Covenant Form 10-K
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
[X]
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For
the fiscal year ended December 31, 2005
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[
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For
the transition period
from
to
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Commission
file number 0-24960
COVENANT
TRANSPORT, INC.
(Exact
name of registrant as specified in its charter)
Nevada
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88-0320154
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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400
Birmingham Hwy.
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Chattanooga,
TN
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37419
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area code:
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423-821-1212
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Securities
registered pursuant to Section 12(b) of the Act:
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None
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Securities
registered pursuant to Section 12(g) of the Act:
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$0.01
Par Value Class A Common Stock
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(Title of class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities
Act.
[X]
Yes [ ] No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.
[X]
Yes
[ ] No
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.
[X]
Yes
[ ] No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [X]
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule
12b-2 of the Act).
[X]
Yes
[ ] No
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
[
] Yes [X] No
The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2005, was approximately $123.4 million
(based upon the $13.20 per share closing price on that date as reported by
Nasdaq). In making this calculation the registrant has assumed, without
admitting for any purpose, that all executive officers, directors, and
affiliated holders of more than 10% of a class of outstanding common stock,
and
no other persons, are affiliates.
As
of
March 1, 2006, the registrant had 11,643,008 shares of Class A common stock
and 2,350,000 shares of Class B common stock outstanding.
Materials
from the registrant's definitive proxy statement for the 2006 annual meeting
of
stockholders to be held on May 23, 2006 have been incorporated by reference
into
Part III of this Form 10-K.
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Part
I
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Item
1.
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Business
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Item
1A.
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Risk
Factors
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Item
1B.
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Unresolved
Staff Comments
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Item
2.
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Properties
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Item
3.
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Legal
Proceedings
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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Part
II
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Item
5.
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Market
for Registrant's Common Equity, Related Stockholder Matters and
Issuer
Purchases of Equity Securities
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Item
6.
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Selected
Financial and Operating Data
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Item
7.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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Item
7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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Item
8.
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Financial
Statements and Supplementary Data
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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Item
9A.
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Controls
and Procedures
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Item
9B.
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Other
Information
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Part
III
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Item
10.
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Directors
and Executive Officers of the Registrant
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Item
11.
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Executive
Compensation
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management
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Item
13.
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Certain
Relationships and Related Transactions
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Item
14.
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Principal
Accounting Fees and Services
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Part
IV
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Item
15.
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Exhibits,
Financial Statement Schedules
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Signatures
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Reports
of Independent Registered Public Accounting Firm
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Financial
Data
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Consolidated
Balance Sheets
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Consolidated
Statements of Operations
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Consolidated
Statements of Stockholders' Equity and Comprehensive Income
(Loss)
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Consolidated
Statements of Cash Flows
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Notes
to Consolidated Financial Statements
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PART
I
This
Annual Report contains certain statements that may be considered forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933,
as
amended and Section 21E of the Securities Exchange Act of 1934, as amended.
Such
statements may be identified by their use of terms or phrases such as "expects,"
"estimates," "projects," "believes," "anticipates," "intends," and similar
terms
and phrases. Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified, which could
cause future events and actual results to differ materially from those set
forth
in, contemplated by, or underlying the forward-looking statements. Readers
should review and consider the factors discussed in Item 1A. Risk Factors of
this Annual Report on Form 10-K, along with various disclosures in our press
releases, stockholder reports, and other filings with the Securities and
Exchange Commission. We disclaim any obligation to update or revise any
forward-looking statements to reflect actual results or changes in the factors
affecting the forward-looking information.
References
in this Annual Report to "we," "us," "our," or the "Company" or similar terms
refer to Covenant Transport, Inc. and its
subsidiaries.
General
We
are
one of the ten largest truckload carriers in the United States measured by
revenue, according to Transport
Topics,
a
publication of the American Trucking Associations. We focus on targeted markets
where we believe our service standards can provide a competitive advantage.
We
are a major carrier for traditional truckload customers such as manufacturers
and retailers, as well as for transportation companies such as freight
forwarders, less-than-truckload carriers, and third-party logistics providers
that require a high level of service to support their businesses.
We
were
founded as a provider of expedited long-haul freight transportation, primarily
using two-person driver teams in transcontinental lanes. From our inception
in
1986 through the late 1990's, we focused primarily on Expedited team service.
During this time, approximately 60% to 70% of our tractors were operated by
teams, and our solo-driver operations primarily supported certain customer
needs
and provided a driver pool from which to build teams. Our operations were
characterized by very long lengths of haul, intense asset utilization that
generated significant mileage and revenue per truck, and a high level of
customer service.
Beginning
in the late 1990's and continuing into 2001, a combination of customer demand
for additional services, changes in freight distribution patterns, a desire
to
reduce exposure to the more cyclical and seasonal long-haul markets, and a
desire for additional growth markets convinced us to offer additional services.
Through our acquisitions of Bud Meyer Truck Line and Southern Refrigerated
Transport, we entered the temperature-controlled market. Through our
acquisitions of Harold Ives Trucking and Con-Way Truckload Services, we
developed a significant solo-driver operation. In addition, over the past
several years, we internally developed the capacity to provide dedicated fleet
services.
The
following charts demonstrate the development of our business into multiple
transportation services.
During
2005, we began the formal realignment of our business into four distinct service
offerings: Expedited team, Refrigerated, Dedicated, and Regional
solo-driver.
We
intend
to manage and operate each service offering separately, each under the authority
of a general manager. We have hired the general managers of the Expedited team,
Refrigerated, and Regional solo-driver service offerings, and we are evaluating
candidates for the Dedicated service offering. In addition, within the Regional
solo-driver service offering, we expect to divide the business into several
service centers, each under separate management as well.
We
believe the realignment of our business will offer a number of opportunities,
as
well as challenges. Some of the more significant opportunities we envision
include:
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Greater
emphasis and ownership of driver management leading to better
retention;
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Better
and faster information about our business, together with fast-acting
smaller service offerings;
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More
responsiveness to customers;
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More
attractive lanes for drivers; and
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More
emphasis on lanes with most of the freight that travels by
truck.
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Some
of
the more significant challenges we may face include:
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Developing
depth at the General Manager level;
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Becoming
accustomed to distributed decision making;
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Coordination
of loads, rates, bids, customers, and drivers among
regions;
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Headcount
while regions develop and over-the-road remains; and
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Increasing
the percentage of transaction-intense freight that requires more
frequent
communications, customer appointments, equipment turns, driver home
time,
and billing.
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The
realignment has involved significant changes, including selecting and installing
new leadership over each service offering, reassigning personnel, allocating
tractors and trailers to each service offering, migrating operations to
preferred traffic lanes for each service offering, acquainting drivers and
customers to new lanes, contacts, and procedures, and developing systems to
support, measure, and hold accountable each service offering. Although we have
made significant progress, this process will continue at least into
2007.
Initial
results of the business realignment on each service offering include the
following:
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Expedited
team service. Focused attention on teams has produced a substantial
increase in average length of haul, average miles per tractor, and
average
freight revenue per tractor. As a result of greater productivity,
the
previous decline in team-driven tractors has
stabilized.
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Refrigerated
service. Prioritizing certain lanes and the allocation of teams to
this
service offering increased average length of haul, average miles
per
tractor, and average revenue per tractor. In addition, we are increasing
the allocation of tractors to this service offering.
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Dedicated
service. There has been essentially no change in Dedicated service
because
of the longer contract duration. In addition, we are continuing to
evaluate individual candidates to manage this business.
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Regional
solo-driver service. This service offering is our largest and is
in the
beginning stages of significant changes in its operating lanes and
territories, freight mix, personnel, and policies and procedures.
Over the
long term we expect these changes to result in a shorter average
length of
haul and an increase in average freight revenue per tractor. However,
interim results may fluctuate substantially. We expect to allocate
trucks
to other service offerings until the operating results of this service
offering improve and become more
consistent.
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Our
business realignment presents numerous challenges and may result in volatile
financial performance or periods of unprofitable results. We believe our results
will be most volatile during the first half of 2006. However, fluctuations
in
results may be ongoing as major activities within the realignment will
continue at least into 2007.
Our
four
service offerings are described in more detail below.
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Expedited
team service offering. At December 31, 2005, we operated
approximately 910 tractors in our Expedited team service offering.
Our
teams generally operate over distances ranging from 1,000 to 2,000
miles
and had an average length of haul 1,525 miles in the fourth quarter
of
2005. Our expedited teams offer service standards such as coast-to-coast
delivery in 72 hours, meeting delivery appointments within
15 minutes, and delivering 99% of loads on-time. We believe our
expedited teams offer greater speed and reliability than rail, rail-truck
intermodal, and solo-driver competitors at a lower cost than air
freight.
The main advantage to us of expedited team service is high revenue
per
tractor. The main challenges are managing the mileage on the trucks
to
avoid decreasing the resale value and recruiting and pairing two
drivers,
particularly during driver shortages, which tend to coincide with
strong
economic activity that increases demand.
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Dedicated
service offering. At December 31, 2005, we operated approximately 609
tractors in our Dedicated service offering. These tractors operate
for a
single customer or on a defined route and frequently have contractually
guaranteed revenue. This part of our business has grown over the
past few
years as customers have desired committed capacity, and we have expanded
our participation in their design, development, and execution of
supply
chain solutions. We believe the advantages of dedicated service include
protection against rate pressure during the term of the agreement
and
predictable equipment utilization and routes, which assist with driver
retention, asset productivity, and management planning. We believe
the
challenges of dedicated fleets include limited ability to react to
certain
cost changes and to increase rates to take advantage of market
shifts.
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Refrigerated
service offering. At December 31, 2005, we operated approximately
765 tractors in our Refrigerated service offering, which consists of
our refrigerated trucks in operation under the Covenant Transport
name and
the Southern Refrigerated Transport, or SRT, name. Our Refrigerated
service offering includes the transport of fresh produce from the
West
Coast to the Midwest or Southeast and return with either refrigerated
or
general commodities and a growing presence within traditional food
and
beverage shippers. We believe the advantages of refrigerated
service include less cyclical freight patterns and a growing
population that requires food products. We believe the challenges
of
refrigerated service include more expensive trailers, the perishable
nature of commodities, and the fuel and maintenance expense associated
with refrigeration units.
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Regional
solo-driver service offering. At December 31, 2005, we operated
approximately 1,187 tractors in our Regional solo-driver service
offering.
The average length of haul was 655 miles in the fourth quarter of
2005. We
expect this to decrease over time as our business gravitates toward
movements with lengths of haul closer to 500-600 miles. According
to
industry sources, 70-80% of the freight transported in the United
States
moves in distances of less than 500 miles. We expect most freight
to
continue to move in regional lengths of haul as manufacturers, retailers,
and distributors move elements of their supply chains into closer
proximity. We believe the advantages of regional truckload service
include
access to large freight volumes, generally higher rates per mile,
and
driver-friendly routes. We believe the disadvantages of regional
truckload
service include lower equipment utilization and a greater percentage
of
non-revenue miles than in long-haul lanes. We are in the process
of
dividing our approximately 1,200 regional truck fleet into sub-regions,
with the goal of enabling each sub-region to operate with a separate
General Manager, separate accountability and responsibility, and
separate
financial statements. This process requires intricate planning, and
we
expect it will take a year or two to complete.
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The
development of our business into four major transportation services has affected
our operating metrics over time, and we expect that the complete formal
separation of our business into four distinct service offerings will create
even
more change, which we should be able to begin quantifying in 2006. Four measures
with significant changes are average length of haul, average freight revenue
per
total mile (excluding fuel surcharges), average miles per tractor, and average
freight revenue per tractor per week. A description of each
follows:
Average
Length of Haul. Our average length of haul has decreased significantly
as
we have increased the use of solo-driver tractors and increased our
focus
on regional markets. Shorter lengths of haul frequently involve higher
rates per mile from customers, fewer miles per truck, and a greater
percentage of non-revenue miles caused by re-positioning of
equipment.
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Average
Freight Revenue Per Total Mile. Our average freight revenue per mile
has
increased sharply. Average freight revenue per loaded mile has increased
approximately 23% since 2000, while non-revenue miles have also increased.
This led to a 21.4% increase in average freight revenue per total
mile.
All freight revenue per mile numbers exclude fuel surcharge
revenue.
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Average
Miles Per Tractor. Our average miles per tractor have decreased because
of
a lower percentage of teams in our fleet and a shortening of our
average
length of haul.
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Average
Freight Revenue per Tractor per Week. We use average freight revenue
per
tractor per week (which excludes fuel surcharges) as our main measure
of
asset productivity. This operating metric takes into account the
effects
of freight rates, non-revenue miles, and miles per tractor. In addition,
because we calculate average freight revenue per tractor using all
of our
trucks, it takes into account the percentage of our fleet that is
unproductive due to lack of drivers, repairs, and other
factors.
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Customers
and Operations
Our
primary customers include manufacturers and retailers, as well as other
transportation companies. In 2005, our five largest customers were Wal-Mart
Stores, Con-Way Transportation, Georgia Pacific, Shaw Industries, and ABX
Logistics. In the aggregate, subsidiaries of CNF, Inc. including Con-Way
Transportation and Menlo Worldwide, accounted for approximately 8% of our
revenue in 2005 and 9% and 11% for 2004 and 2003, respectively.
We
operate tractors driven by a single driver and also tractors assigned to
two-person driver teams. Over time the percentage of our revenue generated
by
driver teams has trended down, although the mix will depend on a variety of
factors over time. Our single driver tractors generally operate in shorter
lengths of haul, generate fewer miles per tractor, and experience more
non-revenue miles, but the 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
equip
our tractors with a satellite-based tracking and communications system that
permits direct communication between drivers and fleet managers. We believe
that
this system enhances our operating efficiency and improves customer service
and
fleet management. This system also updates the tractor's position every 30
minutes, which allows us and our customers to locate freight and accurately
estimate pick-up and delivery times. We also use the system to monitor engine
idling time, speed, performance, and other factors that affect operating
efficiency.
As
an
additional service to customers, we offer electronic data interchange and
Internet-based communication for customer usage in tendering loads and accessing
information such as cargo position, delivery times, and billing information.
These services allow us to communicate electronically with our customers,
permitting real-time information flow, reductions or eliminations in paperwork,
and the employment of fewer clerical personnel. Since 1997, we have used a
document imaging system to reduce paperwork and enhance access to important
information.
Our
operations generally follow the seasonal norm for the trucking industry.
Equipment utilization is usually at its highest from May to August, maintains
high levels through October, and generally decreases during the winter holiday
season and as inclement weather impedes operations.
We
operate throughout the United States and in parts of Canada and Mexico, with
substantially all of our revenue generated from within the United States. All
of
our assets are domiciled in the United States, and for the past three years
less
than one percent of our revenue has been generated in Canada and Mexico. We
do
not separately track domestic and foreign revenue from customers or domestic
and
foreign long-lived assets, and providing such information would be
impracticable.
Drivers
and Other Personnel
Driver
recruitment, retention, and satisfaction are essential to our success, and
we
have made each of these factors a primary element of our strategy. We recruit
both experienced and student drivers as well as independent contractor drivers
who own and drive their own tractor and provide their services to us under
lease. We conduct recruiting and/or driver orientation efforts from four of
our
locations and we offer ongoing training throughout our terminal network. We
emphasize driver-friendly operations throughout our organization. We have
implemented automated programs to signal when a driver is scheduled to be routed
toward home, and we assign fleet managers specific tractor units, regardless
of
geographic region, to foster positive relationships between the drivers and
their principal contact with us.
The
truckload industry has periodically experienced difficulty in attracting and
retaining enough qualified truck drivers. It is also common for the driver
turnover rate of individual carriers to exceed 100%. We believe a combination
of
greater demand for freight transportation and the alternative careers provided
by the expansion in economic activity over the past few years, together with
the
demographics of the truck driving population and other factors, have exacerbated
the shortage of drivers recently. This has increased our costs of recruiting,
training, and retaining drivers and has resulted in more of our trucks lacking
drivers. During 2005, we implemented new strategies focusing on driver
satisfaction and ultimately a greater retention rate. Additionally, we hope
that
our newly realigned business structure, with separate accountability within
each
service offering, will lead to higher retention rates.
We
use
driver teams in a substantial portion of our tractors. Driver teams permit
us to
provide expedited service on selected long-haul lanes because driver teams
are
able to handle longer routes and drive more miles while remaining within
Department of Transportation ("DOT") safety rules. The use of teams contributes
to greater equipment utilization of the tractors they drive than obtained with
single drivers. The use of teams, however, increases personnel costs as a
percentage of revenue and the number of drivers we must recruit. At
December 31, 2005, teams operated approximately 32% of our
tractors.
We
are
not a party to a collective bargaining agreement. At December 31, 2005, we
employed approximately 4,655 drivers and approximately 1,057 non driver
personnel. At December 31, 2005, we also contracted with approximately 145
independent contractor drivers. We believe that we have a good relationship
with
our personnel.
Revenue
Equipment
We
believe that operating high quality, late-model equipment contributes to
operating efficiency, helps us recruit and retain drivers and is an important
part of providing excellent service to customers. Our policy is to operate
our
tractors while under warranty to minimize repair and maintenance costs and
reduce service interruptions caused by breakdowns. We also order most of our
equipment with uniform specifications to reduce our parts inventory and
facilitate maintenance. At December 31, 2005, our tractor fleet had an
average age of approximately 17 months and our trailer fleet had an average
age
of approximately 36 months. All of our tractors were equipped with post October
2002 emission-compliant engines. Approximately 85% of our trailers were dry
vans
and the remainder were temperature-controlled vans.
Industry
and Competition
The
U.S.
market for truck-based transportation services generated total revenues of
approximately $671.2 billion in 2004 and is projected to follow the overall
U.S. economy. The trucking industry includes both private fleets and "for-hire"
carriers. We operate in the highly fragmented for-hire truckload segment of
this
market, which generated estimated revenues of approximately $312 billion in
2004. Our dedicated business also competes in the estimated $279 billion
private fleet portion of the overall trucking market, by seeking to convince
private fleet operators to outsource or supplement their private fleets. The
trucking industry accounted for approximately 87.7% of domestic spending on
freight transportation in 2004. All market estimates contained in this section
are derived from data compiled by Global Insight, Inc., as reported by the
American Trucking Associations in U.S.
Freight Transportation Forecast to 2016.
The
United States trucking industry is highly competitive and includes thousands
of
for-hire motor carriers, none of which dominates the market. Service and price
are the principal means of competition in the trucking industry. Based on
Commercial Carrier Journal: The Top 100 (August 2005), the ten largest truckload
carriers (measured by annual revenue) accounted for approximately
$16.5 billion, or approximately 5.3%, of annual for-hire truckload revenue
in 2004. We compete to some extent with railroads and rail-truck intermodal
service but differentiate our self from rail and rail-truck intermodal carriers
on the basis of service, because rail and rail-truck intermodal movements are
subject to delays and disruptions arising from rail yard congestion, which
reduces the effectiveness of such service to customers with time-definite
pick-up and delivery schedules.
We
believe that the cost and complexity of operating trucking fleets are increasing
and that economic and competitive pressures are likely to force many smaller
competitors and private fleets to consolidate or exit the industry over time.
As
a result, we believe that larger, better-capitalized companies, like us, will
have opportunities to increase profit margins and gain market share. In the
market for dedicated services, we believe that truckload carriers, like us,
have
a competitive advantage over truck lessors, who are the other major participants
in the market, because we can offer lower prices by utilizing back-haul freight
within our network that traditional lessors may not have.
Over
the
past two years our industry has enjoyed an improved pricing environment compared
with our historical experience. We believe that stronger freight demand and
industry-wide capacity constraints caused by a shortage of truck drivers and
a
lack of capital investment in additional revenue equipment by many carriers
contributed to the pricing environment. In addition, many shippers have
recognized that the costs of operating in our industry have increased
significantly, particularly in the areas of driver compensation, revenue
equipment, fuel, and insurance and claims. The pricing environment may not
remain favorable, and we may not continue to capitalize on any increases in
pricing.
Regulation
We
are
subject to various environmental laws and regulations dealing with the hauling
and handling of hazardous materials, fuel storage tanks, air emissions from
our
vehicles and facilities, engine idling, and discharge and retention of storm
water. We operate in industrial areas, where truck terminals and other
industrial activities are located, and where groundwater or other forms of
environmental contamination have occurred. Our operations involve the risks
of
fuel spillage or seepage, environmental damage, and hazardous waste disposal,
among others. We also maintain above-ground bulk fuel storage tanks and fueling
islands at two of our facilities. A small percentage of our freight consists
of
low-grade hazardous substances, which subjects us to a wide array of
regulations.
Although we have instituted programs to monitor and control environmental risks
and promote compliance with applicable environmental laws and regulations,
if we
are involved in a spill or other accident involving hazardous substances, if
there are releases of hazardous substances we transport, or if we are found
to
be in violation of applicable laws or regulations, we could be subject to
liabilities, including substantial fines or penalties or civil and criminal
liability, any of which could have a materially adverse effect on our business
and operating results.
Regulations
limiting exhaust emissions became effective in 2002 and become progressively
more restrictive in 2007 and 2010. Engines manufactured after October 2002
generally cost more, produce lower fuel mileage, and require additional
maintenance compared with earlier models. Substantially all of our tractors
are
equipped with these engines. We expect additional cost increases and possibly
degradation in fuel mileage from the 2007 engines. These adverse effects,
combined with the uncertainty as to the reliability of the newly designed diesel
engines and the residual values of these vehicles, could materially increase
our
costs or otherwise adversely affect our business or operations.
Fuel
Availability and Cost
We
actively manage our fuel costs by routing our drivers through fuel centers
with
which we have negotiated volume discounts. During 2005, the cost of fuel was
in
the range at which we received fuel surcharges. Even with the fuel surcharges,
the high price of fuel decreased our profitability. Although we historically
have been able to pass through a substantial part of increases in fuel prices
and taxes to customers in the form of higher rates and surcharges, the increases
usually are not fully recovered. We do not collect surcharges on fuel used
for
non-revenue or out-of-route miles, or for fuel used by refrigeration units
or
while the tractor is idling.
Seasonality
Our
tractor productivity decreases during the winter season because inclement
weather impedes operations, and some shippers reduce their shipments after
the
winter holiday season. Revenue can also be affected by bad weather and holidays,
since revenue is directly related to available working days of shippers. At
the
same time, operating expenses increase, with fuel efficiency declining because
of engine idling and harsh weather creating higher accident frequency, increased
claims, and more equipment repairs. We can also suffer short-term impacts from
weather-related events such as hurricanes, blizzards, ice storms, and floods
that could harm our results or make our results more volatile.
Additional
Information
At
December 31, 2005, our corporate structure included Covenant Transport, Inc.,
a
Nevada holding company organized in May 1994, and its wholly owned subsidiaries:
Covenant Transport, Inc., a Tennessee corporation; Covenant Asset Management,
Inc., a Nevada corporation; CIP, Inc., a Nevada corporation; Covenant.com,
Inc.,
a Nevada corporation; Southern Refrigerated Transport, Inc., an Arkansas
corporation; Harold Ives Trucking Co., an Arkansas corporation; CVTI Receivables
Corp. ("CRC"), a Nevada corporation; and Volunteer Insurance Limited, a Cayman
Island company. Terminal Truck Broker, Inc. and Tony Smith Trucking, Inc.,
both
Arkansas corporations and former subsidiaries, were dissolved in September
2003
and December 2004, respectively.
Our
headquarters are located at 400 Birmingham Highway, Chattanooga, Tennessee
37419, and our website address is www.covenanttransport.com. Our Annual Report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
and
all other reports we file with the SEC pursuant to Section 13(a) or 15(d) of
the
Securities Exchange Act of 1934, as amended (the "Exchange Act") are available
free of charge through our website. Information contained in or available
through our website is not incorporated by reference into, and you should not
consider such information to be part of, this Annual Report on Form
10-K.
