 (423) 821-0121 (Address, including zip code, and telephone number, including area code, of registrant's principal executive office) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. YES X NO ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date (April 15, 1997) Class A Common Stock, $.01 par value: 11,000,000 shares Class B Common Stock, $.01 par value: 2,350,000 shares Exhibit Index is on Page 11 Page 1 of 12
PART I FINANCIAL INFORMATION PAGE NUMBER Item 1. Financial statements Condensed consolidated balance sheets as of December 31, 1996 and March 31, 1997 (unaudited) 3 Condensed consolidated statements of operations for the three months ended March 31, 1996 and 1997 (unaudited) 4 Condensed consolidated statements of cash flows for the three months ended March 31, 1996 and 1997 (unaudited) 5 Notes to condensed consolidated financial statements (unaudited) 6 Item 2. Management's discussion and analysis of financial condition and results of operations 7 PART II OTHER INFORMATION PAGE NUMBER Item 1. Legal proceedings 11 Items 2., 3., 4., and 5. Not applicable Item 6. Exhibits and reports on Form 8-K 11 Page 2 of 12
<TABLE> COVENANT TRANSPORT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS <CAPTION> ASSETS December 31, March 31, 1996 1997 ------------------------------------- (unaudited) <S> <C> <C> Current assets: Cash and cash equivalents $ 3,491,543 $ 4,264,789 Accounts receivable, net of allowance of $500,000 in 1996 and $550,000 in 1997 29,955,577 34,869,339 Drivers advances and other receivables 3,230,857 1,747,811 Tire and parts inventory 880,086 988,247 Prepaid expenses 3,781,003 6,098,856 Deferred income taxes 248,000 203,000 --------------------------------------- Total current assets 41,587,066 48,172,042 Property and equipment, at cost 183,136,067 197,344,869 Less accumulated depreciation and amortization 38,752,116 44,281,078 --------------------------------------- Net property and equipment 144,383,951 153,063,791 Other 1,177,158 1,169,800 --------------------------------------- Total assets $ 187,148,175 $ 202,405,633 ======================================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 50,000 $ 50,000 Accounts payable 3,892,208 3,330,590 Accrued expenses 4,480,151 6,249,969 --------------------------------------- Total current liabilities 8,422,359 9,630,559 Long-term debt, less current maturities 83,110,000 94,110,000 Deferred income taxes 13,886,000 15,097,000 --------------------------------------- Total liabilities 105,418,359 118,837,559 Stockholders' equity: Class A common stock, $.01 par value; 11,000,000 shares issued and outstanding 110,000 110,000 Class B common stock, $.01 par value; 2,350,000 shares issued and outstanding 23,500 23,500 Additional paid-in-capital 50,469,596 50,469,596 Retained earnings 31,126,720 32,964,978 --------------------------------------- Total stockholders' equity 81,729,816 83,568,074 --------------------------------------- Total liabilities and stockholders' equity $ 187,148,175 $ 202,405,633 ======================================= </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. Page 3 of 12
<TABLE> COVENANT TRANSPORT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1996 AND 1997 (unaudited) <CAPTION> 1996 1997 ---------------------------- <S> <C> <C> Revenue $ 49,457,827 $ 62,587,858 Operating expenses: Salaries, wages, and related expenses 23,525,604 27,685,230 Fuel, oil, and road expenses 11,468,037 15,559,625 Revenue equipment rentals and purchased transportation 231,020 427,388 Repairs 1,054,115 1,267,433 Operating taxes and licenses 1,522,104 1,533,512 Insurance 1,355,062 1,785,908 General supplies and expenses 3,039,812 3,690,990 Depreciation and amortization, including gain on disposition of equipment 5,139,593 6,356,027 ---------------------------- Total operating expenses 47,335,347 58,306,113 ---------------------------- Operating income 2,122,480 4,281,745 Interest expense 1,368,160 1,367,487 ---------------------------- Income before income taxes 754,320 2,914,258 Income tax expense 272,000 1,076,000 ---------------------------- Net income $ 482,320 $ 1,838,258 ============================ Earnings per share: Net income $ 0.04 $ 0.14 ============================ Weighted average shares outstanding 13,350,000 13,350,000 ============================ </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. Page 4 of 12
