form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended June 30, 2007
or
[ ]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
transition period
from to
Commission
File Number: 0-24960
COVENANT
TRANSPORTATION GROUP, INC.
(Exact
name of registrant as specified in its charter)
Nevada
|
|
88-0320154
|
(State
or other jurisdiction of incorporation
|
|
(I.R.S.
Employer Identification No.)
|
or
organization)
|
|
|
|
|
|
400
Birmingham Hwy.
|
|
|
Chattanooga,
TN
|
|
37419
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
423-821-1212
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange
Act (Check one):
Large
accelerated filer [ ]
|
Accelerated
filer [ X ]
|
Non-accelerated
filer
[ ]
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date (August 7, 2007).
Class
A Common Stock, $.01 par value: 11,676,298 shares
Class
B
Common Stock, $.01 par value: 2,350,000 shares
PART
I
FINANCIAL
INFORMATION
|
|
|
Page
Number
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
Consolidated
Condensed Balance Sheets as of June 30, 2007 (Unaudited) and December
31,
2006
|
|
|
|
|
|
Consolidated
Condensed Statements of Operations for the three and six months ended
June
30, 2007 and 2006 (Unaudited)
|
|
|
|
|
|
Consolidated
Condensed Statements of Equity and Comprehensive Loss for the six
months
ended June 30, 2007 (Unaudited)
|
|
|
|
|
|
Consolidated
Condensed Statements of Cash Flows for the six months ended June
30, 2007
and 2006 (Unaudited)
|
|
|
|
|
|
Notes
to Consolidated Condensed Financial Statements (Unaudited)
|
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
|
PART
II
OTHER
INFORMATION
|
|
|
Page
Number
|
|
|
|
Item
1.
|
Legal
Proceedings
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
|
|
|
|
Item
4.
|
Submission
of Matters to Vote of Security Holders
|
|
|
|
|
Item
6.
|
Exhibits
|
|
|
|
|
PART
1
FINANCIAL
INFORMATION
ITEM
1. FINANCIAL
STATEMENTS
COVENANT
TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
(In
thousands, except share data)
|
|
ASSETS
|
|
June
30, 2007
(unaudited)
|
|
|
December
31,
2006
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$ |
4,804
|
|
|
$ |
5,407
|
|
Accounts
receivable, net of
allowance of $1,192 in 2007 and $1,491 in 2006
|
|
|
74,604
|
|
|
|
72,581
|
|
Drivers'
advances and other
receivables, net of allowance of $2,658 in 2007
and $2,598 in 2006
|
|
|
5,649
|
|
|
|
4,259
|
|
Inventory
and
supplies
|
|
|
4,592
|
|
|
|
4,985
|
|
Prepaid
expenses
|
|
|
11,055
|
|
|
|
11,162
|
|
Assets
held for
sale
|
|
|
17,039
|
|
|
|
22,581
|
|
Deferred
income
taxes
|
|
|
25,278
|
|
|
|
16,021
|
|
Income
taxes
receivable
|
|
|
4,770
|
|
|
|
6,371
|
|
Total
current assets
|
|
|
147,791
|
|
|
|
143,367
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, at cost
|
|
|
357,131
|
|
|
|
349,663
|
|
Less
accumulated depreciation and amortization
|
|
|
(90,806 |
) |
|
|
(74,689 |
) |
Net
property and equipment
|
|
|
266,325
|
|
|
|
274,974
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
36,210
|
|
|
|
36,210
|
|
Other
assets, net
|
|
|
19,847
|
|
|
|
20,543
|
|
Total
assets
|
|
$ |
470,173
|
|
|
$ |
475,094
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Securitization
facility (See
Note 10)
|
|
$ |
53,981
|
|
|
$ |
54,981
|
|
Credit
facility (See Note
10)
|
|
|
108,000
|
|
|
|
-
|
|
Checks
outstanding in excess of
bank balances
|
|
|
4,076
|
|
|
|
4,280
|
|
Current
maturities of
acquisition obligation
|
|
|
333
|
|
|
|
333
|
|
Accounts
payable and accrued
expenses
|
|
|
34,117
|
|
|
|
30,521
|
|
Current
portion of insurance
and claims accrual
|
|
|
18,808
|
|
|
|
20,097
|
|
Total
current liabilities
|
|
|
219,315
|
|
|
|
110,212
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt (See Note
10)
|
|
|
-
|
|
|
|
104,900
|
|
Insurance
and claims accrual,
net of current portion
|
|
|
18,336
|
|
|
|
18,002
|
|
Deferred
income
taxes
|
|
|
54,454
|
|
|
|
50,685
|
|
Other
long-term
liabilities
|
|
|
2,513
|
|
|
|
2,451
|
|
Total
liabilities
|
|
|
294,618
|
|
|
|
286,250
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingent liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Class
A common stock, $.01 par
value; 20,000,000 shares authorized; 13,469,090
shares issued; 11,676,298 and 11,650,690 shares
outstanding
as of
June 30, 2007 and December 31, 2006, respectively
|
|
|
135
|
|
|
|
135
|
|
Class
B common stock, $.01 par
value; 5,000,000 shares authorized; 2,350,000
shares issued and outstanding
|
|
|
24
|
|
|
|
24
|
|
Additional
paid-in-capital
|
|
|
92,127
|
|
|
|
92,053
|
|
Treasury
stock at cost;
1,792,792 shares and 1,818,400 shares as of June 30,
2007 and December 31, 2006, respectively
|
|
|
(21,278 |
) |
|
|
(21,582 |
) |
Retained
earnings
|
|
|
104,547
|
|
|
|
118,214
|
|
Total
stockholders' equity
|
|
|
175,555
|
|
|
|
188,844
|
|
Total
liabilities and stockholders' equity
|
|
$ |
470,173
|
|
|
$ |
475,094
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
COVENANT
TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(In
thousands, except per share data)
|
|
Three
months ended
June
30,
(unaudited)
|
|
|
Six
months ended
June
30,
(unaudited)
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight
revenue
|
|
$ |
151,033
|
|
|
$ |
139,344
|
|
|
$ |
294,575
|
|
|
$ |
268,778
|
|
Fuel
surcharge
revenue
|
|
|
26,412
|
|
|
|
30,018
|
|
|
|
49,262
|
|
|
|
52,109
|
|
Total
revenue
|
|
$ |
177,445
|
|
|
$ |
169,362
|
|
|
$ |
343,837
|
|
|
$ |
320,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries,
wages, and related
expenses
|
|
|
69,149
|
|
|
|
64,421
|
|
|
|
136,571
|
|
|
|
123,063
|
|
Fuel
expense
|
|
|
52,136
|
|
|
|
50,301
|
|
|
|
98,126
|
|
|
|
92,217
|
|
Operations
and
maintenance
|
|
|
10,402
|
|
|
|
8,774
|
|
|
|
20,000
|
|
|
|
17,271
|
|
Revenue
equipment rentals and
purchased transportation
|
|
|
15,850
|
|
|
|
15,458
|
|
|
|
31,312
|
|
|
|
30,136
|
|
Operating
taxes and
licenses
|
|
|
3,532
|
|
|
|
3,465
|
|
|
|
7,411
|
|
|
|
6,767
|
|
Insurance
and
claims
|
|
|
14,507
|
|
|
|
8,187
|
|
|
|
20,762
|
|
|
|
16,414
|
|
Communications
and
utilities
|
|
|
1,852
|
|
|
|
1,527
|
|
|
|
3,967
|
|
|
|
3,117
|
|
General
supplies and
expenses
|
|
|
5,838
|
|
|
|
5,740
|
|
|
|
11,520
|
|
|
|
10,044
|
|
Depreciation
and amortization,
including gains and losses on disposition
of equipment
|
|
|
13,586
|
|
|
|
8,516
|
|
|
|
26,320
|
|
|
|
18,515
|
|
Asset
impairment charge
|
|
|
1,665
|
|
|
|
0
|
|
|
|
1,665
|
|
|
|
0
|
|
Total
operating expenses
|
|
|
188,517
|
|
|
|
166,389
|
|
|
|
357,654
|
|
|
|
317,544
|
|
Operating
income (loss)
|
|
|
(11,072 |
) |
|
|
2,973
|
|
|
|
(13,817 |
) |
|
|
3,343
|
|
Other