Factors
That May Affect Future Results
Our
future results may be affected by a number of factors over which we have little
or no control. The following issues, uncertainties, and risks, among others,
should be considered in evaluating our business and growth outlook.
Our
business is subject to general economic and business factors that are largely
out of our control, any of which could have a materially adverse effect on
our
operating results.
Our
business is dependent on a number of factors that may have a materially adverse
effect on our results of operations, many of which are beyond our control.
Some
of the most significant of these factors include excess tractor and trailer
capacity in the trucking industry, declines in the resale value of used
equipment, strikes or other work stoppages, increases in interest rates, fuel
taxes, tolls, and license and registration fees, and rising costs of
healthcare.
We
also
are affected by recessionary economic cycles, changes in customers' inventory
levels, and downturns in customers' business cycles, particularly in market
segments and industries, such as retail and manufacturing, where we have a
significant concentration of customers, and regions of the country, such as
California, Texas, and the Southeast, where we have a significant amount of
business. Economic conditions may adversely affect our customers and their
ability to pay for our services. Customers encountering adverse economic
conditions represent a greater potential for loss, and we may be required to
increase our allowance for doubtful accounts.
In
addition, it is not possible to predict the effects of actual or threatened
terrorist attacks, efforts to combat terrorism, military action against any
foreign state, heightened security requirements, or other related events. Such
events, however, could negatively impact the economy and consumer confidence
in
the United States. Such events could also have a materially adverse effect
on
our future results of operations.
We
may not be successful in improving or maintaining our profitability.
During
2005 we adopted a strategic plan designed to improve our profitability. The
plan
generally involves organizing our operations around four distinct service
offerings. Within each service offering we expect changes to items such as
the
customer base, rate structure, routes served, driver domiciles, management,
reporting structure, and operating procedures. These changes, and others that
we
did not expect, will present significant challenges, including, but not limited
to, the following:
|
Developing
management depth to oversee the service offerings and also manage
regional
terminals within the service offerings;
|
|
Adapting
our personnel to new strategies, policies, and procedures, including
more
distributed decision making;
|
|
Maintaining
customer relationships and freight volumes while changing routes,
pricing,
and other aspects of our operations;
|
|
Maintaining
a sufficient number of qualified drivers while changing routes, policies,
procedures, and management structures;
|
|
Controlling
headcount and expenses generally during a transition that may entail
a
period of duplication of some functions; and
|
|
Improving
or eliminating processes, functions, services, or other items that
are
identified as substandard.
|
We
self-insure for a significant portion of our claims exposure, which could
significantly increase the volatility of, and decrease the amount of, our
earnings.
Our
future insurance and claims expense could reduce our earnings and make our
earnings more volatile. We self-insure for a significant portion of our claims
exposure and related expenses. We accrue amounts for liabilities based on our
assessment of claims that arise and our insurance coverage for the periods
in
which the claims arise, and we evaluate and revise these accruals from
time-to-time based on additional information. We do not currently maintain
directors and officers' insurance coverage, although we are obligated to
indemnify them against certain liabilities they may incur while serving in
such
capacities. Because of our significant self-insured amounts, we have significant
exposure to fluctuations in the number and severity of claims and the risk
of
being required to accrue or
pay
additional amounts if the claims prove to be more severe than originally
assessed. Historically, we have had to adjust our reserves on several occasions,
and future adjustments may occur.
We
maintain insurance above the amounts for which we self-insure with licensed
insurance carriers. If any claim were to exceed our coverage, we would bear
the
excess, in addition to our other self-insured amounts. Our insurance and claims
expense could increase when our current coverages expire, or we could raise
our
self-insured retention. Although we believe our aggregate insurance limits
are
sufficient to cover reasonably expected claims, it is possible that one or
more
claims could exceed those limits. Insurance carriers recently have been raising
premiums for many businesses, including trucking companies. As a result, our
insurance and claims expense could increase, or we could find it necessary
to
again raise our self-insured retention or decrease our aggregate coverage limits
when our policies are renewed or replaced. Our operating results and financial
condition may be adversely affected if these expenses increase, if we experience
a claim in excess of our coverage limits, if we experience a claim for which
we
do not have coverage, or if we have to increase our reserves again.
Ongoing
insurance requirements could constrain our borrowing
capacity.
The
increase in our self-insured retention has caused our outstanding undrawn
letters of credit in favor of insurance companies to increase. We expect
outstanding letters of credit to increase in the future. Outstanding letters
of
credit reduce the available borrowings under our credit agreement, which could
negatively affect our liquidity should we need to increase our borrowings in
the
future.
We
operate in a highly competitive and fragmented industry, and numerous
competitive factors could impair our ability to maintain or improve our
profitability.
These
factors include:
|
We
compete with many other truckload carriers of varying sizes and,
to a
lesser extent, with less-than-truckload carriers, railroads, and
other
transportation companies, many of which have more equipment and greater
capital resources than we do.
|
|
Many
of our competitors periodically reduce their freight rates to gain
business, especially during times of reduced growth rates in the
economy,
which may limit our ability to maintain or increase freight rates
or
maintain significant growth in our business.
|
|
Many
of our customers are other transportation companies, and they may
decide
to transport their own freight.
|
|
Many
customers reduce the number of carriers they use by selecting "core
carriers" as approved service providers, and in some instances we
may not
be selected.
|
|
Many
customers periodically accept bids from multiple carriers for their
shipping needs, and this process may depress freight rates or result
in
the loss of some business to competitors.
|
|
The
trend toward consolidation in the trucking industry may create other
large
carriers with greater financial resources and other competitive advantages
relating to their size.
|
|
Advances
in technology require increased investments to remain competitive,
and our
customers may not be willing to accept higher freight rates to cover
the
cost of these investments.
|
|
Competition
from non-asset-based logistics and freight brokerage companies may
adversely affect our customer relationships and freight rates.
|
|
Economies
of scale that may be passed on to smaller carriers by procurement
aggregation providers may improve their ability to compete with us.
|
We
derive a significant portion of our revenue from our major customers, the loss
of one or more of which could have a materially adverse effect on our
business.
A
significant portion of our revenue is generated from our major customers.
Generally, we do not have long term contractual relationships with our major
customers, and our customers may not continue to use our services or continue
to
use our services at the same levels. For some of our customers, we have entered
into multi-year contracts, and the rates may not remain advantageous. A
reduction in or termination of our services by one or more of our major
customers could have a materially adverse effect on our business and operating
results.
Increases
in driver compensation or difficulty in attracting and retaining qualified
drivers could adversely affect our profitability.
Like
many
truckload carriers, we experience substantial difficulty in attracting and
retaining sufficient numbers of qualified drivers, including independent
contractors. In addition, due in part to current economic conditions, including
the higher cost of fuel, insurance, and tractors, the available pool of
independent contractor drivers has been declining. Because of the shortage
of
qualified drivers, the availability of alternative jobs, and intense competition
for drivers from other trucking companies, we expect to continue to face
difficulty increasing the number of our drivers, including independent
contractor drivers. The compensation we offer our drivers and independent
contractors is subject to market conditions, and we may find it necessary to
continue to increase driver and independent contractor compensation in future
periods. In addition, we and our industry suffer from a high turnover rate
of
drivers. Our high turnover rate requires us to continually recruit a substantial
number of drivers in order to operate existing revenue equipment. If we are
unable to continue to attract and retain a sufficient number of drivers, we
could be required to adjust our compensation packages, let trucks sit idle,
or
operate with fewer trucks and face difficulty meeting shipper demands, all
of
which would adversely affect our growth and profitability.
We
operate in a highly regulated industry, and increased costs of compliance with,
or liability for violation of, existing or future regulations could have a
materially adverse effect on our business.
Our
operations are regulated and licensed by various U.S., Canadian, and Mexican
agencies. Our company drivers and independent contractors also must comply
with
the safety and fitness regulations of the United States DOT, including those
relating to drug and alcohol testing and hours-of-service. Such matters as
weight and equipment dimensions are also subject to U.S. and Canadian
regulations. We also may become subject to new or more restrictive regulations
relating to fuel emissions, drivers' hours-of-service, ergonomics, or other
matters affecting safety or operating methods. Other agencies, such as the
Environmental Protection Agency, or EPA, and the Department of Homeland
Security, or DHS, also regulate our equipment, operations, and drivers. Future
laws and regulations may be more stringent and require changes in our operating
practices, influence the demand for transportation services, or require us
to
incur significant additional costs. Higher costs incurred by us or by our
suppliers who pass the costs onto us through higher prices could adversely
affect our results of operations.
The
DOT,
through the Federal Motor Carrier Safety Administration Act, or FMCSA, imposes
safety and fitness regulations on us and our drivers. New rules that limit
driver hours-of-service were adopted effective January 4, 2004, and then
modified effective October 1, 2005. The rules effective October 1,
2005, did not substantially change the existing rules but are likely to create
a
moderate reduction in the amount of time available to drivers in longer lengths
of haul, which could reduce equipment productivity in those lanes. The FMCSA
is
studying rules relating to braking distance and on-board data recorders that
could result in new rules being proposed. We are unable to predict the effect
of
any rules that might be proposed, but we expect that any such proposed rules
would increase costs in our industry, and the on-board recorders potentially
could decrease productivity and the number of people interested in being
drivers.
In
the
aftermath of the September 11, 2001 terrorist attacks, federal, state, and
municipal authorities have implemented and continue to implement various
security measures, including checkpoints and travel restrictions on large
trucks. The Transportation Security Administration, or TSA, of the DHS has
adopted regulations that require determination by the TSA that each driver
who
applies for or renews his license for carrying hazardous materials is not a
security threat. This could reduce the pool of qualified drivers, which could
require us to increase driver compensation, limit our fleet growth, or let
trucks sit idle. These regulations also could complicate the matching of
available equipment with hazardous material shipments, thereby increasing our
response time on customer orders and our non-revenue miles. As a result, it
is
possible we may fail to meet the needs of our customers or may incur increased
expenses to do so. These security measures could negatively impact our operating
results.
Some
states and municipalities have begun to restrict the locations and amount of
time where diesel-powered tractors, such as ours, may idle, in order to reduce
exhaust emissions. These restrictions could force us to alter our drivers’
behavior, purchase on-board power units that do not require the engine to idle,
or face a decrease in productivity.
We
have significant ongoing capital requirements that could affect our
profitability if we are unable to generate sufficient cash from operations
and
obtain financing on favorable terms.
The
truckload industry is capital intensive, and our policy of operating newer
equipment requires us to expend significant amounts annually. For the past
few
years, we have depended on cash from operations, our credit facilities, and
operating leases to fund our revenue equipment. If we elect to expand our fleet
in future periods, our capital needs would increase. We expect to pay for
projected capital expenditures with cash flows from operations, borrowings
under
our line of credit, proceeds under our financing facilities, and operating
leases of revenue equipment. If we are unable to generate sufficient cash from
operations and obtain financing on favorable terms in the future, we may have
to
limit our growth, enter into less favorable financing arrangements, or operate
our revenue equipment for longer periods, any of which could have a materially
adverse effect on our profitability.
We
currently have trade-in or fixed residual agreements with certain equipment
suppliers concerning the substantial majority of our tractor fleet. If the
suppliers refuse or are unable to meet their financial obligations under these
agreements, or if we decline to purchase the relevant number of replacement
units from the suppliers, we may suffer a financial loss upon the disposition
of
our equipment.
Fluctuations
in the price or availability of fuel, as well as hedging activities, surcharge
collection, and the volume and terms of diesel fuel purchase commitments, may
increase our costs of operation, which could materially and adversely affect
our
profitability.
Fuel
is
one of our largest operating expenses. Diesel fuel prices fluctuate greatly
due
to economic, political, and other factors beyond our control. Fuel also is
subject to regional pricing differences and often costs more on the West Coast,
where we have significant operations. From time-to-time we have used hedging
contracts and volume purchase arrangements to attempt to limit the effect of
price fluctuations. If we do hedge, we may be forced to make cash payments
under
the hedging arrangements. The absence of meaningful fuel price protection
through these measures, fluctuations in fuel prices, or a shortage of diesel
fuel, could materially and adversely affect our results of operations.
We
may not make acquisitions in the future, or if we do, we may not be successful
in our acquisition strategy.
We
made
nine acquisitions between 1996 and 2000, including four between September 1999
and August 2000. Accordingly, acquisitions have provided a substantial portion
of our growth. We may not be successful in identifying, negotiating, or
consummating any future acquisitions. If we fail to make any future
acquisitions, our growth rate could be materially and adversely affected. Any
acquisitions we undertake could involve the dilutive issuance of equity
securities and/or incurring indebtedness. In addition, acquisitions involve
numerous risks, including difficulties in assimilating the acquired company's
operations, the diversion of our management's attention from other business
concerns, risks of entering into markets in which we have had no or only limited
direct experience, and the potential loss of customers, key employees, and
drivers of the acquired company, all of which could have a materially adverse
effect on our business and operating results. If we make acquisitions in the
future, we may not be able to successfully integrate the acquired companies
or
assets into our business.
Our
operations are subject to various environmental laws and regulations, the
violation of which could result in substantial fines or
penalties.
We
are
subject to various environmental laws and regulations dealing with the hauling
and handling of hazardous materials, fuel storage tanks, air emissions from
our
vehicles and facilities, engine idling, and discharge and retention of storm
water. We operate in industrial areas, where truck terminals and other
industrial activities are located, and where groundwater or other forms of
environmental contamination have occurred. Our operations involve the risks
of
fuel spillage or seepage, environmental damage, and hazardous waste disposal,
among others. We also maintain above-ground bulk fuel storage tanks and fueling
islands at two of our facilities. A small percentage of our freight consists
of
low-grade hazardous substances, which subjects us to a wide array of
regulations. Although we have instituted programs to monitor and control
environmental risks and promote compliance with applicable environmental laws
and regulations, if we are involved in a spill or other accident involving
hazardous substances, if there are releases of hazardous substances we
transport, or if we are found to be in violation of applicable laws or
regulations, we could be subject to liabilities, including substantial fines
or
penalties or civil and criminal liability, any of which could have a materially
adverse effect on our business and operating results.
Regulations
limiting exhaust emissions became effective in 2002 and become progressively
more restrictive in 2007 and 2010. Engines manufactured after October 2002
generally cost more, produce lower fuel mileage, and require additional
maintenance compared with earlier models. All of our tractors are equipped
with
these engines. We expect additional cost increases and possibly degradation
in
fuel mileage from the 2007 engines. These adverse effects, combined with the
uncertainty as to the reliability of the newly designed diesel engines and
the
residual values of these vehicles, could increase our costs or otherwise
adversely affect our business or operations.
Increased
prices, reduced productivity, and restricted availability of new revenue
equipment may adversely affect our earnings and cash flows.
We
have
experienced higher prices for new tractors over the past few years, partially
as
a result of government regulations applicable to newly manufactured tractors
and
diesel engines, in addition to higher commodity prices and better pricing power
among equipment manufacturers. More restrictive EPA emissions standards for
2007
will require vendors to introduce new engines, and some carriers may seek to
purchase large numbers of tractors with pre-2007 engines, possibly leading
to
shortages. Our business could be harmed if we are unable to continue to obtain
an adequate supply of new tractors and trailers for these or other reasons.
As a
result, we expect to continue to pay increased prices for equipment and incur
additional expenses and related financing costs for the foreseeable future.
Furthermore, the new engines are expected to reduce equipment productivity
and
lower fuel mileage and, therefore, increase our operating expenses.
We
have
agreements covering the terms of trade-in and/or repurchase commitments from
our
primary equipment vendors for disposal of a substantial portion of our revenue
equipment. The prices we expect to receive under these arrangements may be
higher than the prices we would receive in the open market. We may suffer a
financial loss upon disposition of our equipment if these vendors refuse or
are
unable to meet their financial obligations under these agreements, if we fail
to
enter into definitive agreements that reflect the terms we expect, if we fail
to
enter into similar arrangements in the future, or if we do not purchase the
required number of replacement units from the vendors.
Our
substantial indebtedness and operating lease obligations could adversely affect
our ability to respond to changes in our industry or business.
As
a
result of our level of debt, operating lease obligations, and encumbered assets:
|
Our
vulnerability to adverse economic conditions and competitive pressures
is
heightened;
|
|
We
will continue to be required to dedicate a substantial portion of
our cash
flows from operations to operating lease payments and repayment of
debt,
limiting the availability of cash for other purposes;
|
|
Our
flexibility in planning for, or reacting to, changes in our business
and
industry will be limited;
|
|
Our
profitability is sensitive to fluctuations in interest rates because
some
of our debt obligations are subject to variable interest rates, and
future
borrowings and lease financing arrangements will be affected by any
such
fluctuations;
|
|
Our
ability to obtain additional financing in the future for working
capital,
capital expenditures, acquisitions, or other purposes may be limited;
and
|
|
We
may be required to issue additional equity securities to raise funds,
which would dilute the ownership position of our
stockholders.
|
Our
financing obligations could negatively impact our future operations, our ability
to satisfy our capital needs, or our ability to engage in other business
activities. We also cannot assure you that additional financing will be
available to us when required or, if available, will be on terms satisfactory
to
us.
Our
revolving credit facility contains restrictive and financial covenants, and
we
may be unable to comply with these covenants. A default could result in the
acceleration of all of our outstanding indebtedness, which could have an adverse
effect on our financial condition, liquidity, results of operations, and the
price of our common stock.
Our
credit facilities and our other financing arrangements contain covenants that
impose certain restrictions and require us to maintain specified financial
ratios. If we fail to comply with any of these covenants, we will be in default,
which could cause cross-defaults under other loans or agreements. A default,
if
not waived by our lenders, could cause our debt and other obligations to become
immediately due and payable. To obtain waivers of defaults, we may incur
significant fees and transaction costs. If waivers of defaults are not obtained
and acceleration occurs, we may be unable to borrow sufficient additional funds
to refinance the accelerated debt. Even if new financing is made available
to
us, it may not be available on commercially acceptable terms.
If
we are unable to retain our key employees, our business, financial condition,
and results of operations could be harmed.
We
are
highly dependent upon the services of the following key employees: David R.
Parker, our Chairman of the Board, Chief Executive Officer, and President;
Joey
B. Hogan, our Executive Vice President and Chief Financial Officer; Michael
W.
Miller, our Executive Vice President and Chief Operating Officer; Jeffrey S.
Paulsen, our Senior
Vice President and General Manager;
Jeffrey
D. Taylor, our Vice
President and General Manager;
and
Jeffery D. Acuff, our Vice
President and General Manager.
We
currently do not have employment agreements with any of them. We do maintain
key-man life insurance on David Parker. The loss of any of their services could
negatively impact our operations and future profitability. We must continue
to
develop and retain a core group of managers if we are to realize our goal of
improving our profitability.
Our
Chief Executive Officer and President and his wife control a large portion
of
our stock and have substantial control over us, which could limit your ability
to influence the outcome of key transactions, including changes of control.
Our
Chairman of the Board, Chief Executive Officer, and President, David Parker,
and
his wife, Jacqueline Parker, beneficially own approximately 38% of our
outstanding Class A common stock and 100% of our Class B common stock.
On
all
matters with respect to which our stockholders have a right to vote, including
the election of directors, each share of Class A common stock is entitled to
one
vote, while each share of Class B common stock is entitled to two votes. All
outstanding shares of Class B common stock are owned by the Parkers and are
convertible to Class A common stock on a share-for-share basis at the election
of the Parkers or automatically upon transfer to someone outside of the Parker
family. This voting structure gives the Parkers approximately 47% of our
outstanding votes.
The
Parkers are able to effectively control decisions requiring stockholder
approval, including the election of our entire board of directors, the adoption
of extension of anti-takeover provisions, mergers, and other business
combinations. This concentration of ownership could limit the price that some
investors might be willing to pay for the Class A common stock, and could allow
the Parkers to prevent or delay a change of control, which other stockholders
may favor. The interests of the Parkers may conflict with the interests of
other
holders of Class A common stock, and they may take actions affecting us with
which you disagree.
Seasonality
and the impact of weather affect our operations and
profitability.
Our
tractor productivity decreases during the winter season because inclement
weather impedes operations, and some shippers reduce their shipments after
the
winter holiday season. Revenue can also be affected by bad weather and holidays,
since revenue is directly related to available working days of shippers. At
the
same time, operating expenses increase, with fuel efficiency declining because
of engine idling and harsh weather creating higher accident frequency, increased
claims, and more equipment repairs. We can also suffer short-term impacts from
weather-related events such as hurricanes, blizzards, ice storms, and floods
that could harm our results or make our results more volatile.
None.
Our
headquarters and main terminal are located on approximately 180 acres of
property in Chattanooga, Tennessee. This facility includes an office building
of
approximately 182,000 square feet, a maintenance facility of approximately
65,000 square feet, a body shop of approximately 16,600 square feet, and a
truck
wash. We maintain sixteen terminals located on our major traffic lanes in or
near the cities listed below. These terminals provide a base for drivers in
proximity to their homes, a transfer location for trailer relays on
transcontinental routes, parking space for equipment dispatch, and the other
uses indicated below.
Terminal
Locations
|
Maintenance
|
Recruiting/
Orientation
|
Sales
|
Ownership
|
Chattanooga,
Tennessee
|
x
|
x
|
x
|
Owned
|
Dalton,
Georgia
|
x
|
|
|
Owned
|
Charlotte,
North Carolina
|
|
|
|
Leased
|
Dayton,
Ohio
|
|
|
|
Leased
|
Sayreville,
New Jersey
|
|
|
|
Leased
|
Indianapolis,
Indiana
|
|
|
|
Leased
|
Ashdown,
Arkansas
|
x
|
x
|
x
|
Owned
|
Little
Rock, Arkansas
|
|
|
|
Owned
|
Oklahoma
City, Oklahoma
|
|
|
|
Owned
|
Hutchins,
Texas
|
x
|
x
|
|
Owned
|
El
Paso, Texas
|
|
x
|
|
Leased
|
Columbus,
Ohio
|
|
|
|
Leased
|
French
Camp, California
|
|
|
|
Leased
|
Fontana,
California
|
x
|
|
|
Leased
|
Long
Beach, California
|
|
|
|
Owned
|
Pomona,
California
|
|
x
|
|
Owned
|
From
time
to time we are a party to routine litigation arising in the ordinary course
of
business, most of which involves claims for personal injury and property damage
incurred in connection with the transportation of freight, and administrative
proceedings incidental to our business. We maintain insurance to cover
liabilities arising from the transportation of freight for amounts in excess
of
certain self-insured retentions.
On
March
7, 2003, an accident occurred in Wisconsin involving a vehicle and one of our
tractors. Two adult occupants of the vehicle were killed in the accident. The
only other occupant of the vehicle was a child, who survived with little
apparent injury. Suit was filed in the United States District Court in Minnesota
by heirs of one of the decedents against us and our driver under the style:
Bill
Kayachitch and Susan Kayachitch as co-trustees for the heirs and next of kin
of
Souvorachak Kayachitch, deceased, vs. Julie Robinson and Covenant Transport,
Inc.
The case
was settled on October 10, 2005 at a level below the aggregate coverage limits
of our insurance policies and was formally dismissed in February 2006.
Representatives of the child may file an additional suit against us.
On
August
6, 2004, a two vehicle accident occurred in Texas involving a pick-up truck
towing a flatbed trailer and one of our tractors. The pick-up truck was occupied
by two people and the trailer by four people. Our tractor struck the rear of
the
trailer, and the driver of the tractor is alleged to have left the scene of
the
accident. One occupant of the trailer was killed and others were injured. A
demand on behalf of the plaintiffs for $20.0 million has been made against
us.