<TABLE> COVENANT TRANSPORT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 1996 AND 1997 (unaudited) <CAPTION> 1996 1997 ---------------------------- <S> <C> <C> Cash flows from operating activities: Net income $ 482,320 $ 1,838,258 Adjustments to reconcile net income to net cash provided by operating activities: Provision for losses on receivables 101,511 50,000 Depreciation and amortization 5,118,965 6,360,277 Deferred income taxes (878,000) 1,256,000 Loss (gain) on disposition of property and equipment 20,629 (4,250) Changes in operating assets and liabilities: Receivables and advances 8,438,642 (3,521,503) Prepaid expenses (2,312,821) (2,317,853) Tire and parts inventory 35,395 (108,161) Accounts payable and accrued expenses 4,075,812 1,208,200 ---------------------------- Net cash flows from operating activities 15,082,453 4,760,968 Cash flows from investing activities: Acquisition of property and equipment (14,066,503) (16,288,112) Proceeds from disposition of property and equipment 446,070 1,300,390 ---------------------------- Net cash flows from investing activities (13,620,433) (14,987,722) Cash flows from financing activities: Proceeds from issuance of long-term debt -- 11,000,000 Repayments of long-term debt (1,000,000) -- Deferred debt issuance cost (25,271) -- ---------------------------- Net cash flows from financing activities (1,025,271) 11,000,000 ---------------------------- Net change in cash and cash equivalents 436,749 773,246 Cash and cash equivalents at beginning of period 461,288 3,491,543 ---------------------------- Cash and cash equivalents at end of period $ 898,037 $ 4,264,789 ============================ </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. Page 5 of 12
COVENANT TRANSPORT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 1. Basis of Presentation The condensed consolidated financial statements include the accounts of Covenant Transport, Inc., a Nevada holding company, and its wholly-owned subsidiaries (the Company). All significant intercompany balances and transactions have been eliminated in consolidation. The financial statements have been prepared, without audit, in accordance with generally accepted accounting principles, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the accompanying financial statements include all adjustments which are necessary for a fair presentation of the results for the interim periods presented, such adjustments being of a normal recurring nature. Certain information and footnote disclosures have been condensed or omitted pursuant to such rules and regulations. The December 31, 1996 Condensed Consolidated Balance Sheet was derived from the audited balance sheet of the Company for the year then ended. It is suggested that these condensed consolidated financial statements and notes thereto be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 1996. Results of operations in interim periods are not necessarily indicative of results to be expected for a full year. - ------------------------------------ FORWARD LOOKING STATEMENTS This document contains forward-looking statements in paragraphs that are marked with an asterisk. Statements by the Company in press releases, public filings, and stockholder reports, as well as oral public statements by Company representatives, also may contain certain forward looking information. Forward-looking information is subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Without limitation, these risks and uncertainties include economic factors such as recessions, downturns in customers' business cycles, surplus inventories, inflation, fuel price increases, and higher interest rates; the resale value of the Company's used revenue equipment; the availability and compensation of qualified drivers; and competition from trucking, rail, and intermodal competitors. Readers should review and consider the various disclosures made by the Company in its press releases, stockholder reports, and public filings, as well as the factors explained in greater detail in the Company's annual report on Form 10-K. Page 6 of 12
COVENANT TRANSPORT, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS <TABLE> The following table sets forth the percentage relationship of certain items to revenue for the three months ended March 31, 1996 and 1997: <CAPTION> 1996 1997 ---------------- <S> <C> <C> Revenue 100.0% 100.0% Operating expenses: Salaries, wages, and related expenses 47.6 44.2 Fuel, oil, and road expenses 23.2 24.9 Revenue equipment rentals and purchased transportation 0.5 0.7 Repairs 2.1 2.0 Operating taxes and licenses 3.1 2.5 Insurance 2.7 2.8 General supplies and expenses 6.1 5.9 Depreciation and amortization, including gain on disposition of equiment 10.4 10.2 ---------------- Total operating expenses 95.7 93.2 ---------------- Operating income 4.3 6.8 Interest expense 2.8 2.2 ---------------- Income before income taxes 1.5 4.6 Income tax expense 0.5 1.7 ---------------- Net income 1.0% 2.9% ================ </TABLE> COMPARISON OF THREE MONTHS ENDED MARCH 31, 1997 TO THREE MONTHS ENDED MARCH 31, 1996 Revenue increased $13.1 million (26.5%) to $62.6 