(income) expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
2,975
|
|
|
|
1,095
|
|
|
|
6,006
|
|
|
|
2,239
|
|
Interest
income
|
|
|
(110 |
) |
|
|
(122 |
) |
|
|
(225 |
) |
|
|
(259 |
) |
Other
|
|
|
(34 |
) |
|
|
(22 |
) |
|
|
(116 |
) |
|
|
(75 |
) |
Other
expenses, net
|
|
|
2,831
|
|
|
|
951
|
|
|
|
5,665
|
|
|
|
1,905
|
|
Income
(loss) before income taxes
|
|
|
(13,903 |
) |
|
|
2,022
|
|
|
|
(19,482 |
) |
|
|
1,438
|
|
Income
tax expense (benefit)
|
|
|
(2,646 |
) |
|
|
2,420
|
|
|
|
(6,155 |
) |
|
|
2,721
|
|
Net
income (loss)
|
|
$ |
(11,257 |
) |
|
$ |
(398 |
) |
|
$ |
(13,327 |
) |
|
$ |
(1,283 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share:
|
|
$ |
(0.80 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.95 |
) |
|
$ |
(0.09 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average common shares outstanding
|
|
|
14,019
|
|
|
|
13,997
|
|
|
|
14,011
|
|
|
|
13,991
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
COVENANT
TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
AND
COMPREHENSIVE LOSS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007
(Unaudited
and in thousands)
|
|
Common
Stock
|
|
|
Additional
Paid-In
|
|
|
Treasury
|
|
|
Retained
|
|
|
Total
Stockholders'
|
|
|
Comprehensive
|
|
|
|
Class
A
|
|
|
Class
B
|
|
|
Capital
|
|
|
Stock
|
|
|
Earnings
|
|
|
Equity
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2006
|
|
$ |
135
|
|
|
$ |
24
|
|
|
$ |
92,053
|
|
|
$ |
(21,582 |
) |
|
$ |
118,214
|
|
|
$ |
188,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of restricted stock to
non-employee
directors from
treasury
stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(4 |
) |
|
|
304
|
|
|
|
-
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
impact of change in
accounting for uncertainties in
income taxes (FIN 48 – see Note 7)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(340 |
) |
|
|
(340 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS
No. 123R stock-based employee
compensation cost
|
|
|
|
|
|
|
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(13,327 |
) |
|
|
(13,327 |
) |
|
|
(13,327 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss for six
months ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(13,327 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at June 30, 2007
|
|
$ |
135
|
|
|
$ |
24
|
|
|
$ |
92,127
|
|
|
$ |
(21,278 |
) |
|
$ |
104,547
|
|
|
$ |
175,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
COVENANT
TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(In
thousands)
|
|
Six
months ended June 30,
(unaudited)
|
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(13,327 |
) |
|
$ |
(1,283 |
) |
Adjustments
to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision
for losses on
accounts receivable
|
|
|
377
|
|
|
|
292
|
|
Depreciation
and amortization,
including impairment charge
|
|
|
27,084
|
|
|
|
20,174
|
|
Amortization
of deferred
financing fees
|
|
|
130
|
|
|
|
40
|
|
Deferred
income taxes
(benefit)
|
|
|
(5,828 |
) |
|
|
(1,021 |
) |
Loss
(gain) on disposition of
property and equipment
|
|
|
901
|
|
|
|
(1,659 |
) |
Non-cash
stock
compensation
|
|
|
378
|
|
|
|
62
|
|
Changes
in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
Receivables
and
advances
|
|
|
(2,221 |
) |
|
|
8,107
|
|
Prepaid
expenses and other
assets
|
|
|
249
|
|
|
|
3,614
|
|
Inventory
and
supplies
|
|
|
384
|
|
|
|
5
|
|
Insurance
and claims
accrual
|
|
|
(955 |
) |
|
|
(4,928 |
) |
Accounts
payable and accrued
expenses
|
|
|
2,165
|
|
|
|
890
|
|
Net
cash flows provided by operating activities
|
|
|
9,337
|
|
|
|
24,293
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Acquisition
of property and
equipment
|
|
|
(39,422 |
) |
|
|
(77,757 |
) |
Proceeds
from building sale
leaseback
|
|
|
-
|
|
|
|
29,630
|
|
Proceeds
from disposition of
property and equipment
|
|
|
28,015
|
|
|
|
31,090
|
|
Payment
of acquisition
obligation
|
|
|
(167 |
) |
|
|
-
|
|
Net
cash flows used in investing activities
|
|
|
(11,574 |
) |
|
|
(17,037 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Exercise
of stock
options
|
|
|
-
|
|
|
|
192
|
|
Excess
tax benefits from
exercise of stock options
|
|
|
-
|
|
|
|
17
|
|
Change
in checks outstanding in
excess of bank balances
|
|
|
(204 |
) |
|
|
-
|
|
Proceeds
from issuance of
debt
|
|
|
40,500
|
|
|
|
36,500
|
|
Repayments
of
debt
|
|
|
(38,400 |
) |
|
|
(45,000 |
) |
Debt
refinancing
costs
|
|
|
(262 |
) |
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
1,634
|
|
|
|
(8,291 |
) |
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
(603 |
) |
|
|
(1,035 |
) |
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
5,407
|
|
|
|
3,618
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$ |
4,804
|
|
|
$ |
2,583
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
COVENANT
TRANSPORTATION GROUP, INC. AND SUBSIDIARIES
(Unaudited)
Note
1. Basis
of Presentation
The
consolidated condensed financial statements include the accounts of Covenant
Transportation Group, Inc., a Nevada holding company, and its wholly owned
subsidiaries. References in this report to "we," "us," "our," the "Company,"
and
similar expressions refer to Covenant Transportation Group, Inc. and its wholly
owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
The
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America, pursuant to the rules and
regulations of the Securities and Exchange Commission. In preparing
financial statements, it is necessary for management to make assumptions and
estimates affecting the amounts reported in the consolidated condensed financial
statements and related notes. These estimates and assumptions are
developed based upon all information available. Actual results could
differ from estimated amounts. In the opinion of management, the accompanying
financial statements include all adjustments which are necessary for a fair
presentation of the results for the interim periods presented, such adjustments
being of a normal recurring nature. Certain information and footnote
disclosures have been condensed or omitted pursuant to such rules and
regulations. The December 31, 2006 consolidated condensed balance
sheet was derived from the Company's audited balance sheet as of that
date. These consolidated condensed financial statements and notes
thereto should be read in conjunction with the consolidated condensed financial
statements and notes thereto included in the Company's Form 10-K for the year
ended December 31, 2006. Results of operations in interim periods are
not necessarily indicative of results to be expected for a full
year.