On October 19, 2004, suit was filed in the District Court of Hudspeth
County, Texas, 394th
District, against us and our driver under the style: Toni
Ann Zertuche et. al. vs. Covenant Transport, Inc. and Harold Dennis
Mitchell.
Mediation between the parties to the litigation occurred in May 2005. During
the
third quarter, the claim was settled, and the suit has been
dismissed.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
During
the fourth quarter of the year ended December 31, 2005, no matters were
submitted to a vote of security holders.
PART
II
ITEM
5. MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
Price
Range of Common Stock
Our
Class
A common stock is traded on the NASDAQ National Market, under the symbol "CVTI."
The following table sets forth for the calendar periods indicated the range
of
high and low bid price for our Class A common stock as reported by NASDAQ from
January 1, 2004 to December 31, 2005.
Period
|
High
|
|
Low
|
|
|
|
|
Calendar
Year 2004
|
|
|
|
|
|
|
|
1st
Quarter
|
$20.66
|
|
$16.50
|
2nd
Quarter
|
$19.21
|
|
$15.08
|
3rd
Quarter
|
$20.60
|
|
$16.28
|
4th
Quarter
|
$20.97
|
|
$16.50
|
|
|
|
|
Calendar
Year 2005
|
|
|
|
|
|
|
|
1st
Quarter
|
$21.57
|
|
$16.05
|
2nd
Quarter
|
$18.13
|
|
$11.64
|
3rd
Quarter
|
$14.94
|
|
$11.91
|
4th
Quarter
|
$14.40
|
|
$9.80
|
As
of
March 1, 2006, we had approximately 55 stockholders of record of our
Class A common stock. However, we estimate our actual number of stockholders
is
much higher because a substantial number of our shares are held of record by
brokers or dealers for their customers in street names.
Dividend
Policy
We
have
never declared and paid a cash dividend on our Class A or Class B
common stock. It is the current intention of our Board of Directors to continue
to retain earnings to finance our business and reduce our indebtedness rather
than to pay dividends. The payment of cash dividends is currently limited by
our
credit agreements. Future payments of cash dividends will depend upon our
financial condition, results of operations, capital commitments, restrictions
under then-existing agreements, and other factors deemed relevant by our Board
of Directors.
See
"Equity Compensation Plan Information" under Item 11 in Part III of this Annual
Report for certain information concerning shares of our Class A common
stock authorized for issuance under our equity compensation plans.
ITEM
6. SELECTED
FINANCIAL AND OPERATING DATA
(In
thousands, except per share and operating data
amounts)
|
|
|
|
|
|
|
|
Years
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
Freight
revenue
|
|
$
|
555,428
|
|
$
|
558,453
|
|
$
|
555,678
|
|
$
|
550,603
|
|
$
|
554,132
|
|
Fuel
surcharges
|
|
|
87,626
|
|
|
45,169
|
|
|
26,779
|
|
|
13,815
|
|
|
19,489
|
|
Total
revenue
|
|
$
|
643,054
|
|
$
|
603,622
|
|
$
|
582,457
|
|
$
|
564,418
|
|
$
|
573,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries,
wages, and related expenses (1)
|
|
|
242,157
|
|
|
225,778
|
|
|
220,665
|
|
|
227,332
|
|
|
244,849
|
|
Fuel
expense
|
|
|
170,582
|
|
|
127,723
|
|
|
109,231
|
|
|
96,332
|
|
|
103,894
|
|
Operations
and maintenance
|
|
|
33,625
|
|
|
30,555
|
|
|
39,822
|
|
|
39,625
|
|
|
39,410
|
|
Revenue
equipment rentals and
purchased
transportation
|
|
|
61,701
|
|
|
69,928
|
|
|
69,997
|
|
|
59,265
|
|
|
65,104
|
|
Operating
taxes and licenses
|
|
|
13,431
|
|
|
14,217
|
|
|
14,354
|
|
|
13,934
|
|
|
14,358
|
|
Insurance
and claims expense (2)
|
|
|
41,034
|
|
|
54,847
|
|
|
35,454
|
|
|
31,761
|
|
|
27,838
|
|
Communications
and utilities
|
|
|
6,579
|
|
|
6,517
|
|
|
7,177
|
|
|
7,021
|
|
|
7,439
|
|
General
supplies and expenses
|
|
|
17,778
|
|
|
15,104
|
|
|
14,495
|
|
|
14,677
|
|
|
14,468
|
|
Depreciation
and amortization, including
gains
(losses) on disposition of
equipment
and impairment of assets (3)
|
|
|
39,101
|
|
|
45,001
|
|
|
43,041
|
|
|
49,497
|
|
|
56,324
|
|
Total
operating expenses
|
|
|
625,988
|
|
|
589,670
|
|
|
554,236
|
|
|
539,444
|
|
|
573,684
|
|
Operating
income (loss)
|
|
|
17,066
|
|
|
13,952
|
|
|
28,221
|
|
|
24,974
|
|
|
(63
|
)
|
Other
(income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
4,203
|
|
|
3,098
|
|
|
2,332
|
|
|
3,542
|
|
|
7,855
|
|
Interest
income
|
|
|
(273
|
)
|
|
(48
|
)
|
|
(114
|
)
|
|
(63
|
)
|
|
(328
|
)
|
Other
|
|
|
(538
|
)
|
|
(926
|
)
|
|
(468
|
)
|
|
916
|
|
|
799
|
|
Loss
on early extinguishment of debt
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,434
|
|
|
-
|
|
Other
expenses, net
|
|
|
3,392
|
|
|
2,124
|
|
|
1,750
|
|
|
5,829
|
|
|
8,326
|
|
Income
(loss) before income taxes and
cumulative
effect of change in
accounting
principle
|
|
|
13,674
|
|
|
11,828
|
|
|
26,471
|
|
|
19,145
|
|
|
(8,389
|
)
|
Income
tax expense (benefit)
|
|
|
8,003
|
|
|
8,452
|
|
|
14,315
|
|
|
10,871
|
|
|
(1,727
|
)
|
Income
(loss) before cumulative effect of
change
in accounting principle
|
|
|
5,671
|
|
|
3,376
|
|
|
12,156
|
|
|
8,274
|
|
|
(6,662
|
)
|
Cumulative
effect of change in accounting
principle,
net of tax (4)
|
|
|
(485
|
) |
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
income (loss)
|
|
$
|
5,186
|
|
$
|
3,376
|
|
$
|
12,156
|
|
$
|
8,274
|
|
$
|
(6,662
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes
a $1,500 pre-tax increase to workers' compensation claims reserve in
2004.
|
(2)
|
Includes
an $18,000 pre-tax increase to casualty claims reserve in
2004.
|
(3)
|
Includes
a $3,300 and a $15,400 pre-tax impairment charge related to tractors
in
2002 and 2001, respectively.
|
(4)
|
Includes
a $485 adjustment, net of tax, related to the adoption of FIN 47,
Accounting
for Conditional Asset Retirement Obligations.
|
Basic
earnings (loss) per share before
cumulative
effect of change in
accounting
principle:
|
|
$
|
0.40
|
|
$
|
0.23
|
|
$
|
0.84
|
|
$
|
0.58
|
|
$
|
(0.48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of change in accounting
principle
|
|
|
(0.03
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share:
|
|
$
|
0.37
|
|
$
|
0.23
|
|
$
|
0.84
|
|
$
|
0.58
|
|
$
|
(0.48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share before
cumulative
effect of change in
accounting
principle:
|
|
$
|
0.40
|
|
$
|
0.23
|
|
$
|
0.83
|
|
$
|
0.57
|
|
$
|
(0.48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of change in accounting
principle
|
|
|
(0.03
|
) |
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share:
|
|
$
|
0.37
|
|
$
|
0.23
|
|
$
|
0.83
|
|
$
|
0.57
|
|
$
|
(0.48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares
outstanding
|
|
|
14,175
|
|
|
14,641
|
|
|
14,467
|
|
|
14,223
|
|
|
13,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average common shares
outstanding
|
|
|
14,270
|
|
|
14,833
|
|
|
14,709
|
|
|
14,519
|
|
|
13,987
|
|
|
|
Years
Ended December 31,
|
|
Selected
Balance Sheet Data:
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
property and equipment
|
|
$
|
214,362
|
|
$
|
209,422
|
|
$
|
221,734
|
|
$
|
238,488
|
|
$
|
231,536
|
|
Total
assets
|
|
|
371,261
|
|
|
357,383
|
|
|
354,281
|
|
|
361,541
|
|
|
349,782
|
|
Long-term
debt, less current maturities
|
|
|
33,000
|
|
|
8,013
|
|
|
12,000
|
|
|
1,300
|
|
|
29,000
|
|
Total
stockholders' equity
|
|
|
189,724
|
|
|
195,699
|
|
|
192,142
|
|
|
175,588
|
|
|
161,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
freight revenue per loaded mile (1)
|
|
$
|
1.51
|
|
$
|
1.40
|
|
$
|
1.27
|
|
$
|
1.24
|
|
$
|
1.23
|
|
Average
freight revenue per total mile (1)
|
|
$
|
1.36
|
|
$
|
1.27
|
|
$
|
1.17
|
|
$
|
1.15
|
|
$
|
1.14
|
|
Average
freight revenue per tractor per week
(1)
|
|
$
|
3,013
|
|
$
|
2,995
|
|
$
|
2,897
|
|
$
|
2,870
|
|
$
|
2,803
|
|
Average
miles per tractor per year
|
|
|
115,765
|
|
|
122,899
|
|
|
129,656
|
|
|
129,906
|
|
|
127,714
|
|
Weighted
average tractors for year (2)
|
|
|
3,535
|
|
|
3,558
|
|
|
3,667
|
|
|
3,680
|
|
|
3,791
|
|
Total
tractors at end of period (2)
|
|
|
3,471
|
|
|
3,476
|
|
|
3,752
|
|
|
3,738
|
|
|
3,700
|
|
Total
trailers at end of period (3)
|
|
|
8,565
|
|
|
8,867
|
|
|
9,255
|
|
|
7,485
|
|
|
7,702
|
|
(1)
|
Excludes
fuel surcharge revenue.
|
(2)
|
Includes
monthly rental tractors and tractors provided by
owner-operators.
|
(3)
|
Excludes
monthly rental trailers.
|
ITEM
7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
We
are
one of the ten largest truckload carriers in the United States measured by
revenue according to Transport
Topics,
a
publication of the American Trucking Associations. We focus on targeted markets
where we believe our service standards can provide a competitive advantage.
We
are in the process of building our operations around four major transportation
service offerings: Expedited team service, Refrigerated service, Dedicated
service, and Regional solo-driver service. We are a major carrier for
transportation companies such as freight forwarders, less-than-truckload
carriers, and third-party logistics providers that require a high level of
service to support their businesses, as well as for traditional truckload
customers such as manufacturers and retailers.
Recent
Results and Year-End Financial Condition
For
the
year ended December 31, 2005, total revenue increased 6.5%, to
$643.1 million from $603.6 million during 2004. The increase was
attributable to an increase in fuel surcharge revenue. Freight revenue, which
excludes revenue from fuel surcharges, decreased 0.5%, to $555.4 million in
2005
from $558.5 million in 2004. We generated net income of $5.2 million,
or $0.37 per diluted share, for the year compared with $3.4 million, or
$0.23 per diluted share, for 2004. Our 2004 results included a pretax
$19.6 million adjustment to claims reserves, which reduced earnings per
diluted share by approximately $0.82.
Excluding
the effect of the claims adjustment in 2004 described above, our after-tax
costs
increased approximately 8.3% on a per-mile basis in 2005, or approximately
$0.103 per mile, compared to 2004. The main factors were an approximately
$.08 per mile increase in compensation expense, driven primarily by increases
in
driver pay in the second half of 2004 and in March and April of 2005, an
approximately $0.015 per mile increase in insurance and claims expense primarily
based on higher actuarial accrual rates, and a $.01 per mile increase in
fuel cost net of fuel surcharge recovery. In addition, the decrease in miles
per
tractor affected our cost per mile in fixed costs.
During
2005 we experienced significant fluctuations in our financial results. In the
first half of 2005, we experienced a meaningful reduction in freight volumes
from our customers. We believe the reduction in freight volumes was attributable
to the frequency and magnitude of rate increases we had implemented in 2004,
particularly equipment detention charges. In the second half of 2005, we began
to regain freight volumes. By the fourth quarter, our operating results improved
significantly. The table below reflects the quarterly fluctuations in freight
revenue per tractor per week, our main measure of asset productivity, and
diluted earnings per share.
Quarter
ended
|
March
31
|
June
30
|
September
30
|
December
31
|
Average
freight revenue per tractor per week
|
$2,769
|
$2,961
|
$3,067
|
$3,254
|
Diluted
earnings (loss) per share
|
$(0.04)
|
$0.05
|
$0.09
|
$0.28
|
At
December 31, 2005, our total balance sheet debt was $80.3 million and
our total stockholders' equity was $189.7 million, for a total
debt-to-capitalization ratio of 29.7% and a book value of $13.57 per share.
We
also had $73.9 million in undrawn letters of credit posted with insurance
carriers. At December 31, 2005, we had a combined $32 million of
available borrowing capacity under our revolving credit facility and
securitization facility.
Revenue
We
generate substantially all of our revenue by transporting freight for our
customers. 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, the
number of tractors operating, and the number of miles we generate with our
equipment. These factors relate to, among other things, 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, driver
availability, and our average length of haul.
We
also
derive revenue from fuel surcharges, loading and unloading activities, equipment
detention, and other accessorial services. Prior to 2004, we measured freight
revenue, before fuel and accessorial surcharges, in addition to total revenue.
In 2004, we reclassified accessorial revenue, other than fuel surcharges, into
freight revenue, and our historical financial statements have been conformed
to
this presentation. We continue to measure revenue before fuel surcharges, or
“freight revenue,” because we believe that fuel surcharges tend to be a volatile
source of revenue.
We
believe the exclusion of fuel surcharges affords a more consistent basis for
comparing the results of operations from period to period.
We
operate tractors driven by a single driver and also tractors assigned to
two-person driver teams. Over time, the percentage of our revenue generated
by
driver teams has trended down, although the mix depends on a variety of factors
over time. Our single driver tractors generally operate in shorter lengths
of
haul, generate fewer miles per tractor, and experience more non-revenue miles,
but the lower productive miles are expected to be offset by generally higher
revenue per loaded mile and the reduced expense of compensating only one driver.
We expect operating statistics and expenses to shift with the mix of single
and
team operations.
Expenses
and Profitability
The
main
factors that impact our profitability on the expense side are the variable
costs
of transporting freight for our customers. These costs include fuel expense,
driver-related expenses, such as wages, benefits, training, and recruitment,
and
independent contractor costs, which we record as purchased transportation.
Expenses that have both fixed and variable components include maintenance and
tire expense and our total cost of insurance and claims. These expenses
generally vary with the miles we travel, but also have a controllable component
based on safety, fleet age, efficiency, and other factors. Our main fixed cost
is the acquisition and financing of long-term assets, primarily revenue
equipment and operating terminals. In addition, we have other mostly fixed
costs, such as our non-driver personnel.
The
trucking industry has experienced significant increases in expenses over the
past three years, in particular those relating to equipment costs, driver
compensation, insurance, and fuel. As the U.S. economy has expanded, many
trucking companies have been able to raise freight rates to cover the increased
costs. This is primarily due to a favorable relationship between freight demand
and industry-wide capacity of tractors and trailers. For 2005, our costs
(excluding the effect of the claims adjustment in the fourth quarter of 2004)
rose faster than revenue because of the company-specific decline in freight
volumes during the first half of 2005. We believe the reason for the decline
has
been addressed. Accordingly, we expect increases in revenue per tractor to
exceed increases in costs so long as freight demand continues to exceed truck
capacity, excluding any additional company-specific issues we may face,
including issues we may encounter during our business realignment.
Revenue
Equipment
We
operate approximately 3,471 tractors and 8,565 trailers. Of our tractors, at
December 31, 2005, approximately 2,186 were owned, 1,140 were financed
under operating leases, and 145 were provided by independent contractors, who
own and drive their own tractors. Of our trailers, at December 31, 2005,
approximately 1,020 were owned and approximately 7,545 were financed under
operating leases. We finance a portion of our tractor fleet and most of our
trailer fleet with off-balance sheet operating leases. These leases generally
run for a period of three years for tractors and five to seven years for
trailers.
In
September 2005, we entered into an agreement with a finance company to lease
approximately 1,800 model-year 2006 and 2007 dry van trailers under seven-year
walk away leases. These trailers will replace approximately 1,200 model-years
1998 and 1999 dry van trailers and approximately 600 model-year 2000 dry van
trailers. The 1,800 trailers will be replaced over the next year as new trailers
are delivered. After the completion of this transaction, our oldest trailers
in
operation will be 2001 model-year trailers.
For
2006,
we plan to replace approximately 2,100 tractors, or approximately 65% of our
company-owned tractor fleet. This is approximately twice the number of tractors
we would normally replace and will result in a substantial increase over normal
replacement capital expenditures. We are increasing our purchases in 2006 to
afford us flexibility to evaluate the cost and performance of tractors equipped
with engines that meet 2007 emissions requirements.
Independent
contractors (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 independent
contractors 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 independent contractor-tractors, driver compensation, fuel, and other
expenses are not incurred. Because obtaining equipment from independent
contractors and under operating leases effectively shifts financing expenses
from interest to "above the line" operating expenses, we evaluate our efficiency
using net margin as well as operating ratio.
Business
Realignment and Outlook for 2006
In
mid-2005, we began the process of formally realigning our operations around
four
major transportation service offerings: Expedited team service, Refrigerated
service, Dedicated service, and Regional solo-driver service. The realignment
has involved significant changes, including selecting and installing new
leadership over each service offering, reassigning personnel, allocating
tractors and trailers to each service offering, migrating operations to
preferred traffic lanes for each service offering, acquainting drivers and
customers to new lanes, contacts, and procedures, and developing systems to
support, measure, and hold accountable each service offering. Although we have
made significant progress, this process will continue at least into
2007.
Initial
results of the business realignment on each service offering include the
following:
|
Expedited
team service. Focused attention on teams has produced a substantial
increase in average length of haul, average miles per tractor, and
average
freight revenue per tractor. As a result of greater productivity,
the
previous decline in team-driven tractors has
stabilized.
|
|
|
|
Refrigerated
service. Prioritizing certain lanes and the allocation of teams to
this
service offering increased average length of haul, average miles
per
tractor, and average revenue per tractor. In addition, we are increasing
the allocation of tractors to this service offering.
|
|
|
|
Dedicated
service. There has been essentially no change in Dedicated service
because
of the longer contract duration. In addition, we are continuing to
evaluate individual candidates to manage this business.
|
|
|
|
Regional
solo-driver service. This service offering is our largest and is
in the
beginning stages of significant changes in its operating lanes and
territories, freight mix, personnel, and policies and procedures.
Over the
long term we expect these changes to result in a shorter average
length of
haul and an increase in average freight revenue per tractor. However,
interim results may fluctuate substantially. We expect to allocate
trucks
to other service offerings until the operating results of this service
offering improve and become more
consistent.
|
Our
business realignment presents numerous challenges and may result in volatile
financial performance or periods of unprofitable results. We believe our results
will be most volatile during the first half of 2006. However, fluctuations
in
results may be ongoing as major activities within the realignment will continue
at least into 2007. For 2006, we are expecting a continuation of the favorable
relationship between freight demand and trucking capacity that has allowed
significant rate increases over the past two years. We also expect average
fuel
prices to approximate the average levels in 2005. Based on these expectations
and assuming meaningful progress with our realignment, our financial performance
in 2006 should improve significantly compared with 2005, with most of the
improvement coming in the second half of the year.
RESULTS
OF OPERATIONS
For
comparison purposes in the table below, we use freight revenue, or total revenue
less fuel surcharges, in addition to total revenue when discussing changes
as a
percentage of revenue. We believe excluding this sometimes volatile source
of
revenue affords a more consistent basis for comparing our results of operations
from period to period. Freight revenue excludes $87.6 million, $45.2,
million and $26.8 million of fuel surcharges in each of 2005, 2004, and
2003, respectively.
The
following table sets forth the percentage relationship of certain items to
total
revenue and freight revenue:
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
100.0%
|
|
100.0%
|
|
100.0%
|
|
Freight
revenue
(1)
|
|
100.0%
|
|
100.0%
|
|
100.0%
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Salaries,
wages, and related
expenses
|
|
|
37.7
|
|
|
37.4
|
|
|
37.9
|
|
|
Salaries,
wages, and related
expenses
|
|
|
43.6
|
|
|
40.4
|
|
|
39.7
|
|
Fuel
expense
|
|
|
26.5
|
|
|
21.2
|
|
|
18.8
|
|
|
Fuel expense (1)
|
|
|
14.9
|
|
|
14.8
|
|
|
14.8
|
|
Operations
and maintenance
|
|
|
5.2
|
|
|
5.1
|
|
|
6.8
|
|
|
Operations and maintenance
|
|
|
6.1
|
|
|
5.5
|
|
|
7.2
|
|
Revenue
equipment rentals
and
purchased transportation
|
|
|
9.6
|
|
|
11.6
|
|
|
12.0
|
|
|
Revenue
equipment rentals
and
purchased transportation
|
|
|
11.1
|
|
|
12.5
|
|
|
12.6
|
|
Operating
taxes and licenses
|
|
|
2.1
|
|
|
2.4
|
|
|
2.5
|
|
|
Operating taxes and licenses
|
|
|
2.4
|
|
|
2.5
|
|
|
2.6
|
|
Insurance
and claims
|
|
|
6.4
|
|
|
9.1
|
|
|
6.1
|
|
|
Insurance and claims
|
|
|
7.4
|
|
|
9.8
|
|
|
6.4
|
|
Communications
and utilities
|
|
|
1.0
|
|
|
1.1
|
|
|
1.2
|
|
|
Communications and utilities
|
|
|
1.2
|
|
|
1.2
|
|
|
1.3
|
|
General
supplies and expenses
|
|
|
2.8
|
|
|
2.5
|
|
|
2.5
|
|
|
General supplies and expenses
|
|
|
3.2
|
|
|
2.7
|
|
|
2.6
|
|
Depreciation
and amortization,
including
gains (losses) on
disposition
of equipment
|
|
|
6.1
|
|
|
7.5
|
|
|
7.4
|
|
|
Depreciation
and amortization,
including
gains (losses) on
disposition
of equipment
|
|
|
7.0
|
|
|
8.1
|
|
|
7.7
|
|
Total
operating expenses
|
|
|
97.3
|
|
|
97.7
|
|
|
95.2
|
|
|
Total
operating expenses
|
|
|
96.9
|
|
|
97.5
|
|
|
94.9
|
|
Operating
income
|
|
|
2.7
|
|
|
2.3
|
|
|
4.8
|
|
|
Operating
income
|
|
|
3.1
|
|
|
2.5
|
|
|
5.1
|
|
Other
expense, net
|
|
|
0.5
|
|
|
0.4
|
|
|
0.3
|
|
|
Other
expense, net
|
|
|
0.6
|
|
|
0.4
|
|
|
0.3
|
|
Income
before income taxes and
cumulative
effect of change
in
accounting principle
|
|
|
2.1
|
|
|
2.0
|
|
|
4.5
|
|
|
Income
before income taxes and
cumulative
effect of change
in
accounting principle
|
|
|
2.5
|
|
|
2.1
|
|
|
4.8
|
|
Income
tax expense
|
|
|
1.2
|
|
|
1.4
|
|
|
2.4
|
|
|
Income
tax expense
|
|
|
1.4
|
|
|
1.5
|
|
|
2.6
|
|
Cumulative
effect of change in
accounting
principle,
net
of tax
|
|
|
0.1
|
|
|
0.0
|
|
|
0.0
|
|
|
Cumulative
effect of change in
accounting
principle,
net
of tax
|
|
|
0.1
|
|
|
0.0
|
|
|
0.0
|
|
Net
income
|
|
|
0.9
|
%
|
|
0.6
|
%
|
|
2.1
|
%
|
|
Net
income
|
|
|
1.0
|
%
|
|
0.6
|
%
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Freight
revenue is total revenue less fuel surcharges. In this table, fuel
surcharges are eliminated from revenue and subtracted from fuel expense.