million in the 1997 period from $49.5 million in the 1996 period. The revenue increase was primarily generated by a 24.6% increase in weighted average tractors, to 1,732 during the 1997 period from 1,390 during the 1996 period, as the Company expanded to meet demand from new customers and higher volume from existing customers. The Company's average revenue per loaded mile also increased to approximately $1.11 during the 1997 period from $1.08 during the 1996 period. The increase was attributable to per-mile rate increases negotiated by the Company and approximately $700,000 in fuel surcharge revenue during the 1997 period. In addition, several storms during the 1996 period forced the Company to use secondary customers paying lower rates. The Company's revenue per loaded mile in the 1997 period net of the fuel surcharges was $1.10. Average miles per tractor decreased to 34,389 in the 1997 period from 35,067 in the 1996 period as the 1997 period had one less day and the Company had tractors Page 7 of 12
without drivers during January and late March 1997. Deadhead improved to 5.2% of total miles in the 1997 period from 5.6% in the 1996 period. Salaries, wages, and related expenses increased $4.2 million (17.7%) to $27.7 million in the 1997 period from $23.5 million in the 1996 period. As a percentage of revenue, salaries, wages and related expenses decreased to 44.2% of revenue in the 1997 period from 47.6% in the 1996 period. Driver wages as a percentage of revenue decreased to 32.5% in the 1997 period from 34.0% in the 1996 period as the 1997 period had very little adverse weather and therefore, lower layover expenses. The Company has announced a pay increase for drivers of approximately $0.02 per mile that is effective May 15, 1997. The pay increase is anticipated to increase overall costs for driver wages and benefits by approximately 1.5% of revenue. Non-driving employee payroll expense decreased to 5.2% in the 1997 period from 5.5% in the 1996 period as the Company reduced the number of non-driving employees per tractor. Employee benefits, consisting primarily of health insurance, workers' compensation costs, and employer paid taxes, decreased to 6.6% of revenue in the 1997 period from 8.1% in the 1996 period as the Company did not contract with the leasing company utilized during the 1996 period and obtained more favorable rates for health insurance during the 1997 period. (*) Fuel, oil, and road expenses increased $4.1 million (35.7%) to $15.6 million in the 1997 period from $11.5 million in the 1996 period. As a percentage of revenue, fuel, oil and road expenses increased to 24.9% of revenue in the 1997 period from 23.2% in the 1996 period primarily as a result of higher per gallon fuel costs during the 1997 period. Fuel surcharges totaled $700,000 during the 1997 period and were implemented with a majority of the Company's customers. Revenue equipment rentals and purchased transportation increased $196,000 (85.0%) to $427,000 in the 1997 period from $231,000 in the 1996 period. As a percentage of revenue, revenue equipment rentals and purchased transportation increased to 0.7% in the 1997 period from 0.5% in the 1996 period as operating leases for revenue equipment and the Company initiated the use of independent contractor suppliers of tractors during the 1997 period. Repairs increased $213,000 (20.2%) to $1.3 million in the 1997 period from $1.1 million in the 1996 period. As a percentage of revenue, repairs remained essentially constant at 2.0% in the 1997 period and 2.1% in the 1996 period. Operating taxes and licenses remained virtually unchanged between the periods. As a percent of revenue, operating taxes and licenses decreased to 2.5% in the 1997 period from 3.1% in the 1996 period. The expense as a percent of revenue returned to normalized levels after unusually high expenses in the first quarter of 1996. For the past three years, operating taxes and licenses have averaged 2.6%. Insurance increased $431,000 (31.8%) to $1.8 million in the 1997 period from $1.4 million in the 1996 period. As a percentage of revenue, insurance increased to 2.9% of revenue in the 1997 period from 2.7% in the 1996 period as a larger number of accidents resulted in additional deductibles being paid. - ------------------- (*) May contain "forward-looking" statements. Page 8 of 12