Certain
prior period financial statement balances have been reclassified to conform
to
the current period's classification.
Note
2. Liquidity
As
discussed in Note 10, the Company’s Credit Facility and Securitization Facility
contains certain restrictions and covenants relating to, among other things,
dividends, tangible net worth, leverage, acquisitions and dispositions,
and
total indebtedness. At June 30, 2007, the Company was in compliance with
the covenants of the Credit Facility and Securitization Facility, except
for
violating the minimum tangible net worth, fixed charge coverage ratio,
and
leverage ratio covenants in the Credit Facility. These violations were
waived on
July 27, 2007. Although certain defaults under the Securitization Facility
create a default under the Credit Facility, a default under the Credit
Facility
does not create a default under the Securitization Facility. The Company
is currently in discussions with the bank group to modify the financial
covenants in the Credit Facility to levels better aligned with the Company’s
expected ability to maintain compliance. Without further
modification, the Company anticipates that it would be in default with
one or
all of these same covenants in the quarter ending September 30, 2007. Pursuant
to Emerging Issues Task Force Issue 86-30, Classification of Obligations
When a Violation is Waived by the Creditor (EITF 86-30), the Company has
classified the Credit Facility debt as a current liability. The waiver
is viewed
only as a grace period because the Company has not yet obtained an amendment
to
the Credit Facility covenants which would allow the Company to conclude
that the
Company would be in compliance with all of its Credit Facility covenants in
the quarter ending September 30, 2007. If the Company either fails to obtain
the
amendment or if it experiences future defaults under our Credit Facility,
its
bank group could cease making further advances, declare its debt to be
immediately due and payable, impose significant restrictions and requirements on
its operations, and institute foreclosure procedures against their security.
If
the Company was required to obtain waivers of defaults, the
Company may incur significant fees and transaction costs. If waivers of
defaults are not obtained and acceleration occurs, it may have difficulty
in
borrowing sufficient additional funds to refinance the accelerated debt
or the Company may have to issue equity securities, which would dilute
stock ownership. Even if new financing is made available to the Company,
it may
not be available on acceptable terms. As a result, the Company’s liquidity,
financial condition, and results of operations would be adversely
affected.
Note
3. Comprehensive
Earnings (Loss)
Comprehensive
earnings (loss) generally include all changes in equity during a period except
those resulting from investments by owners and distributions to
owners. Comprehensive earnings (loss) for the six month periods ended
June 30, 2007 and 2006 equaled net income (loss).
Note
4. Segment
Information
The
Company has one reportable segment under the provisions of Statement of
Financial Accounting Standards ("SFAS") No.131, Disclosures about Segments
of an
Enterprise and Related Information. Each of the Company's
transportation service offerings and subsidiaries that meet the quantitative
threshold requirements of SFAS No. 131 provides truckload transportation
services that have been aggregated since they have similar economic
characteristics and meet the other aggregation criteria of SFAS No. 131.
Accordingly, the Company has not presented separate financial information for
each of its service offerings and subsidiaries as the condensed consolidated
financial statements present the Company's one reportable segment. The Company
generates other revenue through a subsidiary that provides freight brokerage
services. The operations of this subsidiary are not material and are therefore
not disclosed.
Note
5. Basic
and Diluted Loss per Share
The
Company applies the provisions of SFAS No. 128, Earnings per Share,
which requires it to present basic EPS and diluted EPS. Basic EPS excludes
dilution and is computed by dividing earnings 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 calculation of diluted loss per share for the three months and
six
months ended June 30, 2007 and 2006, respectively, excludes all unexercised
shares, since the effect of any assumed exercise of the related options would
be
anti-dilutive.
The
following table sets forth, for the periods indicated, the calculation of net
earnings (loss) per share included in the consolidated condensed statements
of
operations:
(in
thousands except per share data)
|
|
Three
months ended
June
30,
|
|
|
Six
months ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(11,257 |
) |
|
$ |
(398 |
) |
|
$ |
(13,327 |
) |
|
$ |
(1,283 |
) |
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per
share – weighted-average
shares
|
|
|
14,019
|
|
|
|
13,997
|
|
|
|
14,011
|
|
|
|
13,991
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock
options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Denominator
for diluted earnings per share – adjusted
weighted-average shares and assumed
conversions
|
|
|
14,019
|
|
|
|
13,997
|
|
|
|
14,011
|
|
|
|
13,991
|
|
Net
loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share:
|
|
$ |
(0.80 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.95 |
) |
|
$ |
(0.09 |
) |
Note
6. Share-Based
Compensation
Prior
to
May 23, 2006, the Company had four stock-based compensation plans. On May 23,
2006, upon the recommendation of the Company's Board of Directors, its
stockholders approved the Covenant Transportation Group, Inc. 2006 Omnibus
Incentive Plan ("2006 Plan"). The Covenant Transport, Inc. 2006 Omnibus
Incentive Plan replaced the Covenant Transportation Group, Inc. 2003 Incentive
Stock Plan, Amended and Restated Incentive Stock Plan, Outside Director Stock
Option Plan, and 1998 Non-Officer Incentive Stock Plan. The 2006 Plan permits
annual awards of shares of the Company's Class A common stock to executives,
other key employees, and non-employee directors under various types of options,
restricted stock awards, or other equity instruments. The number of shares
available for issuance under the 2006 Plan is 1,000,000 shares unless adjustment
is determined necessary by the Committee as the result of a dividend or other
distribution, recapitalization, stock split, reverse stock split,
reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase or exchange of Class A common stock, or other corporate transaction
in order to prevent dilution or enlargement of benefits or potential benefits
intended to be made available. At June 30, 2007, 329,933 of these 1,000,000
shares were available for award under the 2006 Plan. No participant in the
2006
Plan may receive awards of any type of equity instruments in any calendar-year
that relates to more than 250,000 shares of the Company's Class A common stock.
No awards may be made under the 2006 Plan after May 23, 2016. The Company has
a
policy of issuing treasury stock to satisfy all share-based incentive
plans.
Effective
January 1, 2006, the Company adopted SFAS No. 123R, Share-Based Payment
("SFAS No. 123R") using the modified prospective method. Under this method,
compensation cost is recognized on or after the required effective date for
the
portion of outstanding awards for which the requisite service has not yet been
rendered, based on the grant-date fair value of those awards calculated under
SFAS No. 123R for either recognition or pro forma disclosures. Included in
salaries, wages, and related expenses within the consolidated condensed
statements of operations is stock-based compensation expense for the three
months ended June 30, 2007 and 2006 of approximately $228,000 and $58,000,
respectively, and for the six months ended June 30, 2007 and 2006 of
approximately $378,000 and $62,000, respectively. As a result of the
acceleration of vesting of all outstanding unvested stock options on August
31,
2005, there was no cumulative effect of initially adopting SFAS No.
123R.