The amounts were $87.6 million, $45.2 million, and
$26.8 million in 2005, 2004, and 2003,
respectively.
|
Comparison
of Year Ended December 31, 2005 to Year Ended December 31,
2004
Total
revenue increased $39.4 million, or 6.5%, to $643.1 million in 2005,
from $603.6 million in 2004. Freight revenue excludes $87.6 million of
fuel surcharge revenue in 2005 and $45.2 million in 2004. 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 surcharges) decreased $3.0 million (0.5%),
to $555.4 million in 2005, from $558.5 million in 2004. Average
freight revenue per tractor per week, a key statistic that we use to evaluate
our asset productivity, increased 0.6% to $3,013 in 2005 from $2,995 in 2004.
Our average freight revenue per tractor per week increase was primarily
generated by a 7.6% increase in average freight revenue per loaded mile, which
was partially offset by lower miles per tractor and an increase in our
percentage of non-revenue miles. Our rates have increased primarily due to
a
strong freight market, tightened truck capacity, a decrease in our average
length of haul, and an improvement in our freight selection. Weighted average
tractors decreased 0.6% to 3,535 in 2005 from 3,558 in 2004. We have elected
to
constrain the size of our tractor fleet until fleet production and profitability
improve.
Salaries,
wages, and related expenses increased $16.4 million, or 7.3%, to
$242.2 million in 2005, from $225.8 million in 2004. As a percentage
of freight revenue, salaries, wages, and related expenses increased to
43.6% in
2005, from 40.4% in 2004. Driver pay increased $14.7 million, to 30.4% of
freight revenue in 2005 from 27.7% of freight revenue in 2004. The increase
was
largely attributable to mileage pay increases and new retention bonus programs.
A driver retention bonus program went into effect in September 2004, and
mileage
pay increases went into effect in March and April 2005. If the shortage
of
qualified drivers continues, additional driver pay increases may be necessary
in
the future. Our payroll expense for employees other than over-the-road
drivers
remained relatively constant at 7.0% of freight revenue in 2005 and 2004.
Health
insurance, employer paid taxes, workers' compensation, and other employee
benefits increased to 6.2% of freight revenue in 2005 from 5.8% of freight
revenue in 2004 partially due to higher payroll taxes and an increase in
our
health insurance claims.
Fuel
expense, net of fuel surcharge revenue of $87.6 million in 2005 and
$45.2 million in 2004, remained relatively constant at $83.0 million
in 2005 and $82.6 million in 2004. Fuel prices increased sharply during
2005 from already high levels during 2004. As a percentage of freight revenue,
net fuel expense remained relatively constant at 14.9% in 2005 and 14.8%
in
2004. Our fuel surcharge program was able to offset a substantial portion
of the
higher fuel prices. Fuel surcharges amounted to $0.214 per revenue mile in
2005
and $0.103 per revenue mile in 2004. Fuel costs may be affected in the future
by
price fluctuations, supply shortages, volume purchase commitments, the terms
and
collectibility of fuel surcharges, the percentage of miles driven by independent
contractors, and lower fuel mileage due to government-mandated emissions
standards that have resulted in less fuel efficient engines. At
December 31, 2005, we had no derivative financial instruments to reduce our
exposure to fuel price fluctuations.
Operations
and maintenance, which consists primarily of vehicle maintenance and repairs
and
driver recruitment expenses, increased $3.1 million, or 10.0%, to
$33.6 million in 2005, from $30.6 million in 2004. As a percentage of
freight revenue, operations and maintenance increased to 6.1% of freight revenue
from 5.5% in 2004. The increase resulted in part from increased tire costs,
unloading costs, and increased driver recruiting expense due to a tighter supply
of drivers.
Revenue
equipment rentals and purchased transportation decreased $8.2 million, or
11.8%, to $61.7 million in 2005 from $69.9 million in 2004. The
decrease is due primarily to a decrease in the percentage of our total miles
driven by independent contractors, which more than offset an increase in revenue
equipment rental payments. Payments to independent contractors decreased $13.2
million, to $21.5 million in 2005 from $34.7 million in 2004, mainly due to
a
decrease in the independent contractor fleet to an average of 186 trucks in
2005
from an average of 301 in 2004. We have experienced difficulty in retaining
our
independent contractors due to the challenging operating conditions. Tractor
and
trailer equipment rental and other related amounts increased $4.9 million,
to $40.2 million in 2005, compared to $35.3 million in 2004. We had
approximately 1,140 tractors and 7,545 trailers under operating leases at
December 31, 2005, compared with 1,320 tractors and 7,668 trailers financed
at
December 31, 2004. Although we ended the year with fewer pieces of equipment
financed through lease agreements, during 2005 we averaged more equipment
financed through lease agreements than during 2004.
Operating
taxes and licenses decreased $0.8 million, or 5.5%, to $13.4 million
in 2005 from $14.2 million in 2004. The decrease partially resulted from a
property tax settlement of approximately $0.4 million relating to the 2002
tax
year. As a percentage of freight revenue, operating taxes and licenses remained
essentially constant at 2.4% in 2005 and 2.5% in 2004.
Insurance
and claims, consisting primarily of premiums and deductible amounts for
liability, physical damage, and cargo damage insurance and claims, decreased
$13.8 million, or 25.2%, to $41.0 million in 2005 from
$54.8 million in 2004. As a percentage of freight revenue, insurance and
claims expense decreased to 7.4% in 2005 from 9.8% in 2004. During the fourth
quarter of 2004, we recorded an $18.0 million non-cash increase to our
reserves for casualty claims. Excluding the $18.0 million increase to
reserves, insurance and claims increased to 7.4% as a percentage of freight
revenue from 6.6% as a percentage of freight revenue. The increase as a
percentage of freight revenue was attributable to a higher actuarial accrual
rate based on historical trends. Insurance and claims expense will vary based
on
the frequency and severity of claims, premium expenses, and our level of
self-insured retention and may cause our insurance and claims expense to be
higher or more volatile in future periods than in historical periods.
During
the first quarter of 2005, we renewed our casualty program through February
2007. In general, for casualty claims after March 1, 2005, we have
insurance coverage up to $50.0 million per claim. We are self-insured for
personal injury and property damage claims for amounts up to $2.0 million
per occurrence, subject to an additional $2.0 million self-insured
aggregate amount, which results in the total self-insured retention of up to
$4.0 million until the $2.0 million aggregate threshold is reached. We
are self-insured for cargo loss and damage claims for amounts up to
$1.0 million per occurrence.
Communications
and utilities remained relatively constant at $6.6 million in 2005 and
$6.5 million in 2004. As a percentage of freight revenue, communications
and utilities remained constant at 1.2% in 2005 and 2004.
General
supplies and expenses, consisting primarily of headquarters and other terminal
facilities expenses, increased $2.7 million, or 17.7%, to
$17.8 million in 2005, from $15.1 million in 2004. As a percentage of
freight revenue, general supplies and expenses increased to 3.2% in 2005
from
2.7% in 2004. The increase is due to our paying for physicals and drug tests
for
our drivers, which in the past were paid for by the drivers, an increase
in our
travel expenses
related to customer visits, and an increase in our bad debt allowance related
to
two customers. One customer is in mediation and the other customer announced
a
planned liquidation.
Depreciation
and amortization expense, consisting primarily of depreciation of revenue
equipment, decreased $5.9 million, or 13.1%, to $39.1 million in 2005
from $45.0 million in 2004. As a percentage of freight revenue,
depreciation and amortization decreased to 7.0% in 2005 from 8.1% in 2004.
Depreciation and amortization expense is net of any gain or loss on the disposal
of tractors and trailers. The decrease in depreciation as a percentage of
revenue was attributable to gains on the disposal of tractors and trailers
of
approximately $0.7 million in 2005 compared to a loss of $3.5 million
in 2004, an increase in the average percentage of our tractor and trailer fleet
comprised of leased equipment, and increases in revenue per tractor, which
more
efficiently spread this fixed cost. Depreciation expense is expected to increase
as a percentage of revenue in future periods, due to a shift toward owned rather
than leased equipment, and increased preparation costs related to a large
planned trade package for 2006 of approximately 1,800 trailers and approximately
2,000 tractors. The trade-in preparation costs will be reflected as a component
of gains (losses) on disposition of assets.
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, Goodwill
and Other Intangible Assets.
We
evaluate goodwill and certain intangibles for impairment annually. During the
second quarter of 2005, we tested our goodwill ($11.5 million) for impairment
and found no impairment.
The
other
expense category includes interest expense, interest income, and pre-tax
non-cash gains or losses related to the accounting for interest rate derivatives
under SFAS No. 133. Other expense, net, increased $1.3 million, or 59.7%,
to $3.4 million in 2005 from $2.1 million in 2004. As a percentage of
freight revenue, other expense increased to 0.6% in 2005 from 0.4% in 2004.
The
increase is primarily due to higher interest rates and higher debt balances.
In
2004, we accrued a $0.4 million interest charge related to a proposed disallowed
IRS transaction. We recorded a $0.4 million pre-tax, non-cash gain in 2005
compared to a gain of $0.8 million in 2004, related to the accounting for
interest rate derivatives under SFAS No. 133.
Income
tax expense decreased $0.4 million, or 5.3%, to $8.0 million in 2005
from $8.5 million in 2004. 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.
We
recorded a $0.5 million, net of tax, adjustment related to the cumulative
effect
of change in accounting principle. In December 2005, we adopted the provisions
of FASB Interpretation No. 47, Accounting
for Conditional Asset Retirement Obligations,
an
interpretation of FASB Statement No. 143 ("FIN 47"). The adoption of FIN
47
resulted in our recording an asset retirement obligation for the estimated
costs for the de-identification obligations in certain of our equipment
leases.
As
a
result of the factors described above, net income increased $1.8 million,
or 53.6%, to $5.2 million in 2005 from $3.4 million in 2004. As a
result of the foregoing, our net margin increased to 0.9% in 2005 from 0.6%
in
2004.
Comparison
of Year Ended December 31, 2004 to Year Ended December 31,
2003
Total
revenue increased $21.2 million, or 3.6%, to $603.6 million in 2004,
from $582.5 million in 2003. Freight revenue excludes $45.2 million of
fuel surcharge revenue in 2004 and $26.8 million in 2003. 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 surcharges) increased $2.8 million (0.5%),
to $558.5 million in 2004, from $555.7 million in 2003. Revenue per
tractor per week, a key statistic that we use to evaluate our asset
productivity, increased 3.4% to $2,995 in 2004 from $2,897 in 2003. Our revenue
per tractor per week increase was primarily generated by a 10.7% increase
in
average freight revenue per loaded mile which was partially offset by lower
miles per tractor and an increase in our percentage of non-revenue miles.
Our
rates have increased primarily due to a strong freight market, tightened
truck
capacity, a decrease in our average length of haul, and an improvement in
our
freight selection. Weighted average tractors decreased 3.0% to 3,558 in 2004
from 3,667 in 2003. We have elected to constrain the size of our tractor
fleet
until fleet production and profitability improve.
Salaries,
wages, and related expenses increased $5.1 million, or 2.3%, to
$225.8 million in 2004, from $220.7 million in 2003. As a percentage
of freight revenue, salaries, wages, and related expenses increased to
40.4% in
2004, from 39.7% in 2003. Driver pay increased $5.4 million, to 27.7% of
freight revenue in 2004 from 26.8% of freight revenue in 2003. The increase
was
largely attributable to pay increases and new retention bonus programs.
Driver
wages are expected to increase as a percentage of revenue in future periods,
due
to a planned two-cent per mile pay increase that will go into effect March
2005
and an additional one cent per mile pay increase for team drivers in April
2005.
If the shortage of qualified drivers continues, additional driver pay increases
may be necessary in the future. Our payroll expense for employees other
than
over the road drivers remained relatively constant at 7.0% of freight revenue
in
2004 and 7.2% of freight revenue in 2003. Health insurance, employer paid
taxes,
workers' compensation, and other employee benefits remained essentially
constant
at 5.8% of freight revenue in 2004 and 5.7% of freight revenue in 2003.
Workers
compensation expense increased in 2004 and 2003. During the fourth quarter
of
2004, we incurred a $1.5 million non-cash increase to our workers'
compensation claims reserves as a result of a change of estimated ultimate
liability. In 2003, we incurred an approximately $723,000 claim relating
to a
natural gas explosion in our Indianapolis terminal that injured four
employees.
Fuel
expense, net of fuel surcharge revenue of $45.2 million in 2004 and
$26.8 million in 2003, remained constant at $82.6 million in 2004 and
$82.5 million in 2003. Fuel prices increased sharply during 2003 and
remained at high levels in 2004. As a percentage of freight revenue, net fuel
expense remained relatively constant at 14.8% in 2004 and 2003. Fuel surcharges
amounted to $0.103 per revenue mile in 2004 and $0.056 per revenue mile in
2003,
which partially offset the increased fuel expense. Fuel costs may be affected
in
the future by price fluctuations, volume purchase commitments, the terms and
collectibility of fuel surcharges, the percentage of miles driven by independent
contractors, and lower fuel mileage due to government mandated emissions
standards that have resulted in less fuel efficient engines. At
December 31, 2004, we had no derivative financial instruments to reduce our
exposure to fuel price fluctuations.
Operations
and maintenance, which consist primarily of vehicle maintenance, repairs and
driver recruitment expenses, decreased $9.3 million, or 23.3%, to
$30.6 million in 2004 from $39.8 million in 2003. As a percentage of
freight revenue, operations and maintenance expense decreased to 5.5% of freight
revenue from 7.2% in 2003. The decrease resulted in part from the implementation
of our equipment plan to change our four-year tractor trade cycle back to a
period of approximately three years, which has reduced the average age of our
tractor fleet. Accordingly, maintenance costs have decreased. The average age
of
our tractor and trailer fleets decreased substantially during 2003 and remained
relatively low during 2004. At December 31, 2004, the average age of our
tractor and trailer fleets was approximately 16 and 35 months, respectively.
The
maintenance savings are expected to be partially offset by increased driver
recruiting expense due to the greater demand for trucking services and a tighter
supply of drivers.
Revenue
equipment rentals and purchased transportation remained essentially constant
at
$69.9 million in 2004 and $70.0 million in 2003. During 2004, revenue
equipment rental expense increased and was offset by a decrease in purchased
transportation. Revenue equipment rental expense increased $9.9 million, or
38.8%, to $35.3 million in 2004 from $25.4 million in 2003 as we
financed more equipment under operating leases. As of December 2004, we had
financed approximately 1,222 tractors and 7,149 trailers under operating leases
as compared to 963 tractors and 6,050 trailers under operating leases as of
December 2003. Payments to independent contractors decreased $9.9 million
to $34.7 million in 2004 from $44.6 million in 2003, mainly due to a
decrease in the independent contractor fleet to an average of 301 during 2004
versus an average of 390 in 2003. We have experienced difficulty in retaining
our independent contractors due to the challenging operating conditions. In
an
effort to retain and attract more independent contractors, we have planned
a
four cent per mile increase that will go into effect March 2005. Payments due
to
independent contractors could increase as a percentage of revenue in future
periods if the independent contractor fleet remains at its current level.
Operating
taxes and licenses remained essentially constant at $14.2 million in 2004
and $14.4 million in 2003. As a percentage of freight revenue, operating
taxes and licenses remained essentially constant at 2.5% in 2004 and 2.6%
in
2003.
Insurance
and claims, consisting primarily of premiums and deductible amounts for
liability, physical damage, and cargo damage insurance and claims, increased
$19.4 million (54.7%), to $54.8 million in 2004 from
$35.5 million in 2003. As a percentage of freight revenue, insurance and
claims expense increased to 9.8% in 2004 from 6.4% in 2003. During the fourth
quarter of 2004, we recorded an $18.0 million non-cash increase to our
reserves for casualty claims. Excluding the effect of that adjustment, insurance
and claims was 6.6% of freight revenue in 2004 and 6.4% of freight revenue
in
2003. Insurance and claims expense will vary based on the frequency and severity
of claims, the premium expense, and the level of self-insured retention and
may
cause our insurance and claims expense to be higher or more volatile in future
periods than in historical periods.
Communications
and utilities decreased $0.7 million, or 9.2%, to $6.5 million in 2004
from $7.2 million in 2003. As a percentage of freight revenue,
communications and utilities remained essentially constant at 1.2% in 2004
and
1.3% in 2003.
General
supplies and expenses, consisting primarily of headquarters and other terminal
facilities expenses, increased $0.6 million, or 4.2%, to $15.1 million
in 2004 from $14.5 million in 2003. As a percentage of freight revenue,
general supplies and expenses remained essentially constant at 2.7% in 2004
and
2.6% in 2003. An increase in public company expenses relating to Sarbanes-Oxley
requirements affected this category of expenses.
Depreciation
and amortization expense, consisting primarily of depreciation of revenue
equipment, increased $2.0 million, or 4.6%, to $45.0 million in 2004
from $43.0 million in 2003. As a percentage of freight revenue,
depreciation and amortization increased to 8.1% in 2004 from 7.7% in 2003.
The
increase primarily related to trade-in preparation costs and losses on the
sale
of equipment. This was partially offset by a decrease in the value of owned
revenue equipment being depreciated due to more equipment being leased instead
of purchased. To the extent equipment is leased under operating leases, the
amounts will be reflected in revenue equipment rentals and purchased
transportation. 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 $3.5 million in 2004 compared to a gain of
$0.9 million in 2003.
Other
expense, net, increased $0.4 million, or 21.4%, to $2.1 million in
2004 from $1.8 million in 2003. As a percentage of freight revenue, other
expense remained essentially constant at 0.4% in 2004 and 0.3% in 2003. The
increase is due to a $0.4 million interest charge related to a proposed
disallowed IRS transaction and higher interest expense. These increases were
partially offset by a $0.8 million pre-tax, non-cash gain in 2004 related
to the accounting for interest rate derivatives under SFAS No. 133, compared
to
a gain of $0.4 million in 2003. The other expense category includes
interest expense, interest income, and pre-tax non-cash gains or losses related
to the accounting for interest rate derivatives under SFAS No. 133.
Income
tax expense decreased $5.9 million, or 41.0%, to $8.5 million in 2004
from $14.3 million in 2003. 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.
As
a
result of the factors described above, net income decreased $8.8 million,
or 72.2%, to $3.4 million in 2004 from $12.2 million in 2003. As a
result of the foregoing, our net margin decreased to 0.6% in 2004 from 2.2%
in
2003. Excluding the $12.2 million non-cash, after-tax increase to claims
reserves, net income increased $3.4 million, or 28.4%, to
$15.6 million, for a net margin of 2.8%.
LIQUIDITY
AND CAPITAL RESOURCES
Our
business requires significant capital investments. In recent years, we have
financed our capital requirements with borrowings under credit facilities,
cash
flows from operations, and long-term operating leases. Our primary sources
of
liquidity at December 31, 2005, were funds provided by operations, proceeds
under the Securitization Facility and borrowings under our Credit Agreement,
each as defined in Notes 5 and 6 to our consolidated financial statements
contained herein, and operating leases of revenue equipment.
Over
the
past several years, we have financed a large percentage of our revenue equipment
through operating leases. This has reduced the net value of revenue equipment
reflected on our balance sheet, reduced our borrowings, and increased our
net
cash flows compared to purchasing all of our revenue equipment. Certain items
could fluctuate depending on whether we finance our revenue equipment through
borrowings or through operating leases. We expect capital expenditures,
primarily for revenue equipment (net of trade-ins), to be approximately $60
to
$65 million in 2006, exclusive of acquisitions of companies, assuming all
revenue equipment is purchased. We believe our sources of liquidity are adequate
to meet our current and projected needs for at least the next twelve months.
On
a longer term basis, based on anticipated future cash flows, expected
availability under our Credit Agreement and Securitization Facility, and
sources
of financing that we expect will be available to us, we do not expect to
experience significant liquidity constraints in the foreseeable
future.
Cash
Flows
Net
cash
provided by operating activities was $25.6 million in 2005,
$44.1 million in 2004, and $47.7 million in 2003. Our primary sources
of cash flow from operations in 2005 were net income increased by depreciation
and amortization. Our number of days sales in accounts receivable has increased
to 43 days in 2005 from 40 days in 2003 due to difficulty in resolving and
collecting detention accessorial revenue related to the hours-of-service
regulations that went into effect in 2004.
Net
cash
used in investing activities was $43.9 million in 2005, $32.4 million
in 2004, and $25.9 million in 2003. The net cash was used was primarily for
the acquisition of new revenue equipment (net of trade-ins) using proceeds
from
the Credit Agreement.
Net
cash
provided by financing activities was $16.9 million in 2005 compared to cash
used
in financing activities of $9.9 million in 2004 and $18.6 million in
2003. During 2005, outstanding balance sheet debt increased by
$28.1 million. At December 31, 2005, we had outstanding debt of
$80.3 million, consisting of $47.3 million in the Securitization
Facility and $33.0 million drawn under the Credit Agreement. We used
approximately $11.7 million to repurchase shares of our Class A common
stock. In May 2005, the Board of Directors authorized a stock repurchase plan
for up to 1.3 million Company shares to be purchased in the open market or
through negotiated transactions subject to criteria established by the Board.
During 2005, we purchased a total of 720,800 shares with an average price of
$16.17. The stock repurchase plan expires June 30, 2006 and replaced the stock
repurchase program adopted in 2004.
Material
Debt Agreements
In
December 2004, we entered into a credit agreement with a group of banks, (the
"Credit Facility"). The facility matures in December 2009. Borrowings under
the
Credit Agreement are based on the banks' base rate, which floats daily, or
LIBOR, which accrues interest based on one, two, three, or six month LIBOR
rates
plus an applicable margin that is adjusted quarterly between 0.75% and 1.25%
based on cash flow coverage (the applicable margin was 1.0% at December 31,
2005). At December 31, 2005, we had only LIBOR borrowings totaling
$33.0 million outstanding, with a weighted average interest rate of 5.4%.
The Credit Agreement is guaranteed by us and all of our subsidiaries except
CRC
and Volunteer.
The
Credit Agreement has a maximum borrowing limit of $150.0 million with an
accordion feature, which permits an increase up to a maximum borrowing limit
of
$200.0 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
$75.0 million. The Credit Agreement is secured by a pledge of the stock of
most of our subsidiaries. A commitment fee, that is adjusted quarterly between
0.15% and 0.25% per annum based on cash flow coverage, is due on the daily
unused portion of the Credit Agreement. As of December 31, 2005, we had
approximately $21.6 million of available borrowing capacity. At
December 31, 2005 and December 31, 2004, we had undrawn letters of
credit outstanding of approximately $73.9 million and $65.4 million,
respectively.
The
Credit Agreement contains certain restrictions and covenants relating to, among
other things, dividends, tangible net worth, cash flow, acquisitions and
dispositions, and total indebtedness and are cross-defaulted with our
securitization facility. At December 31, 2005, we were in compliance with
the Credit Agreement covenants.