General supplies and expenses, consisting primarily of driver recruiting, communications expenses, and facilities expenses, increased $651,000 (21.4%) to $3.7 million in the 1997 period from $3.0 million in the 1996 period. As a percentage of revenue, general supplies and expenses decreased to 5.9% of revenue in the 1997 period from 6.1% in the 1996 period. The 1997 decrease is primarily related to the fixed nature of a portion of these costs as well as the increased revenue per tractor more than offsetting higher facilities expenses related to the Company's new headquarters and terminal in Chattanooga, Tennessee. Depreciation and amortization, consisting primarily of depreciation of revenue equipment, increased $1.2 million (23.7%) to $6.4 million in the 1997 period from $5.1 million in the 1996 period. As a percentage of revenue, depreciation and amortization decreased to 10.2% of revenue in the 1997 period from 10.4% in the 1996 period as a result of a greater percentage of the Company's fleet being obtained under operating leases and independent contractor agreements, as well as an increase in revenue per tractor. As a result of the foregoing, the Company's operating ratio was 93.2% in the 1997 period versus 95.7% in the 1996 period. Interest expense remained virtually unchanged for the 1997 period as compared to the 1996 period. Interest expense decreased to 2.2% of revenue in the 1997 period from 2.8% in the 1996 period, as higher average debt balances ($85.4 million in the 1997 period compared with $79.2 million in the 1996 period) were offset by lower average interest rates (6.4% in the 1997 period compared with 6.9% in the 1996 period) and higher revenue in 1997. The Company's effective tax rate was 36.9% in the 1997 period compared with 36.1% in the 1996 period reflecting increased state income taxes in the 1997 period. The effective tax rate is expected to average approximately 37.0% for the remainder of 1997. (*) Primarily as a result of the factors described above, net income increased to $1.8 million in the 1997 period (2.9% of revenue) from $482,000 in the 1996 period (1.0% of revenue). LIQUIDITY AND CAPITAL RESOURCES The growth of the Company's business has required significant investments in new revenue equipment. The Company historically has financed its revenue equipment requirements with borrowings under a line of credit, senior notes, cash flows from operations, and operating leases. The Company's primary sources of liquidity at March 31, 1997 were funds provided by operations, borrowings under its credit agreement (which was increased from $70 million to $85 million during the quarter), funds provided from its $25 million in senior notes, and an operating lease covering its new headquarters and terminal facility. The Company's primary source of cash flow from operations is net income increased by depreciation and deferred income taxes. Historically, financing increases in receivables and advances associated with the Company's revenue growth has been a significant use of cash provided by operations. In - ------------------- (*) May contain "forward-looking" statements. Page 9 of 12
the 1996 period, however, receivables and advances decreased due to collection of an other receivable and rectifying an accounts receivable imbalance that had occurred at the end of 1995 resulting in $10.5 million in operating cash flows. Management believes that cash flows in the 1997 period are more representative of a normalized first quarter. Net cash provided by operating activities was $4.8 million in the 1997 period and $15.1 million in the 1996 period. (*) Net cash used in investing activities was $15.0 million in the 1997 period and $13.6 million in the 1996 period. These investments were primarily to acquire additional revenue equipment as the Company expanded its operations. The Company expects capital expenditures (primarily for revenue equipment), net of trade-ins, to be approximately $50.0 million in 1997. (*) Net cash provided by financing activities of $11 million in 1997 was related to borrowings under a credit agreement. This compared with net cash used by financing activities of $1.0 million in 1996 as the Company made repayments under the credit agreement. At March 31, 1997, the Company had outstanding debt of $94.2 million, substantially all of which related to draws under a its credit agreement and $25 million in senior notes. Interest rates on this debt ranged from 6.1% to 7.4% at March 31, 1997. Effective March 31, 1997, the Company renewed its credit agreement and increased its limit to $85 million in order to provide for future needs. At March 31, 1997, $69 million was drawn under the Company's credit agreement. The credit agreement is with a syndicate of banks and provides for outstanding borrowings to bear interest at the London Interbank Offered Rate (LIBOR) plus an applicable margin between 0.375% and 1.0%. For the quarter ended March 31, 1997, the applicable margin was 0.5%. During February and May 1995, the Company entered into interest rate swap agreements that fixed interest rates for two years on $28 million and $10 million of the borrowings under the credit agreement at 6.9% and 