The
following tables summarize our stock option activity for the six months ended
June 30, 2007:
|
|
Number
of options
(in
thousands)
|
|
|
Weighted
average
exercise
price
|
|
Weighted
average
remaining
contractual
term
|
|
Aggregate
intrinsic value
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of the period
|
|
|
1,287
|
|
|
$ |
13.98
|
|
68
months
|
|
$ |
685
|
|
Options
granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Options
exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Options
forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Options
expired
|
|
|
(18 |
) |
|
$ |
13.95
|
|
|
|
|
|
|
Outstanding
at end of period
|
|
|
1,269
|
|
|
$ |
13.99
|
|
63
months
|
|
$ |
663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at end of period
|
|
|
1,163
|
|
|
$ |
14.07
|
|
58
months
|
|
$ |
661
|
|
The
fair
value of each option award is estimated on the date of grant using the
Black-Scholes option-pricing model, which uses a number of assumptions to
determine the fair value of the options on the date of grant. No options were
granted during the six months ended June 30, 2007. Five thousand options were
granted during the six months ended June 30, 2006.
The
expected lives of the options are based on the historical and expected future
employee exercise behavior. Expected volatility is based upon the historical
volatility of the Company's common stock. The risk-free interest rate is based
upon the U.S. Treasury yield curve at the date of grant with maturity dates
approximately equal to the expected life at the grant date.
The
Company issues performance-based restricted stock awards whose vesting is
contingent upon meeting certain earnings-per-share targets selected by the
Compensation Committee. Determining the appropriate amount to expense is based
on likelihood of achievement of the stated targets and requires judgment,
including forecasting future financial results. This estimate is revised
periodically based on the probability of achieving the required performance
targets and adjustments are made as appropriate. The cumulative impact of any
revision is reflected in the period of change.
The
following tables summarize the Company's restricted stock award activity for
the
six months ended June 30, 2007:
|
Number
of
stock
awards
|
Weighted
average
grant
date
fair value
|
Unvested
at January 1, 2007
|
456,984
|
$12.65
|
Granted
|
110,533
|
$10.83
|
Vested
|
-
|
-
|
Forfeited
|
-
|
-
|
Unvested
at June 30,
2007
|
567,517
|
$12.29
|
As
of
June 30, 2007, the Company had no unrecognized compensation expense related
to stock options which is probable to be recognized in the future. As of June
30, 2007, the Company had $0.5 million in unrecognized compensation expense
related to restricted stock awards which is expected to be recognized over
a
weighted average period of approximately 3.5 years.
Note
7. Income
Taxes
Income
tax expense varies from the amount computed by applying the federal corporate
income tax rate of 35% to income before income taxes primarily due to state
income taxes, net of federal income tax effect, adjusted for permanent
differences, the most significant of which is the effect of the per diem pay
structure for drivers.
In
July
2006, the FASB issued Interpretation No. 48 ("FIN 48"), Accounting for
Uncertainty in Income Taxes. The Company was required to adopt the
provisions of FIN 48, effective January 1, 2007. As a result of this adoption,
the Company recognized additional tax liabilities of $0.3 million with a
corresponding reduction to beginning retained earnings as of January 1, 2007.
As
of January 1, 2007, the Company had a $2.8 million liability recorded for
unrecognized tax benefits, which includes interest and penalties of $0.5
million. The Company recognizes interest and penalties accrued related to
unrecognized tax benefits in tax expense. If recognized, $1.7 million of
unrecognized tax benefits would impact the Company's effective tax rate as
of
June 30, 2007.
The
Company is subject to United States Federal income tax examinations for the
tax
years 2003 and forward. The Company files in numerous state tax jurisdictions
with varying statutes of limitations. In connection with the favorable outcome
in March of the captive insurance audit issue of 2003 and 2004 tax years, the
Company recognized approximately $0.4 million of income tax benefit for the
six
months ended June 30, 2007. There were no other material changes to
the total amount of unrecognized tax benefits for the six months ended June
30,
2007.
Note
8. Derivative
Instruments
We
account for derivative instruments in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as
amended ("SFAS No. 133"). SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each
period in current earnings or in other comprehensive income, depending on
whether a derivative is designated as part of a hedging relationship and, if
it
is, depending on the type of hedging relationship.
From
time
to time, we enter into fuel purchase commitments for a notional amount of diesel
fuel at prices which are determined when fuel purchases occur.
Note
9. Property
and Equipment
Depreciation
is determined using the straight-line method over the estimated useful lives
of
the assets. Depreciation of revenue equipment is the Company's largest item
of
depreciation. The Company generally depreciates new tractors (excluding day
cabs) over five years to salvage values of 7% to 26% and new trailers over
seven
to ten years to salvage values of 22% to 39%. The Company annually
reviews the reasonableness of its estimates regarding useful lives and salvage
values of its revenue equipment and other long-lived assets based upon, among
other things, its experience with similar assets, conditions in the used revenue
equipment market, and prevailing industry practice. Changes in the
useful life or salvage value estimates, or fluctuations in market values that
are not reflected in the Company's estimates, could have a material effect
on
its results of operations. Gains and losses on the disposal of revenue equipment
are included in depreciation expense in the consolidated condensed statements
of
operations.
Note
10. Securitization
Facility and Long-Term Debt
Current
and long-term debt consisted of the following at June 30, 2007 and December
31,
2006:
(in
thousands)
|
|
June
30, 2007
|
|
|
December
31, 2006
|
|
|
|
Current
|
|
|
Long-Term
|
|
|
Current
|
|
|
Long-Term
|
|
Securitization
Facility
|
|
$ |
53,981
|
|
|
$ |
-
|
|
|
$ |
54,981
|
|
|
$ |
-
|
|
Borrowings
under Credit Facility (*)
|
|
|
108,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
104,900
|
|
Total
debt
|
|
$ |
161,981
|
|
|
$ |
-
|
|
|
$ |
54,981
|
|
|
$ |
104,900
|
|
*
In
accordance with EITF 86-30, the Company has classified the borrowings under
the
Credit Facility for financial reporting purposes as a current liability for
the
reasons cited below.
In
December 2006, the Company entered into a second amended and restated revolving
credit agreement, (the "Credit Facility") with a group of banks. The Credit
Facility matures in December 2011. Borrowings under the Credit Facility 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 0.625% and 1.625% based on a 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 1.25% at June 30, 2007). At June
30,
2007, the Company had borrowings outstanding under the Credit Facility totaling
$108.0 million with a weighted average interest rate of 6.57%. The Credit
Facility is guaranteed by the Company and all of its subsidiaries, except CVTI
Receivables Corp. ("CRC") and Volunteer Insurance Limited.
The
Credit Facility has a maximum borrowing limit of $200.0 million with an
accordion feature which permits an increase up to a maximum borrowing limit
of
$275.0 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 $100.0
million. The Credit Facility is secured by a pledge of the stock of most of
the
Company's subsidiaries. A commitment fee, which is adjusted quarterly between
0.125% and 0.35% per annum based on a 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, is
due
on the daily unused portion of the Credit Facility. At June 30, 2007 and
December 31, 2006, the Company had undrawn letters of credit outstanding of
approximately $66.1 million and $60.1 million, respectively. As of June 30,
2007, the Company had approximately $25.9 million of available borrowing
capacity.
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 unrelated financial entities.
The
Company can receive up to $70.0 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
Securitization Facility. The net proceeds under the Securitization Facility
is
shown as a current liability because the term, subject to annual renewals,
is
364 days. As of June 30, 2007 and December 31, 2006, the Company had $54.0
million and $55.0 million in outstanding current liabilities related to the
Securitization Facility, respectively, with weighted average interest rates
of
5.31% for both dates, respectively. CRC does not meet the requirements for
off-balance sheet accounting; therefore, it is reflected in the consolidated
condensed financial statements.