In
December 2000, we entered into an accounts receivable securitization facility
(the "Securitization Facility"). On a revolving basis, we sell its 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 $62.0 million of proceeds, subject to eligible receivables and pay
a
service fee recorded as interest expense, based on commercial paper interest
rates plus an applicable margin of 0.44% 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
December 31, 2005 and December 31, 2004, we had $47.3 million and
$44.1 million outstanding, respectively, with weighted average interest
rates of 4.4% and 2.4%, respectively. CRC does not meet the requirements
for
off-balance sheet accounting; therefore, it is reflected in our consolidated
financial statements.
The
Securitization Facility contains certain restrictions and covenants relating
to,
among other things, dividends, tangible net worth, cash flow coverage,
acquisitions and dispositions, and total indebtedness. As of December 31,
2005, we were in compliance with the Securitization Facility
covenants.
Sale-Leaseback
Transactions
In April
2006, we expect to complete a sale-leaseback transaction involving a major
portion of our Chattanooga facility, including our corporate headquarters.
In
the transaction, we plan to sell the headquarters, maintenance facility, body
shop, and approximately 46 acres of surrounding property for approximately
$30.0
million. We expect to lease the facilities back under a 20-year lease with
annual rental of approximately $2.5 million, subject to annual increases of
1.0%. We expect to have options to extend the lease for 5 years after the
initial term and an option to purchase for fair market value.
In
September 2005, we entered into an agreement with a finance company to lease
approximately 1,800 model year 2006 and 2007 dry van trailers under seven year
walk away leases. These trailers will replace approximately 1,200 model years
1998 and 1999 dry van trailers and approximately 600 model year 2000 dry van
trailers. The 1,800 trailers will be replaced over the next year as new trailers
are delivered. After the completion of this transaction, the oldest trailer
we
will be operating will be a 2001 model year trailer.
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
$15.6 million in cash and leased the trailers back under three year walk
away leases. The resulting gain was approximately $0.3 million and is being
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. We sold the trailers, which consisted of model year
1991
to model year 1997 dry van trailers, to the finance company for approximately
$20.5 million in cash and leased the 3,600 dry van trailers back under
seven year walk away leases. 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. The transaction was completed
in the first quarter of 2004 and the leases begin to expire in June
2010.
Contractual
Obligations and Commercial Commitments
The
following table sets forth our contractual cash obligations and commitments
as
of December 31, 2005.
Payments
due by period
(in
thousands)
|
|
Total
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
There-
after
|
|
Long-term
debt, including
current
maturities (1)
|
|
$
|
40,237
|
|
$
|
1,862
|
|
$
|
1,790
|
|
$
|
1,795
|
|
$
|
34,790
|
|
$
|
|
|
$
|
-
|
|
Securitization
facility,
including interest (2)
|
|
|
47,833
|
|
|
47,833
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Operating
leases (3)
|
|
|
110,134
|
|
|
39,025
|
|
|
27,167
|
|
|
18,726
|
|
|
12,990
|
|
|
9,940
|
|
|
2,286
|
|
Lease
residual value
guarantees
|
|
|
47,369
|
|
|
9,124
|
|
|
10,553
|
|
|
14,401
|
|
|
4,418
|
|
|
8,873
|
|
|
-
|
|
Purchase
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diesel
fuel (4)
|
|
|
110,421
|
|
|
110,421
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Equipment
(5)
|
|
|
217,600
|
|
|
217,600
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
contractual cash
obligations
|
|
$
|
573,594
|
|
$
|
425,865
|
|
$
|
39,510
|
|
$
|
34,922
|
|
$
|
52,198
|
|
$
|
18,813
|
|
$
|
2,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents
principal and interest payments owed at December 31, 2005. The
borrowings consist of draws under a revolving line of credit, with
fluctuating borrowing amounts and variable interest rates. In
determining future contractual interest and principal obligations,
for
variable interest rate debt, the interest rate and principal amount
in
place at December 31, 2005 was utilized. The table assumes long-term
debt
is held to maturity. Refer to Note 5, "Long-term Debt" and Note 6,
"Accounts Receivable Securitization and Allowance for Doubtful
Accounts."
|
(2)
|
In
2006, this amount represents proceeds drawn under our Securitization
Facility, and the interest rate in place at December 31, 2005 was
utilized. 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 December 2006.
|
(3)
|
Represents
future monthly rental payment obligations under operating leases
for
over-the-road tractors, day-cabs, and trailers. Substantially
all lease agreements for revenue equipment have fixed payment terms
based
on the passage of time. The tractor lease agreements generally stipulate
maximum miles and provide for mileage penalties for excess miles.
Lease
terms for tractors and trailers range from 30 to 60 months and 60
to 84
months, respectively. Refer to Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations - Off Balance
Sheet Arrangements and Note 7, "Leases," in the accompanying consolidated
financial statements for further information.
|
(4)
|
This
amount represents volume purchase commitments through our truck stop
network. We estimate that these amounts represent approximately 65%
of our
fuel needs for 2006.
|
(5)
|
Amount
reflects the total purchase price or lease commitment of tractors
and
trailers scheduled for delivery throughout 2006. Net of estimated
trade-in
values and other dispositions, the estimated amount due under these
commitments is approximately $127.0 million. These purchases are
expected to be financed by debt, proceeds from sales of existing
equipment, cash flows from operations, and operating leases. We have
the
option to cancel commitments relating to tractor equipment with 60
days
notice.
|
Off
Balance Sheet Arrangements
At
December 31, 2005, we financed approximately 1,140 tractors and 7,545
trailers under operating leases. Vehicles held under operating leases are
not
carried on our balance sheet, and lease payments in respect of such vehicles
are
reflected in our income statements under revenue equipment rentals and purchased
transportation. Our revenue equipment rental and other related amounts were
$40.2 million in 2005, compared to $35.3 million in 2004. The total amount
of remaining payments under operating leases as of December 31, 2005, was
$110.1 million. In connection with various operating leases, we issued
residual value guarantees, which provide that if we do not purchase the leased
equipment from the lessor at the end of the lease term, then we are liable
to
the lessor for an amount equal to the shortage (if any) between the proceeds
from the sale of the equipment and an agreed value. As of December 31,
2005, the maximum amount of the residual value guarantees was approximately
$47.4 million. To the extent the expected value at the lease termination
date is lower than the residual value guarantee, we would accrue for the
difference over the remaining lease term. We believe that the proceeds from
the
sale of equipment under operating leases would exceed the payment obligation
on
substantially all operating leases.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
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 followed in preparation of
the
financial statements is contained in Note 1 of the financial statements attached
hereto. The following discussion addresses our most critical accounting
policies, which are those that are both important to the portrayal of our
financial condition and results of operations and that require significant
judgment or use of complex estimates.
Depreciation
of Revenue Equipment
Depreciation
is calculated using the straight-line method over the estimated useful lives
of
the assets and was approximately $36.8 million on tractors and trailers in
2005.
Depreciation of revenue equipment is our largest item of depreciation. We
generally depreciate new tractors (excluding day cabs) over five years to
salvage values of 4% to 25% and new trailers over seven years to salvage values
of 17% to 39%. Gains
and
losses on the disposal of revenue equipment are included in depreciation expense
in our statements of operations.
We
annually review the reasonableness of our estimates regarding useful lives
and
salvage values of our revenue equipment and other long-lived assets based upon,
among other things, our experience with similar assets, conditions in the used
revenue equipment market, and prevailing industry practice. Changes in our
useful life or salvage value estimates, or fluctuations
in market values that are not reflected in our estimates, could have a material
effect on our results of operations.
Revenue
equipment and other long-lived assets are tested for impairment whenever an
event occurs that indicates an impairment may exist. Expected future cash flows
are used to analyze whether an impairment has occurred. If the sum of expected
undiscounted cash flows is less than the carrying value of the long-lived asset,
then an impairment loss is recognized. We measure the impairment loss by
comparing the fair value of the asset to its carrying value. Fair value is
determined based on a discounted cash flow analysis or the appraised value
of
the asset, as appropriate. We have not recognized any impairments of long-lived
assets to date.
Insurance
and Other Claims
The
primary claims arising against us consist of cargo liability, personal injury,
property damage, workers’ compensation, and employee medical expenses.
Our
insurance program involves self-insurance with high-risk retention levels.
Because of our significant self-insured retention amounts, we have significant
exposure to fluctuations in the number and severity of claims and to variations
between our estimates and actual ultimate payouts. We
accrue
the estimated cost of the uninsured portion of pending claims. Our estimates
require judgments concerning the nature and severity of the claim, historical
trends, advice from third-party administrators and insurers, the specific facts
of individual cases, the jurisdictions involved, estimates of future claims
development, and the legal and other costs to settle or defend the claims.
We
have significant exposure to fluctuations in the number and severity of claims.
If there is an increase in the frequency and severity of claims, or we are
required to accrue or pay additional amounts if the claims prove to be more
severe than originally assessed, or any of the claims would exceed the limits
of
our insurance coverage, our profitability would be adversely affected.
In
addition to estimates within our self-insured retention layers, we also must
make judgments concerning our aggregate coverage limits. If any claim occurrence
were to exceed our aggregate coverage limits, we would have to accrue for
the
excess amount. Our critical estimates include evaluating whether a claim
may
exceed such limits and, if so, by how much. Currently, we are not aware of
any
such claims. If one or more claims were to exceed our then effective coverage
limits, our financial condition and results of operations could be materially
and adversely affected.
During
2004 we engaged an independent, third-party actuarial firm to assist us in
evaluating our claims reserves estimates. As a result of the actuarial study
and
our own procedures we recorded a $19.6 million non-cash, pretax increase to
claims reserves during the fourth quarter of 2004. We have incorporated several
procedures suggested by the actuary into our claims estimation process for
future periods.
Lease
Accounting and Off-Balance Sheet Transactions
Operating
leases have been an important source of financing for our revenue equipment,
computer equipment and company airplane. In connection with the leases of
a
majority of the value of the equipment we finance with operating leases,
we
issue residual value guarantees, which provide that if we do not purchase
the
leased equipment from the lessor at the end of the lease term, then we are
liable to the lessor for an amount equal to the shortage (if any) between
the
proceeds from the sale of the equipment and an agreed value. To the extent
the
expected value at the lease termination date is lower than the residual value
guarantee, we would accrue for the difference over the remaining lease
term.
We
annually review the estimated fair market value of the leased revenue equipment
at the end of the lease term against the residual values we guarantee.
The
estimated values at lease termination involve management judgments. As leases
are entered into determination as to the classification as an operating or
capital lease involves management judgments on residual values and useful
lives.
Accounting
for Income Taxes
In
this
area, we make important judgments concerning a variety of factors, including,
the appropriateness of tax strategies, expected future tax consequences based
on
future company performance, and to the extent tax strategies are challenged
by
taxing authorities, our likelihood of success. We utilize certain income
tax
planning strategies to reduce our overall cost of income taxes. It is possible
that certain strategies might be disallowed, resulting in an increased liability
for income taxes. In connection with an audit of our 2001 and 2002 tax returns,
the IRS proposed to disallow three of our tax strategies. We met with Internal
Revenue Service ("IRS") Appeals Division during the fourth quarter of 2005
and
have proposed a settlement agreement. At this time, we have not received
the
executed IRS response to the agreement. In April 2004, we submitted a
$5.0 million cash bond to the IRS to prevent any future interest expense in
the event of an unsuccessful defense of the strategies. In addition, we have
accrued amounts that we believe are appropriate given our expectations
concerning the ultimate resolution of the strategies. The IRS is currently
auditing our 2003 and 2004 tax returns and has proposed two disallowances
totaling approximately $350,000 for the 2003 and 2004 years related to the
November 2003 stock offering. We have responded to the IRS with a settlement
offer. At this time, the IRS has not responded to the offer. Significant
management judgments are involved in assessing the likelihood of sustaining
the
strategies and in determining the likely range of defense and settlement
costs,
and an ultimate result worse than our expectations could adversely affect
our
results of operations.
Deferred
income taxes represent a substantial liability on our consolidated balance
sheet
and are determined in accordance with SFAS No. 109, Accounting
for Income Taxes.
Deferred tax assets and liabilities (tax benefits and liabilities expected
to be
realized in the future) are recognized for the expected future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases, and operating
loss and tax credit carry forwards.
The
carrying value of our deferred tax assets assumes that we will be able to
generate, based on certain estimates and assumptions, sufficient future taxable
income in certain tax jurisdictions to utilize these deferred tax benefits.
If
these estimates and related assumptions change in the future, we may be required
to establish a valuation allowance against the carrying value of the deferred
tax assets, which would result in additional income tax expense. On a periodic
basis we assess the need for adjustment of the valuation allowance. No valuation
reserve has been established at December 31, 2005, because, based on forecasted
income, we believe that it is more likely than not that the future benefit
of
the deferred tax assets will be realized. However, there can be no assurance
that we will meet our forecasts of future income.
We
believe that we have adequately provided for our future tax consequences
based
upon current facts and circumstances and current tax law. During 2005, we
made
no material changes in our assumptions regarding the determination of income
tax
liabilities. However, should our tax positions be challenged, different outcomes
could result and have a significant impact on the amounts reported through
our
consolidated statement of operations.
New
Accounting Pronouncements
Effective
December 31, 2005, we adopted FIN 47, Accounting
for Conditional Asset Retirement Obligations,
which
clarifies that the term conditional asset retirement obligation as used
in SFAS
No. 143, Accounting
for Asset Retirement Obligations,
refers
to a legal obligation to perform an asset retirement activity in which
the
timing and (or) method of settlement are conditional on a future event
that may
or may not be within the control of the entity. The obligation to perform
the
asset retirement activity is unconditional even though uncertainty exists
about
the timing and (or) method of settlement. Accordingly, an entity is required
to
recognize a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated.
Uncertainty about the timing and (or) method of settlement of a conditional
asset retirement obligation should be factored into the measurement of
the
liability when sufficient information exists. FIN 47 also clarifies when
an
entity would have sufficient information to reasonably estimate the fair
value
of an asset retirement obligation. The adoption of FIN 47 impacted our
accounting for the conditional obligation to remove company decals and
other
identifying markings from certain tractors and trailers under operating
leases
at the end of the lease terms. Upon adoption of this standard, we recorded
an increase to other assets of $0.8 million and accrued expenses of
$1.6 million, in addition to recognizing a non-cash, pre-tax cumulative
effect charge of $0.8 million ($0.5 million on an after tax-basis, or $0.03
per diluted share).
Had
the
adoption of FIN 47 occurred at the beginning of the earliest period presented,
our results of operations and earnings per share would have been affected
as
follows:
(in
thousands except per share data)
|
|
2005
|
|
2004
|
|
2003
|
|
Income
before cumulative effect of change in accounting principle,
as
reported:
|
|
$
|
5,671
|
|
$
|
3,376
|
|
$
|
12,156
|
|
Deduct:
Accretion of conditional asset retirement liability and
amortization
of related asset, net of related tax effects
|
|
|
(251
|
)
|
|
(130
|
)
|
|
(81
|
)
|
Pro
forma net income
|
|
$
|
5,420
|
|
$
|
3,246
|
|
$
|
12,075
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
As
reported, before cumulative effect of change in accounting
principle
|
|
$
|
0.40
|
|
$
|
0.23
|
|
$
|
0.84
|
|
Pro
forma earnings per share:
|
|
$
|
0.38
|
|
$
|
0.22
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
As
reported, before cumulative effect of change in accounting
principle
|
|
$
|
0.40
|
|
$
|
0.23
|
|
$
|
0.83
|
|
Pro
forma diluted earnings per share:
|
|
$
|
0.38
|
|
$
|
0.22
|
|
$
|
0.82
|
|
The
value
of the conditional asset retirement obligation liability calculated on
a pro
forma basis as if the standard had been retrospectively applied to all
periods
presented are as follows:
December
31, 2005
|
December
31, 2004
|
December
31, 2003
|
$1.6
million
|
$1.3
million
|
$1.0
million
|
In
December 2004, the FASB issued SFAS No. 123R, Share-Based
Payments,
revising SFAS No. 123, Accounting
for Stock Based Compensation;
superseding Accounting Principles Board ("APB") Opinion No. 25, Accounting
for Stock Issued to Employees and
its
related implementation guidance; and amending SFAS No. 95, Statement
of Cash Flows.
SFAS
123R requires companies to recognize the grant date fair value of stock options
and other equity-based compensation issued to employees in its income statement.
SFAS 123R was to be effective for most public companies as of the first interim
or annual period beginning after June 15, 2005. In April 2005, the SEC delayed
the effective date, requiring companies to apply SFAS 123R in the first annual
period beginning after June 15, 2005. We adopted SFAS 123R effective January
1,
2006. Our adoption of SFAS 123R will impact our results of operations by
increasing salaries, wages, and related expenses for options granted in periods
subsequent to the effective date of January 1, 2006. The financial impact
for
the unvested options outstanding
as of December 31, 2005 will be de minimis.
In
May
2005, the FASB issued SFAS Statement No. 154,
Accounting Changes and Error Corrections.
SFAS 154 replaces APB No. 20,
Accounting Changes,
and
SFAS Statement No. 3,
Reporting Changes in Interim Financial Statements.
SFAS 154 changes the accounting for, and reporting of, a change in accounting
principle. SFAS 154 requires retrospective application to prior periods’
financial statements of voluntary changes in accounting principle and changes
required by new accounting standards when the standard does not include
specific
transition provisions, unless it is impracticable to do so. SFAS 154
is effective for accounting changes and corrections of errors in fiscal
years
beginning after December 15, 2005. Early application is permitted for
accounting changes and corrections of errors during fiscal years beginning
after
June 1, 2005. We adopted
this statement effective January 2006.
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. New emissions control regulations and
increases in commodity prices, wages of manufacturing workers, and other
items
have resulted in higher tractor prices, and there has been an industry-wide
increase in wages paid to attract and retain qualified drivers. The cost
of fuel
also has risen substantially over the past three years. We believe this
increase
primarily reflects world events rather than underlying inflationary pressure.
We
attempt to limit the effects of inflation through increases in freight
rates,
certain cost control efforts and the effects of fuel prices through fuel
surcharges.
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 because of general increases in shipping
demand during those months. The seasonal shortage typically occurs between
May
and August because California produce carriers' equipment is fully utilized
for
produce during those months and does not compete for shipments hauled by
our dry
van operation. During September and October, business increases as a result
of
increased retail merchandise shipped in anticipation of the
holidays.
The
table
below sets forth quarterly information reflecting our equipment utilization
(miles per tractor per period) during 2005, 2004 and 2003. We believe that
equipment utilization more accurately demonstrates the seasonality for our
business than changes in revenue, which are affected by the timing of deliveries
of new revenue equipment. Results of any one or more quarters are not
necessarily indicative of annual results or continuing trends.
Equipment
Utilization Table
(Miles
Per Tractor Per Period)
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
2005
|
27,245
|
28,589
|
29,592
|
30,376
|
2004
|
29,749
|
31,215
|
31,043
|
30,911
|
2003
|
30,308
|
32,612
|
33,568
|
33,214
|
ITEM
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We
experience various market risks, including changes in interest rates and
fuel
prices. We do not enter into derivatives or other financial instruments for
trading or speculative purposes, nor when there are no underlying related
exposures.
COMMODITY
PRICE RISK
From
time-to-time we may enter into derivative financial instruments to reduce
our
exposure to fuel price fluctuations. In accordance with SFAS 133, we adjust
any
derivative instruments to fair value through earnings on a monthly basis.
As of
December 31, 2005, we had no derivative financial instruments to reduce our
exposure to fuel price fluctuations.
INTEREST
RATE RISK
Our
market risk is also affected by changes in interest rates. Historically, we
have
used a combination of fixed rate and variable rate obligations to manage our
interest rate exposure. Fixed rate obligations expose us to the risk that
interest rates might fall. Variable rate obligations expose us to the risk
that
interest rates might rise.
Our
variable rate obligations consist of our Credit Agreement and our Securitization
Facility. Borrowings under the Credit Agreement, provided there has been no
default, are based on the banks' base rate, which floats daily, or LIBOR, which
accrues interest based on one, two, three, or six month LIBOR rates plus an
applicable margin that is adjusted quarterly between 0.75% and 1.25% based
on a
consolidated leverage ratio, which is generally defined as the ratio of
borrowings, letters of credit, and the present value of operating lease
obligations to our earnings before interest,
income taxes, depreciation, amortization, and rental payments under operating
leases. The applicable margin was 1.0% at December 31, 2005. At
December 31, 2005, we had variable, LIBOR borrowings of $33.0 million
outstanding under the Credit Agreement.
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. Due to the counter-parties' embedded options
to cancel, 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 consolidated statement of operations. At
December 31,
2005,
the
fair value of these interest rate swap agreements was a liability of $13,000.
Our
Securitization Facility carries a variable interest rate based on the commercial
paper rate plus an applicable margin of 0.44% per annum. At December 31,
2005, borrowings of $47.3 million had been drawn on the Securitization
Facility. Assuming variable rate borrowings under the Credit Agreement and
Securitization Facility at December 31, 2005 levels, a one percentage point
increase in interest rates could increase our annual interest expense by
approximately $603,000.
ITEM
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
The
consolidated financial statements of Covenant Transport, Inc. and subsidiaries,
as of December 31, 2005 and 2004, and the related consolidated balance sheets,
statements of operations, statements of stockholders’ equity and comprehensive
income, and statements of cash flows for each of the years in the three-year
period ended December 31, 2005, consolidated selected quarterly financial
data
(unaudited) for the years ended December 31, 2005 and 2004, together with
the
related notes, and the report of KPMG LLP, our independent registered public
accounting firm for the years ended December 31, 2005 2004, and 2003 are
set
forth at pages 46 through 62, elsewhere in this report.
ITEM
9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There
has
been no change in accountants during our three most recent fiscal years.
Evaluation
of Disclosure Controls and Procedures
We
have
established disclosure controls and procedures to ensure that material
information relating to us and our consolidated subsidiaries is made known
to
the officers who certify our financial reports and to other members of senior
management and the Board of Directors.
Based
on
their evaluation as of December 31, 2005, our principal executive officer
and principal financial officer have concluded that our disclosure controls
and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act) are effective to ensure that the information required to be disclosed
by us
in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in
SEC
rules and forms.
Management's
Report on Internal Control Over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control
over
financial reporting. Internal control over financial reporting is defined
in
Rule 13a-15(f) or 15d-(f) promulgated under the Exchange Act as a process
designed by, or under the supervision of, the principal executive and principal
financial officers and effected by the board of directors, management and
other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
|
pertain
to the maintenance of records, that in reasonable detail, accurately
and
fairly reflect the transactions and dispositions of our
assets;
|
|
|
|
provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with generally
accepted
accounting principles, and that our receipts and expenditures are
being
made only in accordance with authorizations of our management and
directors; and
|
|
|
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could
have
a material effect on our financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management
assessed the effectiveness of our internal control over financial reporting
as
of December 31, 2005. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) an Internal Control-Integrated Framework.
Based
on
its assessment, management believes that, as of December 31, 2005, our
internal control over financial reporting is effective based on those
criteria.
Management's
assessment of the effectiveness of internal control over financial reporting
as
of December 31, 2005, has been audited by KPMG LLP, the independent registered
public accounting firm who also audited our consolidated financial statements.
KPMG LLP's attestation report on management's assessment of our internal
control
over financial reporting appears on page 45 herein.
Design
and Changes in Internal Control over Financial Reporting
The
design, monitoring, and revision of the system of internal accounting controls
involves, among other things, management's judgments with respect to the
relative cost and expected benefits of specific control measures.