5.8%, respectively, plus the applicable margin. An additional $25 million swap agreement was completed in 1996 to fix interest rates from February 1997 until February 1999 at 5.9% plus the applicable margin. All remaining borrowings under the credit agreement are at one, two, or three month LIBOR plus the applicable margin. The Company also has outstanding $25 million in senior notes due October 2005 that were placed with an insurance company. The notes bear interest at 7.39%, payable semi-annually. Principal payments are due in equal annual installments beginning in October 2001. In December 1996, the Company took possession of its new headquarters and terminal facility. The facility was constructed under a "build-to-suit" operating lease and is expected to increase the Company's annual facilities costs by approximately $750,000. The credit agreement, senior notes, and headquarters and terminal lease agreement contain certain restrictions and covenants relating to, among other things, dividends, tangible net worth, cash flow, acquisitions and dispositions, and total indebtedness. All of these agreements are cross-defaulted. The Company was in compliance with the agreements at March 31, 1997. - ------------------- (*) May contain "forward-looking" statements. Page 10 of 12
COVENANT TRANSPORT, INC. AND SUBSIDIARIES PART II OTHER INFORMATION Item 1. Legal Proceedings No reportable events or material changes occurred during the quarter for which this report is filed. Items 2, 3, 4 and 5. Not applicable Item 6. Exhibits and reports on Form 8-K. (a) Exhibits Exhibit Number Description 10.1 Credit Agreement dated January 17, 1995, among Covenant Transport, Inc., a Tennessee corporation, ABN-AMRO Bank N.V., as agent, and certain other banks, filed as Exhibit 10 to the Company's Form 10-Q for the quarter ended March 31, 1995, and incorporated herein by reference. 10.2 Lease dated January 1, 1990, between David R. and Jacqueline F. Parker and Covenant Transport, Inc, a Tennessee corporation, with respect to the Chattanooga, Tennessee headquarters, filed as Exhibit 10.5 to the Company's Registra- tion Statement on Form S-1, Registration No. 33-82978, effective October 28, 1994, and incorporated herein by reference. 10.3 Lease dated June 1, 1994, between David R. and Jacqueline F. Parker and Covenant Transport, Inc, a Tennessee corporation, with respect to terminal facility in Greer, South Carolina, filed as Exhibit 10.6 to the Company's Registration Statement on Form S-1, Registration No. 33-82978, effective October 28, 1994, and incorporated herein by reference. 10.4 Incentive Stock Plan, filed as Exhibit 10.9 to the Company's Registration Statement on Form S-1, Registration No. 33-82978, effective October 28, 1994, and incorporated herein by reference. 10.5 401(k) Plan, filed as Exhibit 10.10 to the Company's Registra- tion Statement on Form S-1, Registration No. 33-82978, effective October 28, 1994, and incorporated herein by reference. 10.6 Note Purchase Agreement dated October 15, 1995, among Covenant Transport, Inc, a Tennessee corporation and CIG & Co., filed as Exhibit 10.12 to the Company's Form 10-K for the year ended December 31, 1995, and incorporated herein by reference. 10.7 First Amendment to Credit Agreement and Waiver dated October 15, 1995, filed as Exhibit 10.13 to the Company's Form 10-K for the year ended December 31, 1995, and incorporated herein by reference. 10.8 Participation Agreement dated March 29, 1996, among Covenant Transport, Inc, a Tennessee corporation, Lease Plan USA, Inc., and ABN-AMRO Bank, N.V., Atlanta Agency, filed as Exhibit 10.14 to the Company's Form 10-Q for the period ended March 31, 1996, and incorporated herein by reference. 10.9 Second Amendment to Credit Agreement and Waiver dated April 12, 1996, filed as Exhibit 10.15 to the Company's Form 10-Q for the period ended March 31, 1996, and incorporated herein by reference. 10.10 First Amendment to Note Purchase Agreement and Waiver dated April 1, 1996, filed as Exhibit 10.16 to the Company's Form 10-Q for the period ended March 31, 1996, and incorporated herein by reference. 10.11* Third Amendment to Credit Agreement and Waiver dated March 31, 1997. 10.12* Waiver to Note Purchase Agreement dated March 31, 1997. 11* Statement re: Computation of Per Share Earnings. 21* Subsidiaries of the Registrant. 27* Financial data schedule. - ------------------------------------ * Filed herewith. (b) No reports on Form 8 - K have been filed during the quarter for which this report is filed. Page 11 of 12
SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COVENANT TRANSPORT, INC. Date: April 18, 1997 /s/ Bradley A. Moline -------------- -------------------- Bradley A. Moline Treasurer and Chief Financial Officer Page 12 of 12