The
Credit Facility and Securitization Facility contain certain restrictions and
covenants relating to, among other things, dividends, tangible net worth,
leverage, acquisitions and dispositions, and total indebtedness. At June
30, 2007, the Company was in compliance with the covenants of the Credit
Facility and Securitization Facility, except for violating the minimum tangible
net worth, fixed charge coverage ratio, and leverage ratio covenants in the
Credit Facility. These violations were waived on July 27, 2007. Although
certain defaults under the Securitization Facility create a default under the
Credit Facility, a default under the Credit Facility does not create a default
under the Securitization Facility. The
Company is currently in discussions with the bank group to modify the financial
covenants in the Credit Facility to levels better aligned with the Company’s
expected ability to maintain compliance. Without further modification, the
Company anticipates that it would be in default with one or all of these same
covenants in the quarter ending September 30, 2007. Pursuant to EITF 86-30,
the
Company has classified the Credit Facility debt as a current liability. The
waiver is viewed only as a grace period because the Company has not yet obtained
an amendment to the Credit Facility covenants which would allow the Company
to
conclude that the Company would be in compliance with all of its Credit Facility
covenants in the quarter ending September 30, 2007. Upon the
expected completion of a satisfactory amendment to the Credit Facility covenants
during the third fiscal quarter of 2007, the Credit Facility debt would then
be
reclassified as a noncurrent liability.
Note
11. Acquisition
On
September 14, 2006, the Company acquired 100% of the outstanding stock of Star
Transportation, Inc. ("Star"), a short-to-medium haul dry van regional truckload
carrier based in Nashville, Tennessee. The acquisition included 614 tractors
and
1,719 trailers. The total purchase price of approximately $40.1 million has
been
allocated to tangible and intangible assets acquired and liabilities assumed
based on their fair market values as of the acquisition date in accordance
with
SFAS No. 141, "Business Combinations". Star's operating results have been
accounted for in the Company's consolidated results of operations since the
acquisition date.
The
following table summarizes the Company's estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition:
(In
thousands) |
|
|
|
|
|
|
|
Current
assets
|
|
$ |
10,970
|
|
Property
and equipment
|
|
|
62,339
|
|
Deferred
tax assets
|
|
|
275
|
|
Other
assets – Interest rate swap
|
|
|
252
|
|
Identifiable
intangible assets:
|
|
|
|
|
Tradename
(4-year estimated
useful life)
|
|
|
920
|
|
Noncompetition
agreement
(7-year useful life)
|
|
|
1,000
|
|
Customer
relationships (20-year
estimated useful life)
|
|
|
3,490
|
|
Goodwill
|
|
|
24,655
|
|
Total
assets
|
|
$ |
103,901
|
|
|
|
|
|
|
Current
liabilities
|
|
$ |
13,181
|
|
Long-term
debt, net of current maturities
|
|
|
36,298
|
|
Deferred
tax liabilities
|
|
|
14,361
|
|
Total
liabilities
|
|
$ |
63,840
|
|
|
|
|
|
|
Total
purchase price
|
|
$ |
40,061
|
|
The
total
purchase price of $40.1 million includes purchase price consideration paid
to
the selling shareholders of Star, or their respective escrow agents, totaling
$38.8 million and $0.3 million of acquisition-related costs, as well as an
additional 3-year acquisition obligation note payable totaling $1.0 million
to
one of the selling shareholders of Star related to her 7-year noncompetition
agreement.
Note
12.
Recent Accounting Pronouncements
In
February 2007, the Financial Accounting Standards Board ("FASB") issued SFAS
No.
159, The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159). SFAS No. 159 permits entities to choose
to measure certain financial assets and liabilities at fair
value. Unrealized gains and losses on items for which the fair value
option has been elected are reported in earnings. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007. The Company
is
currently assessing the expected impact of SFAS No. 159 in the consolidated
condensed financial statements.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements.
This Statement defines fair value, establishes a framework for measuring
fair
value in generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. The provisions of SFAS No. 157
are
effective as of the beginning of the first fiscal year that begins after
November 15, 2007. The Company does not believe the adoption of SFAS No.
157
will have a material impact in the consolidated condensed financial
statements.
Note
13. Commitments
and Contingencies
From
time
to time, the Company is a party to ordinary, 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.
The Company maintains insurance to cover liabilities arising from the
transportation of freight for amounts in excess of certain self-insured
retentions. In management's opinion, the Company's potential exposure under
pending legal proceedings is adequately provided for in the accompanying
consolidated condensed financial statements.
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 it believes are adequate to provide for potential
credit losses. The majority of its 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.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
consolidated condensed financial statements include the accounts of Covenant
Transportation Group, Inc., a Nevada holding company, and its wholly-owned
subsidiaries. References in this report to "we," "us," "our," the "Company,"
and
similar expressions refer to Covenant Transportation Group, Inc. and its
wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Except
for certain historical information contained herein, this report contains
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and Section 27A of the
Securities Act of 1933, as amended that involve risks, assumptions, and
uncertainties that are difficult to predict. All statements, other than
statements of historical fact, are statements that could be deemed
forward-looking statements, including without limitation: any projections of revenues,
earnings,
cash flows, profit margins, capital expenditures, or other financial items;
any
statement of plans, strategies, and objectives of management for our business
realignment or future operations; any statements concerning proposed acquisition
plans, new services or developments; any statements regarding future economic
or
competitive conditions or performance; and any statements of belief and any
statement of assumptions underlying any of the foregoing. Words such as
"believe," "may," "could," "expects," "hopes," "anticipates," and "likely,"
and
variations of these words, or similar expressions, are intended to identify
such
forward-looking statements. Actual events or results could differ materially from
those discussed in forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in the section entitled "Item 1A. Risk Factors," set forth in our
form
10-K for the year ended December 31, 2006, as supplemented in Part II
below.
All
such
forward-looking statements speak only as of the date of this Form
10-Q. You are cautioned not to place undue reliance on such
forward-looking statements. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in the
Company's expectations with regard thereto or any change in the events,
conditions, or circumstances on which any such statement is based.
Executive
Overview
We
are
the twelfth largest truckload carrier 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. Currently, we categorize our
business with five major transportation service offerings: Expedited long haul
service, Refrigerated service, Dedicated service, Covenant regional solo-driver
service, and Star 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. We also generate revenue through
a subsidiary that provides freight brokerage services.
On
September 14, 2006, we acquired 100% of the outstanding stock of Star
Transportation, Inc. ("Star"), a short-to-medium haul dry van regional truckload
carrier based in Nashville, Tennessee. Star's operating results have been
accounted for in the Company's consolidated condensed financial statements
since
the acquisition date. Star's total revenue for the three months ended June
30,
2007 was $25.3 million, representing approximately 14.3% of our consolidated
total revenue. Star's total revenue for the six months ended June 30, 2007
was
$48.9 million, representing approximately 14.2% of our consolidated total
revenue.
For
the
six months ended June 30, 2007, total revenue increased $22.9 million, or 7.2%,
to $343.8 million from $320.9 million in the 2006 period. Freight revenue,
which excludes revenue from fuel surcharges, increased $25.8 million, or 9.6%,
to $294.6 million in the 2007 period from $268.8 million in the 2006
period. We experienced a net loss of $13.3 million, or ($0.95) per
share, for the first six months of 2007, compared with a net loss of $1.3
million, or ($0.09) per share, for the first six months of 2006.