There
were no changes in our internal control over financial reporting that occurred
during the quarter ended December 31, 2005, that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
Not
applicable.
PART
III
ITEM
10. DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
We
incorporate by reference the information respecting executive officers and
directors set forth under the captions "Election of Directors - Information
Concerning Directors and Executive Officers" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in our Proxy Statement for the 2006 annual
meeting of stockholders, which will be filed with the Securities and Exchange
Commission in accordance with Rule 14a-6 promulgated under the Securities
Exchange Act of 1934, as amended (the "Proxy Statement"); provided, that the
section entitled "Audit Committee Report for 2005" and the Stock Performance
Graph contained in the Proxy Statement are not incorporated by
reference.
We
incorporate by reference the information set forth under the section entitled
"Executive Compensation" in our Proxy Statement for the 2006 annual meeting
of
stockholders; provided, that the section entitled "Compensation Committee Report
on Executive Compensation" contained in the Proxy Statement is not incorporated
by reference.
ITEM
12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We
incorporate by reference the information set forth under the section entitled
"Security Ownership of Certain Beneficial Owners and Management" in our Proxy
Statement for the 2006 annual meeting of stockholders. The following table
provides certain information as of December 31, 2005, with respect to our
compensation plans and other arrangements under which shares of our Class A
common stock are authorized for issuance.
Equity
Compensation Plan Information
Plan
category
|
Number
of
securities
to
be
issued
upon
exercise
of
outstanding
options,
warrants
and
rights
|
Weighted-
average
exercise
price
of
outstanding
options,
warrants
and
rights
|
Number
of securities
remaining
available for
future
issuance under
equity
compensation
plans
(excluding
securities
reflected in
column
(a))
|
|
(a)
|
(b)
|
(c)
|
Equity
compensation plans approved
by
security holders (1)
|
1,328,513
|
$14.37
|
765,031
|
Equity
compensation plans not
approved
by security holders (2)
|
125,000
|
$13.93
|
-
|
Total
|
1,453,513
|
$14.33
|
765,031
|
(1)
|
Includes
1994 Incentive Stock Plan, Outside Director Stock Option Plan, and
2003
Incentive Stock Plan.
|
(2)
|
Includes
1998 Non-Officer Incentive Stock Plan, and shares reserved for issuance
pursuant to grants outside any
plan.
|
Summary
Description of Equity Compensation Plans Not Approved by Security
Holders
Summary
of 1998 Non-Officer Incentive Stock Plan
In
October 1998, our Board of Directors adopted the Non-Officer Plan to attract
and
retain executive personnel and other key employees and motivate them through
incentives that were aligned with our goals of increased profitability and
stockholder value. The Board of Directors authorized 200,000 shares of our
Class
A common stock for grants or awards pursuant to the Non-Officer Plan. Awards
under the Plan could be in the form of incentive stock options, non-qualified
stock options, restricted stock awards, or any other awards of stock consistent
with the Non-Officer Plan's purpose. The Non-Officer Plan was to be administered
by the Board of Directors or a committee that could be appointed by the Board
of
Directors. All non-officer employees were eligible for participation, and actual
participants in the Non-Officer Plan were selected from time-to-time by the
administrator. The administrator could
substitute
new stock options for previously granted options. In conjunction with adopting
the 2003 Plan, the Board of Directors voted to terminate the Non-Officer Plan
effective as of May 31, 2003. Option grants previously issued continue in
effect and may be exercised on the terms and conditions under which the grants
were made.
Summary
of Grants Outside the Plan
On
August
31, 1998, our Board of Directors approved the grant of an option to purchase
5,000 shares of our Class A common stock to each of our four outside directors.
The exercise price of the stock was equal to the mean between the lowest
reported bid price and the highest reported asked price on the date of the
grant. The options have a term of ten years from the date of grant, and the
options vested 20% on each of the first through fifth anniversaries of the
grant.
On
September 23, 1998, our Board of Directors approved the grant of an option
to
purchase 20,000 shares of our Class A common stock to Tony Smith upon closing
of
the acquisition of SRT and Tony Smith Trucking, Inc. The exercise price was
the
mean between the low bid price and the high asked price on the closing date.
The
options have a term of ten years from the date of grant, and the options vested
20% on each of the first through fifth anniversaries of the grant.
On
May
20, 1999, our Board of Directors approved the grant of an option to purchase
2,500 shares of our Class A common stock to each of our four outside directors.
The exercise price of the stock was equal to the mean between the lowest
reported bid price and the highest reported asked price on the date of the
grant. The options have a term of ten years from the date of grant, and the
options vested 20% on each of the first through fifth anniversaries of the
grant.
ITEM
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
We
incorporate by reference the information set forth under the sections entitled
"Compensation Committee Interlocks and Insider Participation" and "Certain
and
Relationships and Related Transactions" in our Proxy Statement for the 2006
annual meeting of stockholders.
ITEM
14. PRINCIPAL
ACCOUNTING FEES AND SERVICES
We
incorporate by reference the information set forth under the section entitled
"Principal Accounting Fees and Services" in our Proxy Statement for the 2006
annual meeting of stockholders.
ITEM
15. EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
(a)
|
1.
|
Financial
Statements.
|
|
|
|
|
|
|
|
Our
audited consolidated financial statements are set forth at the following
pages of this report:
|
|
|
|
Reports
of Independent Registered Public Accounting Firm - KPMG
LLP
|
44
|
|
|
Consolidated
Balance Sheets
|
46
|
|
|
Consolidated
Statements of Operations
|
47
|
|
|
Consolidated
Statements of Stockholders' Equity and Comprehensive Income
(Loss)
|
48
|
|
|
Consolidated
Statements of Cash Flows
|
49
|
|
|
Notes
to Consolidated Financial Statements
|
50
|
|
|
|
|
|
2.
|
Financial
Statement Schedules.
|
|
|
|
|
|
|
|
Financial
statement schedules are not required because all required information
is
included in the financial statements.
|
|
|
|
|
|
|
3.
|
Exhibits.
|
|
|
|
|
|
|
|
The
exhibits required to be filed by Item 601 of Regulation S-K are listed
under paragraph (b) below and on the Exhibit Index appearing at the
end of
this report. Management contracts and compensatory plans or arrangements
are indicated by an asterisk.
|
|
|
|
|
|
(b)
|
|
Exhibits.
|
|
|
|
|
|
|
|
The
following exhibits are filed with this Form10-K or incorporated by
reference to the document set forth next to the exhibit listed
below.
|
|
Exhibit
Number
|
Reference
|
Description
|
3.1
|
(1)
|
Restated
Articles of Incorporation
|
3.2
|
(1)
|
Amended
Bylaws dated September 27, 1994
|
4.1
|
(1)
|
Restated
Articles of Incorporation
|
4.2
|
(1)
|
Amended
Bylaws dated September 27, 1994
|
10.1
|
(1)
|
401(k)
Plan filed as Exhibit 10.10*
|
10.2
|
(2)
|
Outside
Director Stock Option Plan, filed as Appendix A*
|
10.3
|
(3)
|
Amendment
No. 1 to the Outside Director Stock Option Plan, filed as Exhibit
10.11*
|
10.4
|
(4)
|
Loan
Agreement dated December 12, 2000, among CVTI Receivables Corp.,
Covenant
Transport, Inc., Three Pillars Funding Corporation, and SunTrust
Equitable
Securities Corporation, filed as Exhibit 10.10
|
10.5
|
(4)
|
Receivables
Purchase Agreement dated as of December 12, 2000, among CVTI
Receivables Corp., Covenant Transport, Inc., and Southern Refrigerated
Transport, Inc., filed as Exhibit 10.11
|
10.6
|
(5)
|
Clarification
of Intent and Amendment No. 1 to Loan Agreement dated March 7, 2001,
among
CVTI Receivables Corp., Covenant Transport, Inc., Three Pillars Funding
Corporation, and SunTrust Equitable Securities Corporation, filed
as
Exhibit 10.12
|
10.7
|
(6)
|
Incentive
Stock Plan, Amended and Restated as of May 17, 2001, filed as
Appendix B*
|
10.8
|
(7)
|
Covenant
Transport, Inc. 2003 Incentive Stock Plan, filed as Appendix
B*
|
10.9
|
(8)
|
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), filed as Exhibit
10.3
|
10.10
|
(9)
|
Master
Lease Agreement dated April 15, 2003, between Transport International
Pool, Inc. and Covenant Transport, Inc., filed as Exhibit
10.4
|
10.11
|
(10)
|
Amendment
No. 5 to Loan Agreement dated December 9, 2003, among CVTI Receivables
Corp., Covenant Transport, Inc., Three Pillars Funding LLC (successor
to
Three Pillars Funding Corporation), and SunTrust Capital Markets,
Inc.
(formerly SunTrust Equitable Securities Corporation), filed as Exhibit
10.16
|
10.12
|
(11)
|
Amendment
No. 6 to Loan Agreement dated July 8, 2004, among CVTI Receivables
Corp.,
Covenant Transport, Inc., Three Pillars Funding LLC (f/k/a Three
Pillars
Funding Corporation), and SunTrust Capital Markets, Inc. (formerly
SunTrust Equitable Securities Corporation) effective July 1, 2004,
filed
as Exhibit 10.1
|
10.13
|
(11)
|
Form
of Indemnification Agreement between Covenant Transport, Inc. and
each
officer and director, effective May 1, 2004, filed as Exhibit
10.2
|
10.14
|
(12)
|
Amendment
No. 7 to Loan Agreement dated November 17, 2004, among CVTI Receivables
Corp., Covenant Transport, Inc., Three Pillars Funding LLC (f/k/a
Three
Pillars Funding Corporation), and SunTrust Capital Markets, Inc.
(formerly
SunTrust Equitable Securities Corporation), filed as Exhibit
10.14
|
10.15
|
(12)
|
Amended
and Restated Credit Agreement dated December 16, 2004, among Covenant
Asset Management, Inc., Covenant Transport, Inc., Bank of America,
N.A.,
and each other financial institution which is a party to the Credit
Agreement, filed as Exhibit 10.15
|
10.16
|
(13)
|
Amendment
No. 8 to Loan Agreement dated March 29, 2005, among Three Pillars
Funding
LLC (f/k/a Three Pillars Funding Corporation), SunTrust Capital Markets,
Inc. (f/k/a SunTrust Equitable Securities Corporation), CVTI Receivables
Corp., and Covenant Transport, Inc., filed as Exhibit
10.16
|
10.17
|
(14)
|
Amendment
No. 1 to Amended and Restated Credit Agreement dated July 18, 2005,
among
Covenant Asset Management, Inc., Covenant Transport, Inc., a Nevada
Corporation, Bank of America, N.A., as Agent, and the lenders party
thereto from time-to-time, filed as Exhibit 10.1
|
21
|
#
|
List
of Subsidiaries
|
23
|
#
|
Consent
of Independent Registered Public Accounting Firm - KPMG
LLP
|
31.1
|
#
|
Certification
pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant
to
Section 302 of the Sarbanes-Oxley Act of 2002, by David R. Parker,
the
Company's Chief Executive Officer
|
31.2
|
#
|
Certification
pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant
to
Section 302 of the Sarbanes-Oxley Act of 2002, by Joey B. Hogan,
the
Company's Chief Financial Officer
|
32.1
|
#
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002, by David R. Parker, the Company's
Chief
Executive Officer
|
32.2
|
#
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002, by Joey B. Hogan, the Company's Chief
Financial Officer
|
All
other
footnotes indicate a document previously filed as an exhibit to and incorporated
by reference from the following:
(1)
|
Form
S-1, Registration No. 33-82978, effective October 28,
1994
|
(2)
|
Schedule
14A, filed April 13, 2000
|
(3)
|
Form
10-Q for the quarter ended September 30, 2000, filed November 13,
2000
|
(4)
|
Form
10-K for the year ended December 31, 2000, filed March 29,
2001
|
(5)
|
Form
10-Q for the quarter ended March 31, 2001, filed May 14,
2001
|
(6)
|
Schedule
14A, filed April 5, 2001
|
(7)
|
Schedule
14A, filed April 16, 2003
|
(8)
|
Form
10-Q for the quarter ended June 30, 2003, filed August 11,
2003
|
(9)
|
Form
10-Q/A for the quarter ended June 30, 2003, filed October 31,
2003
|
(10)
|
Form
10-K, filed March 15, 2004
|
(11)
|
Form
10-Q, filed August 5, 2004
|
(12)
|
Form
10-K, filed March 16, 2005
|
(13)
|
Form
10-Q, filed May 9, 2005
|
(14)
|
Form
8-K, filed July 22, 2005
|
(c)
|
|
Financial
Statement Schedules.
|
|
|
|
|
|
|
|
Not
applicable.
|
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
COVENANT
TRANSPORT, INC.
|
|
|
|
|
Date:
March 31, 2006
|
By:
|
/s/
Joey B. Hogan
|
|
|
Joey
B. Hogan
|
|
|
Executive
Vice President and Chief
Financial
Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
and Title
|
|
Date
|
|
|
|
/s/
David R. Parker
|
|
March
31, 2006
|
David
R. Parker
|
|
|
Chairman
of the Board, President, and Chief Executive Officer (principal executive
officer)
|
|
|
|
|
|
/s/
Joey B. Hogan
|
|
|
Joey
B. Hogan
|
|
|
Executive
Vice President and Chief Financial Officer
(principal
financial and accounting officer)
|
|
|
|
|
|
/s/
Bradley A. Moline
|
|
|
Bradley
A. Moline
|
|
|
Director
|
|
|
|
|
|
/s/
William T. Alt
|
|
|
William
T. Alt
|
|
|
Director
|
|
|
|
|
|
/s/
Robert E. Bosworth
|
|
|
Robert
E. Bosworth
|
|
|
Director
|
|
|
|
|
|
/s/
Hugh O. Maclellan, Jr.
|
|
|
Hugh
O. Maclellan, Jr.
|
|
|
Director
|
|
|
|
|
|
/s/
Mark A. Scudder
|
|
|
Mark
A. Scudder
|
|
|
Director
|
|
|
|
|
|
/s/
Niel B. Nielson
|
|
|
Niel
B. Nielson
|
|
|
Director
|
|
|
The
Board
of Directors and Stockholders
Covenant
Transport, Inc.:
We
have
audited the accompanying Consolidated Balance Sheets of Covenant Transport,
Inc.
and subsidiaries as of December 31, 2005 and 2004, and the related Consolidated
Statements of Operations, Stockholders’ Equity and Comprehensive Income, and
Cash Flows for each of the years in the three-year period ended December 31,
2005. These Consolidated Financial Statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
Consolidated Financial Statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the Consolidated Financial Statements referred to above present fairly,
in all material respects, the financial position of Covenant Transport, Inc.
and
subsidiaries as of December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2005, in conformity with U.S. generally accepted accounting
principles.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Covenant Transport, Inc.
and subsidiaries’ internal control over financial reporting as of December 31,
2005, based on criteria established in
Internal Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and
our report dated March 31, 2006, expressed an unqualified opinion on
management’s assessment of, and the effective operation of, internal control
over financial reporting.
As
discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for conditional asset retirement obligations
in
2005.
KPMG
LLP
/s/
KPMG
LLP
Atlanta,
Georgia
March
31,
2006
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Stockholders
Covenant
Transport, Inc.:
We
have
audited management's assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting set forth in Item 9A of
Covenant Transport, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 2005, that Covenant Transport, Inc. and subsidiaries
maintained effective internal control over financial reporting as of December
31, 2005, based on criteria established in
Internal Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion
on
management's assessment and an opinion on the effectiveness of the Company’s
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control
over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management's assessment that Covenant Transport, Inc. and subsidiaries
maintained effective internal control over financial reporting as of December
31, 2005, is fairly stated, in all material respects, based on criteria
established in
Internal Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Also, in our opinion, Covenant Transport, Inc. and subsidiaries maintained,
in
all material respects, effective internal control over financial reporting
as of
December 31, 2005, based on criteria
established in Internal
Control—Integrated Framework issued
by
the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Consolidated Balance Sheets of Covenant
Transport, Inc. and subsidiaries as of December 31, 2005 and 2004, and the
related Consolidated Statements of Operations, Stockholders’ Equity and
Comprehensive Income, and Cash Flows for each of the years in the three-year
period ended December 31 2005, and our report dated March 31, 2006, expressed
an unqualified opinion on those consolidated financial statements.
KPMG
LLP
/s/
KPMG
LLP
Atlanta,
Georgia
March
31,
2006
CONSOLIDATED
BALANCE SHEETS
DECEMBER
31, 2005 AND 2004
(In
thousands, except share data)
|
|
|
|
2005
|
|
|
2004
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,618
|
|
$
|
5,066
|
|
Accounts
receivable, net of allowance of $2,200 in 2005
and
$1,700 in 2004
|
|
|
77,969
|
|
|
74,127
|
|
Drivers
advances and other receivables
|
|
|
3,932
|
|
|
7,400
|
|
Inventory
and supplies
|
|
|
4,661
|
|
|
3,581
|
|
Prepaid
expenses
|
|
|
16,199
|
|
|
11,643
|
|
Deferred
income taxes
|
|
|
16,158
|
|
|
17,189
|
|
Income
taxes receivable
|
|
|
7,559
|
|
|
5,689
|
|
Total
current assets
|
|
|
130,096
|
|
|
124,695
|
|
|
|
|
|
|
|
|
|
Property
and equipment, at cost
|
|
|
301,129
|
|
|
298,389
|
|
Less
accumulated depreciation and amortization
|
|
|
(86,767
|
)
|
|
(88,967
|
)
|
Net
property and equipment
|
|
|
214,362
|
|
|
209,422
|
|
|
|
|
|
|
|
|
|
Other
assets, net
|
|
|
26,803
|
|
|
23,266
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
371,261
|
|
$
|
357,383
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
|
-
|
|
|
9
|
|
Securitization
facility
|
|
|
47,281
|
|
|
44,148
|
|
Accounts
payable
|
|
|
8,457
|
|
|
6,574
|
|
Accrued
expenses
|
|
|
17,088
|
|
|
15,253
|
|
Insurance
and claims accrual
|
|
|
41,801
|
|
|
46,200
|
|
Total
current liabilities
|
|
|
114,627
|
|
|
112,184
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current maturities
|
|
|
33,000
|
|
|
8,013
|
|
Deferred
income taxes
|
|
|
33,910
|
|
|
41,487
|
|
Total
liabilities
|
|
|
181,537
|
|
|
161,684
|
|
|
|
|
|
|
|
|
|
Commitments
and contingent liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Class
A common stock, $.01 par value; 20,000,000 shares authorized;
13,447,608
and 13,421,527 shares issued; 11,629,208 and 12,323,927
outstanding
as of December 31, 2005 and 2004, respectively
|
|
|
134
|
|
|
134
|
|
Class
B common stock, $.01 par value; 5,000,000 shares authorized;
2,350,000
shares issued and outstanding as of December 31, 2005 and
2004
|
|
|
24
|
|
|
24
|
|
Additional
paid-in-capital
|
|
|
91,553
|
|
|
91,058
|
|
Treasury
stock at cost; 1,818,400 and 1,097,600 shares as of December
31,
2005
and 2004, respectively
|
|
|
(21,582
|
)
|
|
(9,925
|
)
|
Retained
earnings
|
|
|
119,595
|
|
|
114,408
|
|
Total
stockholders' equity
|
|
|
189,724
|
|
|
195,699
|
|
Total
liabilities and stockholders' equity
|
|
$
|
371,261
|
|
$
|
357,383
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF OPERATIONS
YEARS
ENDED DECEMBER 31, 2005, 2004, AND 2003
(In
thousands, except per share data)
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
Freight
revenue
|
|
$
|
555,428
|
|
$
|
558,453
|
|
$
|
555,678
|
|
Fuel
surcharges
|
|
|
87,626
|
|
|
45,169
|
|
|
26,779
|
|
Total
revenue
|
|
|
643,054
|
|
|
603,622
|
|
|
582,457
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Salaries,
wages, and related expenses
|
|
|
242,157
|
|
|
225,778
|
|
|
220,665
|
|
Fuel
expense
|
|
|
170,582
|
|
|
127,723
|
|
|
109,231
|
|
Operations
and maintenance
|
|
|
33,625
|
|
|
30,555
|
|
|
39,822
|
|
Revenue
equipment rentals and purchased
transportation
|
|
|
61,701
|
|
|
69,928
|
|
|
69,997
|
|
Operating
taxes and licenses
|
|
|
13,431
|
|
|
14,217
|
|
|
14,354
|
|
Insurance
and claims
|
|
|
41,034
|
|
|
54,847
|
|
|
35,454
|
|
Communications
and utilities
|
|
|
6,579
|
|
|
6,517
|
|
|
7,177
|
|
General
supplies and expenses
|
|
|
17,778
|
|
|
15,104
|
|
|
14,495
|
|
Depreciation
and amortization, including gains (losses) on
disposition
of equipment
|
|
|
39,101
|
|
|
45,001
|
|
|
43,041
|
|
Total
operating expenses
|
|
|
625,988
|
|
|
589,670
|
|
|
554,236
|
|
Operating
income
|
|
|
17,066
|
|
|
13,952
|
|
|
28,221
|
|
Other
(income) expenses:
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
4,203
|
|
|
3,098
|
|
|
2,332
|
|
Interest
income
|
|
|
(273
|
)
|
|
(48
|
)
|
|
(114
|
)
|
Other
|
|
|
(538
|
)
|
|
(926
|
)
|
|
(468
|
)
|
Other
expenses, net
|
|
|
3,392
|
|
|
2,124
|
|
|
1,750
|
|
Income
before income taxes and cumulative effect of change in
accounting
principle
|
|
|
13,674
|
|
|
11,828
|
|
|
26,471
|
|
Income
tax expense
|
|
|
8,003
|
|
|
8,452
|
|
|
14,315
|
|
Income
before cumulative effect of change in accounting
principle
|
|
|
5,671
|
|
|
3,376
|
|
|
12,156
|
|
Cumulative
effect of change in accounting principle, net of tax
(Note
1)
|
|
|
(485
|
) |
|
-
|
|
|
-
|
|
Net
income
|
|
$
|
5,186
|
|
$
|
3,376
|
|
$
|
12,156
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share before cumulative effect of change in
accounting
principle:
|
|
$
|
0.40
|
|
$
|
0.23
|
|
$
|
0.84
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of change in accounting principle
|
|
|
(0.03
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
$
|
0.37
|
|
$
|
0.23
|
|
$
|
0.84
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share before cumulative effect of change in
accounting
principle:
|
|
$
|
0.40
|
|
$
|
0.23
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of change in accounting principle
|
|
|
(0.03
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
$
|
0.37
|
|
$
|
0.23
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
14,175
|
|
|
14,641
|
|
|
14,467
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average shares outstanding
|
|
|
14,270
|
|
|
14,833
|
|
|
14,709
|
|
See
accompanying notes to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
AND
COMPREHENSIVE INCOME
FOR
THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
(In
thousands)
|
Common
Stock
|
Additional
Paid-In
Capital
|
Treasury
Stock
|
Retained
Earnings
|
Total
Stockholders'
Equity
|
Comprehensive
Income
|
|
Class
A
|
Class
B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2002 |
$130
|
$24
|
$84,493 |
$(7,935) |
$98,876 |
$175,588 |
|
|
|
|
|
|
|
|
|
Exercise
of employee stock options
|
3
|
-
|
3,615
|
-
|
-
|
3,618
|
|
|
|
|
|
|
|
|
|
Income
tax benefit arising from the
exercise
of stock options
|
-
|
-
|
780
|
-
|
-
|
780
|
|
|
|
|
|
|
|
|
|
Net
income
|
-
|
-
|
-
|
-
|
12,156
|
12,156
|
12,156
|
|
|
|
|
|
|
|
|
Comprehensive
income for 2003
|
|
|
|
|
|
|
$12,156
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2003
|
$133
|
$24
|
$88,888
|
$(7,935)
|
$111,032
|
$192,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of employee stock options
|
1
|
-
|
1,960
|
-
|
-
|
1,961
|
|
|
|
|
|
|
|
|
|
Income
tax benefit arising from the
exercise
of stock options
|
-
|
-
|
210
|
-
|
-
|
210
|
|
|
|
|
|
|
|
|
|
Stock
repurchase
|
-
|
-
|
-
|
(1,990)
|
-
|
(1,990)
|
|
|
|
|
|
|
|
|
|
Net
income
|
-
|
-
|
-
|
-
|
3,376
|
3,376
|
3,376
|
|
|
|
|
|
|
|
|
Comprehensive
income for 2004
|
|
|
|
|
|
|
$3,376
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2004
|
$134
|
$24
|
$91,058
|
$(9,925)
|
$114,408
|
$195,699
|
|
|
|
|
|
|
|
|
|
Exercise
of employee stock options
|
-
|
-
|
445
|
-
|
-
|
445
|
|
|
|
|
|
|
|
|
|
Income
tax benefit arising from the
exercise
of stock options
|
-
|
-
|
50
|
-
|
-
|
50
|
|
|
|
|
|
|
|
|
|
Stock
repurchase
|
-
|
-
|
-
|
(11,657)
|
-
|
(11,657)
|
|
|
|
|
|
|
|
|
|
Net
income
|
-
|
-
|
-
|
-
|
5,186
|
5,186
|
5,186
|
|
|
|
|
|
|
|
|
Comprehensive
income for 2005
|
|
|
|
|
|
|
$5,186
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2005
|
$134
|
$24
|
$91,553
|
$(21,582)
|
$119,595
|
$189,724
|
|
See
accompanying notes to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
(In
thousands)
|
|
2005
|
|
2004
|
|
2003
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
5,186
|
|
$
|
3,376
|
|
$
|
12,156
|
|
Adjustments
to reconcile net income to net cash
provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
provision for losses on accounts receivable
|
|
|
1,598
|
|
|
547
|
|
|
94
|
|
Depreciation
and amortization
|
|
|
39,769
|
|
|
41,456
|
|
|
43,909
|
|
Income
tax benefit from exercise of stock options
|
|
|
50
|
|
|
210
|
|
|
780
|
|
Deferred
income taxes (benefit)
|
|
|
(6,249
|
)
|
|
(12,063
|
)
|
|
(9,605
|
)
|
Loss
(gain) on disposition of property and equipment
|
|
|
(668
|
)
|
|
3,545
|
|
|
(867
|
)
|
Cumulative effect of change in accounting principle, net of
tax
|
|
|
485
|
|
|
-
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Receivables
and advances
|
|
|
(4,841
|
)
|
|
(9,454
|
)
|
|
(4,193
|
)
|
Prepaid
expenses and other assets
|
|
|
(4,555
|
)
|
|
4,542
|
|
|
(1,735
|
)
|
Inventory
and supplies
|
|
|
(1,081
|
)
|
|
-
|
|
|
(356
|
)
|
Insurance
and claims accrual
|
|
|
(4,399
|
)
|
|
18,779
|
|
|
6,210
|
|
Accounts
payable and accrued expenses
|
|
|
278
|
|
|
(6,825
|
)
|
|
1,343
|
|
Net
cash flows provided by operating activities
|
|
|
25,573
|
|
|
44,113
|
|
|
47,716
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
|
(109,918
|
)
|
|
(81,615
|
)
|
|
(94,362
|
)
|
Proceeds
from disposition of property and equipment
|
|
|
65,992
|
|
|
49,179
|
|
|
68,487
|
|
Net
cash used in investing activities
|
|
|
(43,926
|
)
|
|
(32,436
|
)
|
|
(25,875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options
|
|
|
445
|
|
|
1,961
|
|
|
3,615
|
|
Repurchase
of company stock
|
|
|
(11,657
|
)
|
|
(1,990
|
)
|
|
-
|
|
Proceeds
from Credit Facility
|
|
|
105,000
|
|
|
47,026
|
|
|
59,000
|
|
Proceeds
from Securitization Facility
|
|
|
17,000
|
|
|
10,000
|
|
|
13,000
|
|
Repayment
from Credit Facility
|
|
|
(80,022
|
)
|
|
(52,305
|
)
|
|
(90,000
|
)
|
Repayments
of Securitization Facility
|
|
|
(13,867
|
)
|
|
(14,205
|
)
|
|
(3,877
|
)
|
Deferred
costs
|
|
|
6
|
|
|
(404
|
)
|
|
(315
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
16,905
|
|
|
(9,917
|
)
|
|
(18,577
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
(1,448
|
)
|
|
1,760
|
|
|
3,264
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
5,066
|
|
|
3,306
|
|
|
42
|
|
Cash
and cash equivalents at end of year
|
|
$
|
3,618
|
|
$
|
5,066
|
|
$
|
3,306
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
4,255
|
|
$
|
3,031
|
|
$
|
2,332
|
|
Income
taxes
|
|
$
|
16,261
|
|
$
|
20,867
|
|
$
|
22,795
|
|
See
accompanying notes to consolidated financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005, 2004, AND 2003
1. SUMMARY
OF
SIGNIFICANT ACCOUNTING POLICIES
Nature
of
Business - Covenant Transport, Inc. (the "Company") is a holding company for
subsidiaries that offer transportation services to customers throughout the
United States. The Company's current operations comprise a single segment for
financial reporting purposes.