For
the
six months ended June 30, 2007, our average freight revenue per tractor per
week, our main measure of asset productivity, increased 0.4%, to $3,037 compared
to $3,025 in the same period of 2006. The increase was primarily generated
by a
0.4% increase in average freight revenue per total mile, offset by a 0.1%
decrease in average miles per tractor. Weighted average tractors increased
7.3%
to 3,685 in the 2007 period from 3,434 in the 2006 period, primarily as a result
of the Star acquisition. The second quarter freight market reflected a sustained
decline in truck tonnage and continued numerous customer bid packages, resulting
in continued pressure on freight rates and soft demand for
capacity.
Our
after-tax costs on a per-mile basis increased 6.3%, or $.086 per mile, compared
with the first six months of 2006. The main factors were: a $.022 per mile
increase in compensation expense; (driven primarily by increases in driver
pay
from better retention of experienced drivers, office salaries resulting from
growth of our brokerage subsidiary, and
severance
payments and additional headcount related to our realignment efforts); a $.028
per mile increase in net fuel expense associated with an increase in broker
freight, an increase in non-revenue miles, and customer resistance to our fuel
surcharge rates; a $.015 per mile increase in insurance and claims expense
related to the settlement of two large claims during the quarter; a $.030 per
mile
increase in depreciation and amortization expense (resulting primarily from
the
acquisition of tangible and intangible assets of Star and a reduction in gain
on
sale of revenue equipment); a $.008 per mile impairment charge related to our
decision to sell our corporate aircraft; and a $.017 per mile increase in
interest expense related to the additional debt from the September 2006
acquisition of Star. These increases were partially offset by a $.043 per mile
decrease in income tax expense.
For
the
three months ended June 30, 2007, results of the business realignment on each
service offering include the following, as compared to the results we had
achieved for the three months ended June 30, 2006:
●
|
Expedited
long haul service. We increased the fleet by approximately 8%, primarily
through the January 2007 assimilation of the former Covenant Refrigerated
service offering's team-driver trucks into this service offering.
The
Expedited service offering suffered from lower fuel surcharge collection
and a reduction in team drivers within this fleet, resulting in an
increase in solo-driver loads. Average freight revenue per truck
per week
declined by 1.5%, with rates up slightly and miles down about
1.5%.
|
|
|
|
Refrigerated
service. In January 2007, we assimilated the single-driver trucks
from our
former Covenant Refrigerated service offering into our Southern
Refrigerated Transport ("SRT") service offering. The addition
of the unprofitable Covenant Refrigerated operations into SRT resulted
in
a deterioration of SRT's performance, primarily due to a significant
increase in freight from freight brokers and acceptance of new customer
contracts at lower rates to keep trucks loaded. SRT’s rates declined by
approximately $.04 per mile. Fuel surcharge recovery also suffered,
primarily led by the additional broker freight an increase in non-revenue
miles from 9% to 12% of total miles. Based on its historical performance,
we expect SRT to gradually reduce its dependency on broker freight
throughout the year.
|
|
|
|
Dedicated
service. We increased the fleet by approximately 2%. However, rates
were
down $.04 per mile and, as a result, average freight revenue per
total
mile decreased almost 3%. In addition, average miles per truck decreased
about 3% and we had too many unseated tractors. Rates were down partially
due to a decision to write-off $0.4 million of disputed receivables
with a
major customer. In addition, we did not effectively manage our drivers’
time off causing us to fail to meet minimum revenue per truck parameters
of certain shipping contracts.
|
|
|
|
Covenant
regional solo-driver service. We decreased the average fleet by
approximately 380 trucks or 40%. We achieved a 9.5% increase in average
freight revenue per truck, primarily through an 8.9% increase in
average
miles per truck. Rates increased slightly and fuel surcharge recovery
declined. Substantial additional improvements are needed for this
service
offering to become profitable.
|
|
|
|
Star
regional solo-driver service. On September 14, 2006, we acquired
100% of
the outstanding stock of Star, a short-to-medium haul dry van regional
truckload carrier based in Nashville, Tennessee. Star's total revenue
for
the quarter ended June 30, 2007 totaled approximately $25.3 million.
Especially soft freight demand in the Southeastern United States,
where
Star’s lanes are concentrated, resulted in rate pressure, fewer
loaded miles, and reduced fuel surcharge collection, all related
in part,
to greater reliance on brokered freight.
|
|
|
|
Covenant
Transport Solutions’ brokerage freight service. Covenant Transport
Solutions has continued to grow through the addition of agents, who
are
paid a commission for each load of freight they provide. The number
of
loads increased to 2,157 from just 196 loads in the second quarter
of
2006. Average revenue per load also increased 18.4% to $1,663 from
$1,404
per load in the second quarter of 2006. The brokerage operation has
helped
us continue to serve customers when we lacked capacity in a given
area or
when the load has not met the operating profile of one of our service
offerings. This service has been useful as we continue to realign
trucks
between service offerings and subsidiaries and in the management
of our
freight mix toward preferred lanes.
|
At
June
30, 2007, we had $175.6 million in stockholders' equity and $162.0 million
in
balance sheet debt for a total debt-to-capitalization ratio of 48.0% and a
book
value of $12.52 per share.
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. We 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. 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 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. The variable 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.
Our
business realignment presents numerous challenges and may result in volatile
financial performance or periods of unprofitable results. Fluctuations in
results may be ongoing as major activities within the realignment are expected
to continue throughout 2007. Looking ahead to the remainder of the year our
goals have changed substantially. Our near-term goal is to break even
for the second half of 2007, possibly posting a loss in the third quarter,
followed by a small profit in the fourth quarter. We believe this is
achievable with help from the economy, improved rates and fuel surcharge
collection, and favorable results from our assets held for
sale. However, it is by no means certain that we can achieve this
goal as we are anticipating slow and modest improvements given the current
freight environment.
Revenue
Equipment
We
operate approximately 3,676 tractors and 8,980 trailers. Of our tractors, at
June 30, 2007, approximately 3,034 were owned, 513 were financed under operating
leases, and 129 were provided by independent contractors, who own and drive
their own tractors. Of our trailers, at June 30, 2007,
approximately 2,491 were owned and approximately 6,489 were financed under
operating leases. These leases generally run for a period of three years for
tractors and five to seven years for trailers.
During
2006, we replaced approximately 2,000 tractors, or approximately 55% of our
Company-owned tractor fleet. This is a substantially greater percentage than
the
number of tractors we would normally have replaced and resulted in a substantial
increase over normal replacement capital expenditures. We increased our
purchases in 2006 to afford us flexibility to evaluate the cost and performance
of tractors equipped with engines that meet 2007 emissions requirements. We
continue to have a young fleet with an average tractor age of 1.8 years and
an
average trailer age of 3.1 years.
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.
RESULTS
OF OPERATIONS
The
following table sets forth the percentage relationship of certain items to
total
revenue and freight revenue:
|
|
Three
Months Ended
June
30,
|
|
|
|
Three
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
2007
|
|
|
2006
|
|
Total
revenue
|
|
|
100.0 |
% |
|
|
100.0 |
% |
Freight
revenue (1)
|
|
|
100.0 |
% |
|
|
100.0 |
% |
Operating
expenses:
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Salaries,
wages, and related
expenses
|
|
|
39.0
|
|
|
|
38.0
|
|
Salaries,
wages, and related
expenses
|
|
|
45.8
|
|
|
|
46.2
|
|
Fuel
expense
|
|
|
29.4
|
|
|
|
29.7
|
|
Fuel
expense (1)
|
|
|
17.0
|
|
|
|
14.6
|
|
Operations
and
maintenance
|
|
|
5.9
|
|
|
|
5.2
|
|
Operations
and
maintenance
|
|
|
6.9
|
|
|
|
6.3
|
|
Revenue
equipment rentals and
purchased
transportation
|
|
|
8.9
|
|
|
|
9.1
|
|
Revenue
equipment rentals and
purchased
transportation
|
|
|
10.5
|
|
|
|
11.1
|
|
Operating
taxes and
licenses
|
|
|
2.0
|
|
|
|
2.1
|
|
Operating
taxes and
licenses
|
|
|
2.3
|
|
|
|
2.5
|
|
Insurance
and
claims
|
|
|
8.2
|
|
|
|
4.8
|
|
Insurance
and
claims
|
|
|
9.6
|
|
|
|
5.9
|
|
Communications
and
utilities
|
|
|
1.0
|
|
|
|
1.0
|
|
Communications
and
utilities
|
|
|
1.2
|
|
|
|
1.1
|
|
General
supplies and
expenses
|
|
|
3.3
|
|
|
|
3.4
|
|
General
supplies and
expenses
|
|
|
3.9
|
|
|
|
4.1
|
|
Depreciation
and
amortization
|
|
|
7.6
|
|
|
|
5.0
|
|
Depreciation
and
amortization
|
|
|
9.0
|
|
|
|
6.1
|
|
Asset
impairment charge
|
|
|
0.9
|
|
|
|
0.0
|
|
Asset
impairment charge
|
|
|
1.1
|
|
|
|
0.0
|
|
Total
operating
expenses
|
|
|
106.2
|
|
|
|
98.3
|
|
Total
operating
expenses
|
|
|
107.3
|
|
|
|
97.9
|
|
Operating
income (loss)
|
|
|
(6.2 |
) |
|
|
1.8
|
|
Operating
income (loss)
|
|
|
(7.3 |
) |
|
|
2.1
|
|
Other
expense,
net
|
|
|
1.6
|
|
|
|
0.6
|
|
Other
expense,
net
|
|
|
1.9
|
|
|
|
0.7
|
|
Income
(loss) before income taxes
|
|
|
(7.8 |
) |
|
|
1.2
|
|
Income
(loss) before income taxes
|
|
|
(9.2 |
) |
|
|
1.4
|
|
Income
tax expense
(benefit)
|
|
|
(1.5 |
) |
|
|
1.4
|
|
Income
tax expense
(benefit)
|
|
|
(1.8 |
) |
|
|
1.7
|
|
Net
loss
|
|
|
(6.3 |
)% |
|
|
(0.2 |
)% |
Net
loss
|
|
|
(7.5 |
)% |
|
|
(0.3 |
)% |
(1)
|
Freight
revenue is total revenue less fuel surcharge revenue. Fuel
surcharge revenue is shown netted against the fuel expense category
($26.4
million and $30.0 million in the three months ended June 30, 2007
and
2006, respectively).
|
|
|
Six
Months Ended
June
30,
|
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
2007
|
|
|
2006
|
|
Total
revenue
|
|
|
100.0 |
% |
|
|
100.0 |
% |
Freight
revenue (2)
|
|
|
100.0 |
% |
|
|
100.0 |
% |
Operating
expenses:
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Salaries,
wages, and related
expenses
|
|
|
39.7
|
|
|
|
38.4
|
|
Salaries,
wages, and related
expenses
|
|
|
46.5
|
|
|
|
45.8
|
|
Fuel
expense
|
|
|
28.5
|
|
|
|
28.7
|
|
Fuel
expense (2)
|
|
|
16.6
|
|
|
|
14.9
|
|
Operations
and
maintenance
|
|
|
5.8
|
|
|
|
5.4
|
|
Operations
and
maintenance
|
|
|
6.8
|
|
|
|
6.4
|
|
Revenue
equipment rentals and
purchased
transportation
|
|
|
9.1
|
|
|
|
9.4
|
|
Revenue
equipment rentals and
purchased
transportation
|
|
|
10.6
|
|
|
|
11.2
|
|
Operating
taxes and
licenses
|
|
|
2.2
|
|
|
|
2.1
|
|
Operating
taxes and
licenses
|
|
|
2.5
|
|
|
|
2.5
|
|
Insurance
and
claims
|
|
|
6.0
|
|
|
|
5.1
|
|
Insurance
and
claims
|
|
|
7.0
|
|
|
|
6.1
|
|
Communications
and
utilities
|
|
|
1.2
|
|
|
|
1.0
|
|
Communications
and
utilities
|
|
|
1.3
|
|
|
|
1.2
|
|
General
supplies and
expenses
|
|
|
3.4
|
|
|
|
3.1
|
|
General
supplies and
expenses
|
|
|
3.9
|
|
|
|
3.7
|
|
Depreciation
and
amortization
|
|
|
7.6
|
|
|
|
5.8
|
|
Depreciation
and
amortization
|
|
|
8.9
|
|
|
|
6.9
|
|
Asset
impairment charge
|
|
|
0.5
|
|
|
|
0.0
|
|
Asset
impairment charge
|
|
|
0.6
|
|
|
|
0.0
|
|
Total
operating
expenses
|
|
|
104.0
|
|
|
|
99.0
|
|
Total
operating
expenses
|
|
|
104.7
|
|
|
|
98.8
|
|
Operating
income (loss)
|
|
|
(4.0 |
) |
|
|
1.0
|
|
Operating
income (loss)
|
|
|
(4.7 |
) |
|
|
1.2
|
|
Other
expense,
net
|
|
|
1.7
|
|
|
|
0.6
|
|
Other
expense,
net
|
|
|
1.9
|
|
|
|
0.7
|
|
Income
(loss) before income taxes
|
|
|
(5.7 |
) |
|
|
0.4
|
|
Income
(loss) before income taxes
|
|
|
(6.6 |
) |
|
|
0.5
|
|
Income
tax expense
(benefit)
|
|
|
(1.8 |
) |
|
|
0.8
|
|
Income
tax expense
(benefit)
|
|
|
(2.1 |
) |
|
|
1.0
|
|
Net
loss
|
|
|
(3.9 |
)% |
|
|
(0.4 |
)% |
Net
loss
|
|
|
(4.5 |
)% |
|
|
(0.5 |
)% |
(2)
|
Freight
revenue is total revenue less fuel surcharge revenue. Fuel
surcharge revenue is shown netted against the fuel expense category
($49.3
million and $52.1 million in the six months ended June 30, 2007 and
2006,
respectively).
|
COMPARISON
OF THREE MONTHS ENDED JUNE 30, 2007 TO THREE MONTHS ENDED JUNE 30,
2006
For
the
quarter ended June 30, 2007, we suffered a net loss of $11.3 million compared
with a net loss of $0.4 million for the 2006 period. The main factors
in the loss were an approximately 0.9% decline in average freight revenue per
tractor per week combined with substantial increases in insurance and claims
expense, net fuel cost, depreciation, and interest. The following
table reconciles the net loss in the 2007 period to the net loss in the 2006
period.