Principles
of Consolidation - The consolidated financial statements include the accounts
of
the Company, a holding company incorporated in the state of Nevada in 1994,
and
its wholly-owned subsidiaries, Covenant Transport, Inc., a Tennessee
corporation; Harold Ives Trucking Co., an Arkansas corporation; ("Harold Ives");
Southern Refrigerated Transport, Inc., an Arkansas corporation; ("SRT");
Covenant.com, Inc., a Nevada corporation; Covenant Asset Management, Inc.,
a
Nevada corporation; CIP, Inc., a Nevada corporation; CVTI Receivables Corp.,
a
Nevada corporation; ("CRC"); and Volunteer Insurance Limited, a Cayman Islands
company; ("Volunteer"). Tony Smith Trucking, Inc. and Terminal Truck Broker,
Inc., both Arkansas corporations, were dissolved in December 2004 and September
2003, respectively. All significant intercompany balances and transactions
have
been eliminated in consolidation.
Revenue
Recognition - Revenue, drivers' wages and other direct operating expenses are
recognized on the date shipments are delivered to the customer. The Company
includes fuel surcharges in total revenue in its statements of operations.
The
Company also reports freight revenue, which is total revenue excluding fuel
surcharge revenue because the Company believes that fuel surcharges tend to
be a
volatile source of revenue, and the exclusion of fuel surcharges affords a
more
consistent basis for comparing the results of operations from period to period.
Cash
and
Cash Equivalents - The Company considers all highly liquid investments with
a
maturity of three months or less to be cash equivalents.
Inventories
and supplies - Inventories and supplies consist of parts, tires, fuel, and
supplies. Tires on new revenue equipment are capitalized as a component of
the
related equipment cost when the tractor or trailer is placed in service and
recovered through depreciation over the life of the vehicle. Replacement tires
and parts on hand at year end are recorded at the lower of cost or market with
cost determined using the first-in, first-out (FIFO) method. Replacement tires
are expensed when placed in service.
Property
and Equipment - Depreciation is calculated using the straight-line method over
the estimated useful lives of the assets. Revenue equipment is generally
depreciated over five to ten years with salvage values ranging from 4% to 39%.
The salvage value, useful life, and annual depreciation of tractors and trailers
are evaluated annually based on the current market environment and on the
Company's 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 consolidated statements
of
operations.
Impairment
of Long-Lived Assets - The Company evaluates the carrying value of long-lived
assets by analyzing the operating performance and future cash flows for those
assets when events or changes in circumstances indicate that the carrying
amounts of such assets may not be recoverable. Impairment can be impacted by
the
Company's projection of the actual level of future cash flows, the level of
actual cash flows and salvage values, the methods of estimation used for
determining fair values and the impact of guaranteed residuals. Any changes
in
management's judgments could result in greater or lesser annual depreciation
expense or additional impairment charges in the future.
Intangible
and Other Assets - The Company periodically evaluates the net realizability
of
the carrying amount of intangible assets. Non-compete agreements are amortized
over the life of the agreement, and deferred loan costs are amortized over
the
life of the loan.
Goodwill
- The Company utilizes Statement of Financial Accounting Standards ("SFAS")
No.
142, Goodwill
and Other Intangible Assets,
which
requires the Company to evaluate goodwill and other intangible assets with
indefinite useful lives for impairment on an annual basis, with any resulting
impairment losses being recorded as a component of income from operations in
the
consolidated statements of operations. Goodwill that was acquired in purchase
business combinations completed before July 1, 2001, has not been amortized
since January 1, 2002. During the second quarter of each year, the Company
completes its annual evaluation of its goodwill for impairment and determined
that there was no impairment. At December 31, 2005 and 2004, the Company
had approximately $11.5 million of goodwill.
Fair
Value of Financial Instruments - The Company's financial instruments consist
primarily of cash, accounts receivable, accounts payable, and long term debt.
The carrying amount of cash, accounts receivable, and accounts payable
approximates their fair value because of the short term maturity of these
instruments. Interest rates that are currently available to the Company for
issuance of long term debt with similar terms and remaining maturities are
used
to estimate the fair value of the Company's long term debt. The carrying amount
of the Company's short and long term debt at December 31, 2005 and 2004 was
approximately $80.3 million and $52.2 million, respectively, including
the accounts receivable securitization borrowings and approximates the estimated
fair value, due to the variable interest rates on these
instruments.
Capital
Structure - The shares of Class A and B common stock are substantially identical
except that the Class B shares are entitled to two votes per share while
beneficially owned by David Parker or certain members of his immediate family
and Class A shares are entitled to one vote per share. The terms of any future
issuances of preferred shares will be set by the Board of
Directors.
Insurance
and Claims - The Company's insurance program for liability, property damage,
and
cargo loss and damage, involves self-insurance with high retention levels.
Under
the casualty program, the Company is self-insured for personal injury and
property damage claims for varying amounts depending on the date the claim
was
incurred. The insurance retention also provides for an additional self-insured
aggregate amount, with a limit per occurrence until an aggregate threshold
is
reached. The deductible amount increased from $250,000 in 2001 to
$2.0 million in 2005, subject to aggregate thresholds. For the years ended
December 31, 2005 and 2004, the Company was self-insured for personal
injury and property damage claims for amounts up to $2.0 million per
occurrence, subject to an additional $2.0 million self-insured aggregate
amount, which results in the total self-insured retention of up to
$4.0 million per occurrence until the $4.0 million aggregate threshold
is reached. For cargo loss and damage claims, the Company is self-insured for
amounts up to the first $1.0 million per occurrence. The Company maintains
a workers' compensation plan and group medical plan for its employees with
a
deductible amount of $1.0 million for each workers' compensation claim and
a per claim limit amount of $275,000 for each group medical claim. The Company
accrues the estimated cost of the retained portion of incurred claims. These
accruals are based on an 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 self-insured retention levels.
The
Company recorded an aggregate $19.6 million pre-tax adjustment to its
claims reserves during the fourth quarter of 2004. The adjustment included
an
$18.0 million increase to the Company's casualty reserve, which was
reflected in insurance and claims on its consolidated statement of operations,
and a $1.5 million increase to the Company's workers' compensation reserve,
which was reflected in salaries, wages, and benefits on its consolidated
statement of operations.
Concentrations
of Credit Risk - The Company performs ongoing credit evaluations of its
customers and does not require collateral for its accounts receivable. The
Company maintains reserves which management believes are adequate to provide
for
potential credit losses. The Company's customer base spans the continental
United States with a diverse customer base that results in a lack of a
concentration of credit risk for the year ended December 31, 2005. However,
during 2004, three of the Company's customers, which were autonomously managed
and operated, were wholly owned subsidiaries of a public entity, when added
together amounted to approximately 9% of revenue in 2004 and approximately
11%
of revenue in 2003.
Use
of
Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
Income
Taxes - Income taxes are accounted for using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax
assets and liabilities of a change in tax rates is recognized in income in
the
period that includes the enactment date.
Derivative
Instruments and Hedging Activities - The Company engages in activities that
expose it to market risks, including the effects of changes in interest rates
and fuel prices. Financial exposures are evaluated as an integral part of the
Company's risk management program, which seeks, from time to time, to reduce
potentially adverse effects that the volatility of the interest rate and fuel
markets may have on operating results. The Company does not regularly engage
in
speculative transactions, nor does it regularly hold or issue financial
instruments for trading purposes.
All
derivatives are recognized on the balance sheet at their fair values. On the
date the derivative contract is entered into, the Company designates the
derivative a hedge of a forecasted transaction or of the variability of cash
flows to be received or paid related to a recognized asset or liability ("cash
flow hedge"). The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as cash-flow hedges to specific
assets and liabilities on the balance sheet or to specific firm commitments
or
forecasted transactions.
The
Company also formally assesses, both at the hedge's inception and on an ongoing
basis, whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of hedged items.
Changes in the fair value of a derivative that is highly effective and that
is
designated and qualifies as a fair-value hedge, along with the loss or gain
on
the hedged asset or liability or unrecognized firm commitment of the hedged
item
that is attributable to the hedged risk, are recorded in earnings. Changes
in
the fair value of a derivative that is highly effective and that is designated
and qualifies as a cash-flow hedge are recorded in other comprehensive income,
until earnings are affected by the variability in cash flows or unrecognized
firm commitment of the designated hedged item.
The
Company discontinues hedge accounting prospectively when it is determined that
the derivative is no longer effective in offsetting changes in the fair value
or
cash flows of the hedged item: the derivative expires or is sold, terminated,
or
exercised; the derivative is undesignated as a hedging instrument, because
it is
unlikely that a forecasted transaction will occur; a hedged firm commitment
no
longer meets the definition of a firm commitment; or management determines
that
designation of the derivative as a hedging instrument is no longer
appropriate.
When
hedge accounting is discontinued because it is determined that the derivative
no
longer qualifies as an effective fair-value hedge, the Company continues to
carry the derivative on the balance sheet at its fair value, and no longer
adjusts the hedged asset or liability for changes in fair value. The adjustment
of the carrying amount of the hedged asset or liability is accounted for in
the
same manner as other components of the carrying amount of that asset or
liability. When hedge accounting is discontinued because the hedged item no
longer meets the definition of a firm commitment, the Company continues to
carry
the derivative on the balance sheet at its fair value, removes any asset or
liability that was recorded pursuant to recognition of the firm commitment
from
the balance sheet, and recognizes any gain or loss in earnings. When hedge
accounting is discontinued because it is probable that a forecasted transaction
will not occur, the Company continues to carry the derivative on the balance
sheet at its fair value, and gains and losses that were accumulated in other
comprehensive income are recognized immediately in earnings. In all other
situations in which hedge accounting is discontinued, the Company continues
to
carry the derivative at its fair value on the balance sheet and recognizes
any
changes in its fair value in earnings.
Effect
of
New Accounting Pronouncements - Effective December 31, 2005, the Company
adopted
FIN 47, Accounting
for Conditional Asset Retirement Obligations,
which
clarifies that the term conditional asset retirement obligation as used
in SFAS
No. 143, Accounting
for Asset Retirement Obligations,
refers
to a legal obligation to perform an asset retirement activity in which
the
timing and (or) method of settlement are conditional on a future event
that may
or may not be within the control of the entity. The obligation to perform
the
asset retirement activity is unconditional even though uncertainty exists
about
the timing and (or) method of settlement. Accordingly, an entity is required
to
recognize a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated.
Uncertainty about the timing and (or) method of settlement of a conditional
asset retirement obligation should be factored into the measurement of
the
liability when sufficient information exists. FIN 47 also clarifies when
an
entity would have sufficient information to
reasonably
estimate the fair value of an asset retirement obligation. The adoption of
FIN
47 impacted the Company's accounting for the conditional obligation to remove
company decals and other identifying markings from certain tractors and trailers
under operating leases at the end of the lease terms. Upon adoption of this
standard, the Company recorded an increase to other assets of $0.8 million
and accrued expenses of $1.6 million, in addition to recognizing a non-cash
pre-tax cumulative effect charge of $0.8 million ($0.5 million on an after
tax-basis, or $0.03 per diluted share).
Had
the
adoption of FIN 47 occurred at the beginning of the earliest period presented,
the Company's results of operations and earnings per share would have been
affected as follows:
(in
thousands except per share data)
|
|
2005
|
|
2004
|
|
2003
|
|
Income
before cumulative effect of change in accounting principle,
as
reported:
|
|
$5,671
|
|
$3,376
|
|
$12,156
|
|
Deduct:
Accretion of conditional asset retirement liability and
amortization
of related asset, net of related tax effects
|
|
|
(251
|
)
|
|
(130
|
)
|
|
(81
|
)
|
Pro
forma net income
|
|
$
|
5,420
|
|
$
|
3,246
|
|
$
|
12,075
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
As
reported, before cumulative effect of change in accounting
principle
|
|
$
|
0.40
|
|
$
|
0.23
|
|
$
|
0.84
|
|
Pro
forma earnings per share:
|
|
$
|
0.38
|
|
$
|
0.22
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
As
reported, before cumulative effect of change in accounting
principle
|
|
$
|
0.40
|
|
$
|
0.23
|
|
$
|
0.83
|
|
Pro
forma diluted earnings per share:
|
|
$
|
0.38
|
|
$
|
0.22
|
|
$
|
0.82
|
|
The
value
of the conditional asset retirement obligation liability calculated on a
pro
forma basis as if the standard had been retrospectively applied to all periods
presented are as follows:
December
31, 2005
|
December
31, 2004
|
December
31, 2003
|
$1.6
million
|
$1.3
million
|
$1.0
million
|
In
December 2004, the FASB issued SFAS No. 123R, Share-Based
Payments,
revising SFAS No. 123, Accounting
for Stock Based Compensation;
superseding Accounting Principles Board ("APB") Opinion No. 25, Accounting
for Stock Issued to Employees and
its
related implementation guidance; and amending SFAS No. 95, Statement
of Cash Flows.
SFAS
123R requires companies to recognize the grant date fair value of stock options
and other equity-based compensation issued to employees in its income statement.
SFAS 123R was to be effective for most public companies as of the first interim
or annual period beginning after June 15, 2005. In April 2005, the SEC delayed
the effective date, requiring companies to apply SFAS 123R in the first annual
period beginning after June 15, 2005. The Company adopted SFAS 123R effective
January 1, 2006. The Company's adoption of SFAS 123R will impact its results
of
operations by increasing salaries, wages, and related expenses for
options granted in periods subsequent to the effective date of January 1,
2006.
The financial impact for the unvested options outstanding
as of December 31, 2005 will be de minimis.
In
May
2005, the FASB issued SFAS Statement No. 154,
Accounting Changes and Error Corrections.
SFAS 154 replaces APB No. 20,
Accounting Changes,
and
SFAS Statement No. 3,
Reporting Changes in Interim Financial Statements.
SFAS 154 changes the accounting for, and reporting of, a change in accounting
principle. SFAS 154 requires retrospective application to prior periods’
financial statements of voluntary changes in accounting principle and changes
required by new accounting standards when the standard does not include specific
transition provisions, unless it is impracticable to do so. SFAS 154
is effective for accounting changes and corrections of errors in fiscal years
beginning after December 15, 2005. Early application is permitted for
accounting changes and corrections of errors during fiscal years beginning
after
June 1, 2005. The Company adopted
this statement effective January 2006.
Earnings
per Share ("EPS") - The Company applies the provisions of SFAS No.
128,
Earnings per Share,
which
requires companies to present basic EPS and diluted EPS. Basic EPS excludes
dilution and is computed by dividing income available to common stockholders
by
the weighted-average number of common shares outstanding for the period.
Diluted
EPS reflects the dilution that could occur if securities or other contracts
to
issue common stock were exercised or converted into common stock or resulted
in
the issuance of common stock that then shared in the earnings of the Company.
The
following table sets forth for the periods indicated the weighed average
shares
outstanding used in the calculation of net income per share included in the
Company's consolidated statements of operations:
(in
thousands)
|
2005
|
|
2004
|
|
2003
|
Denominator
for basic earnings per share - weighted-average shares
|
14,175
|
|
14,641
|
|
14,467
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive
options
|
95
|
|
192
|
|
242
|
|
|
|
|
|
|
Denominator
for diluted earnings per share - adjusted weighted-
average
shares and assumed conversions
|
14,270
|
|
14,833
|
|
14,709
|
|
|
|
|
|
|
At
December 31, 2005, the Company had four stock-based compensation plans, which
are described more fully in Note 11. The Company accounted for those plans
under
the recognition and measurement principles of APB Opinion No. 25, Accounting
for Stock Issued to Employees, and
related Interpretations. No stock-based compensation cost was reflected in
net
income, as all options granted under those plans had an exercise price equal
to
the market value of the underlying common stock on the date of grant. The
following table illustrates 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 compensation.
(in
thousands except per share data)
|
|
2005
|
|
2004
|
|
2003
|
|
Net
income, as reported:
|
|
$
|
5,186
|
|
$
|
3,376
|
|
$
|
12,156
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct:
Total stock-based compensation expense determined
under
fair value based method for all awards, net of related tax
effects
|
|
|
(2,235
|
)
|
|
(1,185
|
)
|
|
(1,743
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma net income
|
|
$
|
2,951
|
|
$
|
2,190
|
|
$
|
10,413
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.37
|
|
$
|
0.23
|
|
$
|
0.84
|
|
Pro
forma
|
|
$
|
0.21
|
|
$
|
0.15
|
|
$
|
0.72
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.37
|
|
$
|
0.23
|
|
$
|
0.83
|
|
Pro
forma
|
|
$
|
0.21
|
|
$
|
0.15
|
|
$
|
0.71
|
|
On
August
31, 2005, the Compensation Committee of the Company’s Board of Directors
approved the acceleration of the vesting of all outstanding unvested stock
options. As a result, the vesting of approximately 170,000 previously unvested
stock options granted under the Company's Incentive Stock Plan (Amended and
Restated as of May 17, 2001) and the Company's 2003 Incentive Stock Plan was
accelerated and all such options became fully exercisable as of August 31,
2005.
This acceleration of vesting did not result in any compensation expense for
the
Company during 2005. Under the fair value method of SFAS 123, the Company
would have recorded $2.2 million, net of tax, which represents the pro
forma compensation expense as well as the effect of the acceleration of the
stock options that would be recorded as compensation expense.
Because
most of these stock options had exercise prices significantly in excess of
the
Company’s then current stock price, the Company believes that the future charge
to earnings that would be required under SFAS 123R for the remaining original
fair value of the stock options would not have been an accurate reflection
of
the economic value to the employees holding them and that the options were
not
fully achieving their original objectives of employee retention and
satisfaction. The Company also believes that the reduction in the Company’s
stock option compensation expense for fiscal years 2007 and 2008 will enhance
comparability of the Company’s financial statements with those of prior and
subsequent years, since stock options are expected to represent a smaller
portion of total compensation for the foreseeable future.
Reclassifications
- Certain prior period financial statement balances have been reclassified
to
conform to the current period's classification.
2. INVESTMENT
IN
TRANSPLACE
Effective
July 1, 2000, the Company combined its logistics business with the logistics
businesses of five other transportation companies into a company called
Transplace, Inc. Transplace operates a global transportation logistics service.
In the transaction, Covenant contributed its logistics customer list, logistics
business software and software licenses, certain intellectual property,
intangible assets totaling approximately $5.1 million, and
$5.0 million in cash for the initial funding of the venture, in exchange
for 12.4% ownership. Upon completion of the transaction, Covenant ceased
operating its own transportation logistics and brokerage business. The Company
accounts for its investment using the cost method of accounting, with the
investment included in other assets.
During
the first quarter of 2005, the Company loaned Transplace approximately $2.7
million. The 6% interest-bearing note matures January 2007.
3. PROPERTY
AND
EQUIPMENT
A
summary
of property and equipment, at cost, as of December 31, 2005 and 2004 is as
follows:
(in
thousands)
|
|
Estimated
Useful
Lives
|
|
2005
|
|
2004
|
|
Revenue
equipment
|
|
|
3-8
years
|
|
$
|
202,027
|
|
$
|
207,422
|
|
Communications
equipment
|
|
|
5
years
|
|
|
16,422
|
|
|
16,829
|
|
Land
and improvements
|
|
|
10-24
years
|
|
|
15,216
|
|
|
14,781
|
|
Buildings
and leasehold improvements
|
|
|
10-40
years
|
|
|
46,503
|
|
|
40,423
|
|
Construction
in progress
|
|
|
|
|
|
6,432
|
|
|
5,611
|
|
Other
|
|
|
1-5
years
|
|
|
14,529
|
|
|
13,323
|
|
|
|
|
|
|
$
|
301,129
|
|
$
|
298,389
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense amounts were $39.7 million, $41.2 million, and
$43.7 million in 2005, 2004, and 2003, respectively.
4. OTHER
ASSETS
A
summary
of other assets as of December 31, 2005 and 2004 is as
follows:
(in
thousands)
|
|
2005
|
|
2004
|
|
Covenants
not to compete
|
|
$
|
1,690
|
|
$
|
1,690
|
|
Trade
name
|
|
|
330
|
|
|
330
|
|
Goodwill
|
|
|
12,416
|
|
|
12,416
|
|
Less
accumulated amortization of intangibles
|
|
|
(2,566
|
)
|
|
(2,536
|
)
|
Net
intangible assets
|
|
|
11,870
|
|
|
11,900
|
|
Investment
in Transplace
|
|
|
10,666
|
|
|
10,666
|
|
Note
receivable from Transplace
|
|
|
2,869
|
|
|
-
|
|
Other,
net
|
|
|
1,398
|
|
|
700
|
|
|
|
$
|
26,803
|
|
$
|
23,266
|
|
|
|
|
|
|
|
|
|
5. LONG-TERM
DEBT
Long-term
debt consists of the following at December 31, 2005 and 2004:
(in
thousands)
|
|
2005
|
|
2004
|
|
Borrowings
under the Credit Agreement
|
|
$
|
33,000
|
|
$
|
8,000
|
|
Equipment
and vehicle obligations with commercial lending
institutions
|
|
|
-
|
|
|
22
|
|
Total
long-term debt
|
|
|
33,000
|
|
|
8,022
|
|
Less
current maturities
|
|
|
-
|
|
|
9
|
|
Long-term
debt, less current portion
|
|
$
|
33,000
|
|
$
|
8,013
|
|
|
|
|
|
|
|
|
|
In
December 2004, the Company entered into a credit agreement with a group
of
banks, (the "Credit Facility"). The facility matures in December 2009.
Borrowings under the Credit Agreement are based on the banks' base rate,
which
floats daily, or LIBOR, which accrues interest based on one, two, three,
or six
month LIBOR rates plus an applicable margin that is adjusted quarterly
between
0.75% and 1.25% based on cash flow coverage (the applicable margin was
1.0% at
December 31, 2005). At December 31, 2005, the Company had only LIBOR
borrowings totaling $33.0 million outstanding, with a weighted average
interest rate of 5.4%. The Credit Agreement is guaranteed by the Company
and all
of the Company's subsidiaries except CRC and Volunteer.
The
Credit Agreement has a maximum borrowing limit of $150.0 million with an
accordion feature which permits an increase up to a maximum borrowing limit
of
$200.0 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
$75.0 million. The Credit Agreement is secured by a pledge of the stock of
most of the Company's subsidiaries. A commitment fee, that is adjusted
quarterly
between 0.15% and 0.25% per annum based on cash flow coverage, is due on
the
daily unused portion of the Credit Agreement. As of December 31, 2005, the
Company had approximately $21.6 million of available borrowing capacity. At
December 31, 2005 and December 31, 2004, the Company had undrawn
letters of credit outstanding of approximately $73.9 million and
$65.4 million, respectively.
The
Company's $33.0 million of long-term debt as of December 31, 2005 will
mature in 2009. The Credit Agreement contains certain restrictions and covenants
relating to, among other things, dividends, tangible net worth, cash flow,
acquisitions and dispositions, and total indebtedness and are cross-defaulted
with the Company's securitization facility. At December 31, 2005, the
Company was in compliance with the Credit Agreement
covenants.
6. ACCOUNTS
RECEIVABLE SECURITIZATION AND ALLOWANCE FOR DOUBTFUL
ACCOUNTS
In
December 2000, the Company entered into an accounts receivable securitization
facility (the "Securitization Facility"). On a revolving basis, the Company
sells its interests in its 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.
The
Company can receive up to $62.0 million of proceeds, subject to eligible
receivables and pay a service fee recorded as interest expense, based on
commercial paper interest rates plus an applicable margin of 0.44% 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 December 31, 2005 and December 31, 2004, the Company had
$47.3 million and $44.1 million outstanding, respectively, with
weighted average interest rates of 4.4% and 2.4%, respectively. CRC does not
meet the requirements for off-balance sheet accounting; therefore, it is
reflected in the Company's consolidated financial statements.
The
Securitization Facility contains certain restrictions and covenants relating
to,
among other things, dividends, tangible net worth, cash flow coverage,
acquisitions and dispositions, and total indebtedness. As of December 31,
2005, the Company was in compliance with the Securitization Facility
covenants.
The
activity in allowance for doubtful accounts (in thousands) is as
follows:
Years
ended
December
31:
|
|
Beginning
balance
January
1,
|
|
Additional
provisions
to
allowance
|
|
Write-offs
and
other
deductions
|
|
Ending
balance
December
31,
|
|
|
|
|
|
|
|
|
|
2005
|
|
$1,700
|
|
$1,598
|
|
$1,098
|
|
$2,200
|
|
|
|
|
|
|
|
|
|
2004
|
|
$1,350
|
|
$547
|
|
$197
|
|
$1,700
|
|
|
|
|
|
|
|
|
|
2003
|
|
$1,800
|
|
$94
|
|
$544
|
|
$1,350
|
|
|
|
|
|
|
|
|
|
7. LEASES
The
Company has operating lease commitments for office and terminal properties,
revenue equipment, and computer and office equipment, exclusive of
owner/operator rentals and month-to-month equipment rentals, summarized
for the
following fiscal years (in thousands):
2006
|
$39,025
|
2007
|
27,167
|
2008
|
18,726
|
2009
|
12,990
|
2010
|
9,940
|
Thereafter
|
2,286
|
A
portion
of the Company's operating leases of tractors and trailers contain residual
value guarantees under which the Company guarantees a certain minimum cash
value
payment to the leasing company at the expiration of the lease. The Company
estimates that the residual guarantees are approximately $47.4 million and
$55.6 million at December 31, 2005 and
December 31, 2004, respectively. The Company expects its residual
guarantees to approximate the expected market value at the end of the lease
term.
Rental
expense is summarized as follows for each of the three years ended December
31:
(in
thousands)
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Revenue
equipment rentals
|
|
$
|
41,379
|
|
$
|
36,625
|
|
$
|
25,625
|
|
Terminal
rentals
|
|
|
1,252
|
|
|
1,236
|
|
|
1,041
|
|
Other
equipment rentals
|
|
|
3,060
|
|
|
3,158
|
|
|
3,201
|
|
|
|
$
|
45,691
|
|
$
|
41,019
|
|
$
|
29,867
|
|
|
|
|
|
|
|
|
|
|
|
|
8. INCOME
TAXES
Income
tax expense from continuing operations for the years ended December 31, 2005,
2004, and 2003 is comprised of:
(in
thousands)
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal,
current
|
|
$
|
13,344
|
|
$
|
17,796
|
|
$
|
20,011
|
|
Federal,
deferred
|
|
|
(6,056
|
)
|
|
(10,930
|
)
|
|
(7,771
|
)
|
State,
current
|
|
|
1,205
|
|
|
2,720
|
|
|
3,909
|
|
State,
deferred
|
|
|
(490
|
)
|
|
(1,134
|
)
|
|
(1,834
|
)
|
|
|
$
|
8,003
|
|
$
|
8,452
|
|
$
|
14,315
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense from continuing operations varies from the amount computed by
applying the federal corporate income tax rate of 35% to income before income
taxes for the years ended December 31, 2005, 2004, and 2003 as
follows:
(in
thousands)
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Computed
"expected" income tax expense
|
|
$
|
4,786
|
|
$
|
4,140
|
|
$
|
9,265
|
|
State
income taxes, net of federal income tax
effect
|
|
|
465
|
|
|
1,031
|
|
|
1,349
|
|
Per
diem allowances
|
|
|
2,591
|
|
|
2,760
|
|
|
3,487
|
|
Other,
net
|
|
|
161
|
|
|
521
|
|
|
214
|
|
Actual
income tax expense
|
|
$
|
8,003
|
|
$
|
8,452
|
|
$
|
14,315
|
|
|
|
|
|
|
|
|
|
|
|
|
The
temporary differences and the approximate tax effects that give rise to the
Company's net deferred tax liability at December 31, 2005 and 2004 are as
follows:
(in
thousands)
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Net
current deferred tax assets:
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
475
|
|
$
|
249
|
|
Insurance
and claims
|
|
|
15,493
|
|
|
16,652
|
|
State
net operating loss carryovers
|
|
|
179
|
|
|
87
|
|
Deferred
gain
|
|
|
11
|
|
|
201
|
|
Total
net current deferred tax assets
|
|
|
16,158
|
|
|
17,189
|
|
|
|
|
|
|
|
|
|
Net
non-current deferred tax liabilities:
|
|
|
|
|
|
|
|
Property
and equipment
|
|
|
33,305
|
|
|
41,377
|
|
Intangible
and other assets
|
|
|
766
|
|
|
271
|
|
Investments
|
|
|
(161
|
)
|
|
(161
|
)
|
Total
net non-current deferred tax liabilities
|
|
|
33,910
|
|
|
41,487
|
|
|
|
|
|
|
|
|
|
Net
deferred tax asset/ liability
|
|
$
|
17,752
|
|
$
|
24,298
|
|
|
|
|
|
|
|
|
|
Based
upon the expected reversal of deferred tax liabilities and the level of
historical and projected taxable income over periods in which the deferred
tax
assets are deductible, the Company's management believes it is more likely
than
not that the Company will realize the benefits of the deductible differences
at
December 31, 2005.
In
connection with an audit of our 2001 and 2002 tax returns, the IRS proposed
to
disallow three of our tax strategies. We met with Internal Revenue Service
("IRS") Appeals Division during the fourth quarter of 2005 and have proposed
a
settlement agreement. At this time, we have not received the executed IRS
response to the agreement. In April 2004, we submitted a $5.0 million cash
bond to the IRS to prevent any future interest expense in the event of an
unsuccessful defense of the strategies. In addition, we have accrued amounts
that we believe are appropriate given our expectations concerning the ultimate
resolution of the strategies. The IRS is currently auditing our 2003 and
2004
tax returns and has proposed two disallowances totaling approximately $350,000
for the 2003 and 2004 years related to the November 2003 stock offering.
We have
responded to the IRS with a settlement offer. At this time, the IRS has not
responded to the offer. The amount ultimately paid upon resolution of the
issue
raised may differ from the amount accrued.
In
the
normal course of business, the Company is also subject to audits by the state
and local tax authorities. The Company believes that its liability for state
and
local taxes is adequately accrued at December 31, 2005. However, should the
Company’s tax positions be challenged, different outcomes could result and have
an impact on the amounts reported in the Company’s consolidated financial
statements.
9. STOCK
REPURCHASE PLAN
In
May
2005, the Board of Directors authorized a stock repurchase plan for up to
1.3
million Company shares to be purchased in the open market or through negotiated
transactions subject to criteria established by the Board. During 2005, the
Company purchased a total of 720,800 shares with an average price of $16.17.
The
stock repurchase plan expires June 30, 2006 and replaced the stock repurchase
program adopted in 2004.
10.
DEFERRED
PROFIT SHARING
EMPLOYEE BENEFIT PLAN
The
Company has a deferred profit sharing and savings plan that covers substantially
all employees of the Company with at least six months of service. Employees
may
contribute a percentage of their annual compensation up to the maximum amount
allowed by the Internal Revenue Code. The Company may make discretionary
contributions as determined by a committee of the Board of Directors. The
Company contributed approximately $1.1 million, $0.9 million, and
$0.8 million in 2005, 2004, and 2003, respectively, to the profit sharing
and savings plan.
11. STOCK
OPTION
PLANS
The
Company has adopted stock plans for employees and directors. Awards may be
stock
options or other forms. The Company has reserved approximately 2,300,000 shares
of Class A common stock for distribution at the discretion of the Board of
Directors. The following table details the activity of the incentive stock
option plan:
|
Shares
|
Weighted
Average
Exercise
Price
|
Options
Exercisable
at
Year
End
|
|
|
|
|
Under
option at December 31, 2002
|
1,381,540
|
$13.48
|
855,685
|
|
|
|
|
Options
granted in 2003
|
196,664
|
$17.51
|
|
Options
exercised in 2003
|
(295,711)
|
$12.24
|
|
Options
canceled in 2003
|
(53,103)
|
$15.19
|
|
Under
option at December 31, 2003
|
1,229,390
|
$14.37
|
891,813
|
|
|
|
|
Options
granted in 2004
|
196,300
|
$15.81
|
|
Options
exercised in 2004
|
(126,501)
|
$15.50
|
|
Options
canceled in 2004
|
(38,097)
|
$16.45
|
|
Under
option at December 31, 2004
|
1,261,092
|
$14.42
|
926,713
|
|
|
|
|
Options
granted in 2005
|
237,085
|
$14.11
|
|
Options
exercised in 2005
|
(28,081)
|
$15.86
|
|
Options
canceled in 2005
|
(16,583)
|
$14.99
|
|
Under
option at December 31, 2005
|
1,453,513
|
$14.33
|
1,443,513
|
|
|
|
|
|
Options
Outstanding
|
Options
Exercisable
|
Range
of Exercise
Prices
|
Number
Outstanding
at
12/31/05
|
Weighted-
Average
Remaining
Contractual
Life
|
Weighted-
Average
Exercise
Price
|
Number
Exercisable
at
12/31/05
|
Weighted-
Average
Exercise
Price
|
$
8.00 to $13.00
|
392,356
|
50
|
$10.08
|
382,356
|
$10.06
|
$13.01
to $16.50
|
681,387
|
74
|
$14.94
|
681,387
|
$14.94
|
$16.51
to $21.50
|
379,770
|
75
|
$17.64
|
379,770
|
$17.64
|
|
1,453,513
|
|
|
1,443,513
|
|
|
|
|
|
|
|
The
Company accounts for its stock-based compensation plans under APB No. 25, under
which no compensation expense has been recognized because all employee and
outside director stock options have been granted with the exercise price equal
to the fair value of the Company's Class A common stock on the date of grant.
Under SFAS No. 123, fair value of options granted are estimated as of the date
of grant using the Black-Scholes option pricing model and the following weighted
average assumptions: risk-free interest rates ranging from 2.3% to 4.3%;
expected life of 5 years; dividend rate of zero percent; and expected volatility
of 42.2% for 2005, 50.7% for 2004, and 52.2% for
2003. Using these assumptions, the fair value of the employee
and outside director stock options which would have been expensed in 2005,
2004,
and 2003 is $2.2 million, $1.2 million, and $1.7 million,
respectively.
12. RELATED
PARTY
TRANSACTIONS
Transactions
involving related parties are as follows:
The
Company from time to time utilizes outside legal services from two members
of
the Company's Board of Directors. During 2005, 2004, and 2003, the Company
paid
approximately $332,000, $196,000 and $434,000, respectfully, for legal and
consulting services to a firm that employs a member of the Company's Board
of
Directors. Also, during 2003, the Company paid approximately $138,000 for
legal
services to another firm that employs another member of the Company's Board
of
Directors.
The
Company provides transportation services to Transplace. During 2005, 2004,
and
2003, gross revenue from services provided to Transplace was approximately
$14.1 million, $15.0 million and $9.6 million, respectively. The
accounts receivable balance as of December 31, 2005 was approximately $2.2
million. During the first quarter of 2005, the Company loaned Transplace
approximately $2.7 million, bearing interest at 6% and matures January 2007.
A
company
wholly owned by a relative of a significant shareholder and executive officer
operates a "company store" on a rent-free basis in the Company's headquarters
building, and uses Covenant service marks on its products at no cost. The
Company pays fair market value for all supplies that are purchased which totaled
approximately $373,000, $512,000 and $350,000 in 2005, 2004, and 2003
respectively.
In
2003,
the Company purchased equipment from Tenn-Ga Truck Sales, Inc., a corporation
wholly owned by a significant shareholder for approximately $286,000. Also
in
2003, the Company was retained to repair certain equipment owned by Tenn-Ga
Truck Sales for approximately $223,000.
13. DERIVATIVE
INSTRUMENTS
The
Company adopted SFAS No. 133 effective January 1, 2001 but had no instruments
in
place on that date. In 2001, the Company entered into two $10 million
notional amount cancelable interest rate swap agreements to manage the risk
of
variability in cash flows associated with floating-rate debt. Due to the
counter-parties' imbedded options to cancel, these derivatives did not qualify,
and are not designated, as hedging instruments under SFAS No. 133. Consequently,
these derivatives are marked to fair value through earnings, in other expense
in
the accompanying consolidated statements of operations. At December 31,
2005 and 2004, the fair value of these interest rate swap agreements was a
liability of approximately $13,000 and $0.4 million, respectively, which
are included in accrued expenses on the consolidated balance
sheets.
The
derivative activity as reported in the Company's consolidated financial
statements for the years ended December 31, 2005 and 2004 is summarized in
the
following:
(in
thousands):
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Net
liability for derivatives at January 1
|
|
$
|
(439
|
)
|
$
|
(1,201
|
)
|
Changes
in statements of operations:
|
|
|
|
|
|
|
|
Gain
on derivative instruments:
|
|
|
|
|
|
|
|
Gain
in value of derivative instruments that do
not
qualify as hedging instruments
|
|
|
426
|
|
|
762
|
|
Net
liability for derivatives at December 31
|
|
$
|
(13
|
)
|
$
|
(439
|
)
|
|
|
|
|
|
|
|
|
From
time
to time, the Company enters into fuel purchase commitments for a notional amount
of diesel fuel at prices which are determined when fuel purchases
occur.
14. COMMITMENTS
AND CONTINGENT LIABILITIES
The
Company, in the normal course of business, is party to ordinary, routine
litigation, most of which involves claims for personal injury and property
damage incurred in connection with the transportation of freight. The Company
maintains insurance to cover liabilities arising from the transportation
of
freight for amounts in excess of certain self-insured retentions. In the
opinion
of management, the Company's potential exposure under pending legal proceedings
is adequately provided for in the accompanying consolidated financial
statements. Currently, the Company is involved in the significant personal
injury claim described below.
On
March
7, 2003, an accident occurred in Wisconsin involving a vehicle and one of
the
Company's tractors. Two adult occupants of the vehicle were killed in the
accident. The only other occupant of the vehicle was a child, who survived
with
little apparent injury. Suit was filed in the United States District Court
in
Minnesota by heirs of one of the decedents against the Company and its driver
under the style: Bill
Kayachitch and Susan Kayachitch as co-trustees for the heirs and next of
kin of
Souvorachak Kayachitch, deceased, vs. Julie Robinson and Covenant Transport,
Inc.
The case
was settled on October 10, 2005 at a level below the aggregate coverage limits
of the Company's
insurance policies and was formally dismissed in February 2006. Representatives
of the child may file an additional suit against the Company.
Financial
risks which potentially subject the Company to concentrations of credit risk
consist of deposits in banks in excess of the Federal Deposit Insurance
Corporation limits. The Company's sales are generally made on account without
collateral. Repayment terms vary based on certain conditions. The Company
maintains reserves which management believes are adequate to provide for
potential credit losses. The majority of the Company's customer base spans
the
United States. The Company monitors these risks and believes the risk of
incurring material losses is remote.
The
Company uses purchase commitments through suppliers to reduce a portion of
its
cash flow exposure to fuel price fluctuations. At December 31, 2005, the
notional amount for purchase commitments for 2006 is approximately 45 million
gallons.
15. QUARTERLY
RESULTS OF OPERATIONS (UNAUDITED)
(In
thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
Quarters
ended
|
|
March
31, 2005
|
|
June
30, 2005
|
|
Sept.
30, 2005
|
|
Dec.
31, 2005 (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight
revenue
|
|
$
|
123,570
|
|
$
|
138,736
|
|
$
|
144,681
|
|
$
|
148,442
|
|
Operating
income
|
|
|
276
|
|
|
3,042
|
|
|
3,850
|
|
|
9,898
|
|
Net
income (loss) before cumulative
effect
of change in accounting
principle
|
|
|
(649
|
)
|
|
652
|
|
|
1,217
|
|
|
4,451
|
|
Cumulative
effect of change in
accounting
principle
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(485
|
) |
Net
income (loss)
|
|
|
(649
|
)
|
|
652
|
|
|
1,217
|
|
|
3,966
|
|
Basic
earnings (loss) per share
before
cumulative effect of
change
in accounting principle
|
|
|
(0.04
|
)
|
|
0.05
|
|
|
0.09
|
|
|
0.31
|
|
Cumulative
effect of change in
accounting
principle
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(0.03
|
) |
Basic
earnings (loss) per share
|
|
|
(0.04
|
)
|
|
0.05
|
|
|
0.09
|
|
|
0.28
|
|
Diluted
earnings (loss) per share
before
cumulative effect of
change
in accounting principle
|
|
|
(0.04
|
)
|
|
0.05
|
|
|
0.09
|
|
|
0.31
|
|
Cumulative
effect of change in
accounting
principle
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(0.03
|
) |
Diluted
earnings (loss) per share
|
|
|
(0.04
|
)
|
|
0.05
|
|
|
0.09
|
|
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
Quarters
ended
|
|
March
31, 2004
|
|
June
30, 2004
|
|
Sept.
30, 2004
|
|
Dec.
31, 2004 (2)
|
|
|
|
|
|
|
|
|
|
|
|
Freight
revenue
|
|
$
|
130,590
|
|
$
|
140,036
|
|
$
|
140,631
|
|
$
|
147,196
|
|
Operating
income (loss)
|
|
|
3,058
|
|
|
8,725
|
|
|
10,242
|
|
|
(8,071
|
)
|
Net
income (loss)
|
|
|
721
|
|
|
4,388
|
|
|
4,745
|
|
|
(6,476
|
)
|
Basic
earnings (loss) per share
|
|
|
0.05
|
|
|
0.30
|
|
|
0.33
|
|
|
(0.44
|
)
|
Diluted
earnings (loss) per share
|
|
|
0.05
|
|
|
0.30
|
|
|
0.32
|
|
|
(0.44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes
a $485 net of tax adjustment for the cumulative effect of a change
in
accounting principle.
|
(2)
|
Includes
a $19,600 pre-tax adjustment to claims
reserves.
|