Loss
Per Share, Quarter Ended June 30, 2006
|
|
$ |
(0.03 |
) |
Additional
insurance claims
accrual (*)
|
|
|
(0.26 |
) |
FIN
18 effective tax rate
revision (*)
|
|
|
(0.12 |
) |
Impairment
charge on airplane
(*)
|
|
|
(0.07 |
) |
Fuel
expense, net of fuel
surcharges
|
|
|
(0.19 |
) |
Capital
costs
|
|
|
(0.15 |
) |
Other,
net
|
|
|
0.02
|
|
Loss
Per Share, Quarter Ended June 30, 2007
|
|
$ |
(0.80 |
) |
*Items
believed to be of an infrequent nature
The
increase in insurance claims accrual related to settlement of two large claims
during the quarter, the change in estimated effective tax rate, and the
impairment charge associated with the sale of the corporate airplane are each
considered to be infrequent in nature. The aggregate negative impact
of these items was $0.45 per share.
For
the
quarter ended June 30, 2007, total revenue increased $8.1 million, or 4.8%,
to
$177.5 million from $169.4 million in the 2006 period. Total revenue
includes $26.4 million and $30.1 million of fuel surcharge revenue in the 2007
and 2006 periods, respectively. For comparison purposes in the
discussion below, we use freight revenue (total revenue less fuel surcharge
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.
On
September 14, 2006, we acquired 100% of the outstanding stock of Star
Transportation, Inc. ("Star"), a short-to-medium haul dry van regional truckload
carrier based in Nashville, Tennessee. Star operates primarily in the
southeastern United States, with shipments concentrated from Texas across the
Southeast to Virginia, and an average length of haul of approximately 414
miles. We are operating Star as a separate subsidiary, continuing
with substantially the same personnel, customers, lanes and terminal locations
as it had prior to our acquisition. The acquisition included 614
tractors and 1,719 trailers. Star's operating results have been accounted for
in
the Company's results of operations since the acquisition date. Star's total
revenue for the quarter ended June 30, 2007 totaled approximately $25.3 million,
which is included in our consolidated condensed statements of operations for
the
quarter ended June 30, 2007. Star's cost structure is similar to that of our
additional operating subsidiaries, and therefore has a minimal impact on
expenses as a percentage of freight revenue.
Freight
revenue increased $11.7 million, or 8.4%, to $151.0 million in the three months
ended June 30, 2007, from $139.3 million in the same period of 2006. The second
quarter freight market reflected a sustained decline in truck tonnage and
numerous requests for bid packages which continued through the quarter. As
a
result, average freight revenue per tractor per week, our main measure of asset
productivity, decreased 0.9%, to $3,081 in the three months ended June 30,
2007,
compared to $3,109 in the same period of 2006 as average miles per tractor
decreased 1.3%, slightly offset by a 0.4% increase in average freight revenue
per total mile. Weighted average tractors increased 7.0% to 3,683 in the 2007
period from 3,441 in the 2006 period. Excluding Star,
we downsized our tractor fleet with the goal of achieving greater fleet
utilization and improved profitability. In general, excluding Star, the
changes in freight mix as a result of the realignment expanded the portions
of
our business with longer lengths of haul, more miles per tractor, and generally
lower rate structures, while shrinking the regional service offering, which
had
the highest rate structure but significantly lower miles per
tractor.
Salaries,
wages, and related expenses increased $4.7 million, or 7.3%, to $69.1 million
in
the 2007 period, from $64.4 million in the 2006 period. As a percentage of
freight revenue, salaries, wages, and related expenses decreased to 45.8% in
the
2007 period, from 46.2% in the 2006 period. Driver pay increased $3.5
million to $47.6 million in the 2007 period, from $44.1 million in the 2006
period. This resulted in increased driver pay on a cost per mile basis of 1.6%
in the 2007 period over the 2006 period. The increase was largely attributable
to improved driver retention that resulted in higher wages for more experienced
drivers. Our payroll expense for employees, other than over-the-road drivers,
as
well as our employee benefits, increased $1.3 million to $21.6 million in the
2007 period from $20.3 million in the 2006 period. These non-driver payroll
expenses decreased to 14.3% of freight revenues in the 2007 period from 14.6%
of
freight revenues in the 2006 period.
Fuel
expense, net of fuel surcharge revenue of $26.4 million in the 2007 period
and
$30.0 million in the 2006 period, increased $5.4 million, or 26.8%, to $25.7
million in the 2007 period, from $20.3 million in the 2006 period. As a
percentage of freight revenue, net fuel expense increased to 17.0% in the
2007 period from 14.6% in the 2006 period. Diesel fuel prices were
down approximately $0.03 per gallon compared to the 2006 quarter. Fuel
surcharges amounted to $0.24 per total mile in the 2007 period and $0.29 in
the
same period 2006. In the 2007 period, we had a lower surcharge collection rate
due primarily to three factors: 1) the increase in freight obtained through
brokers, 2) customer resistance to our fuel surcharge rates and bases, and
3) an
increase in the percentage of non-revenue miles, due to the decrease in freight
demand. Our total miles increased about 5.6% while our fuel surcharge
revenue decreased 12.0% with a resulting net effect being that our fuel
expense, net of surcharge increased approximately $.04 per mile. 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.
Operations
and maintenance, consisting primarily of vehicle maintenance, repairs, and
driver recruitment expenses, increased $1.6 million to $10.4 million in the
2007
period from $8.8 million in the 2006 period. As a percentage of
freight revenue, operations and maintenance increased to 6.9% in the 2007 period
from 6.3% in the 2006 period because of additional maintenance expense related
to an increase in the average age of our fleet and increased tire
expense.
Revenue
equipment rentals and purchased transportation increased $0.4 million, or 2.5%,
to $15.9 million in the 2007 period, from $15.5 million in the 2006
period. As a percentage of freight revenue, revenue equipment rentals
and purchased transportation expense decreased to 10.5% in the 2007 period
from
11.1% in the 2006 period. Payments to third-party transportation providers
from
our brokerage subsidiary were $3.2 million in the 2007 period, compared to
$0.3
million in the 2006 period. Tractor and trailer equipment rental and other
related expenses decreased $2.2 million, to $8.2 million compared with $10.2
million in the same period of 2006. We had financed approximately 513 tractors
and 6,713 trailers under operating leases at June 30, 2007, compared with 1,412
tractors and 7,021 trailers under operating leases at June 30, 2006. Payments
to
independent contractors decreased $0.5 million, or 10.2%, to $4.5 million in
the
2007 period from $5.0 million in the 2006 period, mainly due to a slight
decrease in the independent contractor fleet.
Operating
taxes and licenses remained constant at $3.5 million in the 2007 period and
$3.5
million in the 2006 period. As a percentage of freight revenue, operating taxes
and licenses decreased to 2.3% in the 2007 period versus 2.5% in the 2006
period.
Insurance
and claims, consisting primarily of premiums and deductible amounts for
liability, physical damage, and cargo damage insurance and claims, increased
$6.3 million, or 77.2%, to approximately $14.5 million in the 2007 period from
approximately $8.2 million in the 2006 period. As a percentage of freight
revenue, insurance and claims increased to 9.6% in the 2007 period from 5.9%
in
the 2006 period. The increase was a result of unfavorable developments on two
large claims where new information became available and the claims were
ultimately settled during the quarter, increasing our accrual for casualty
claims by $5.2 million. The underlying claims had occurred in 2004 and
2005. In contrast to these two settlements, our frequency and severity of
accidents during the 2007 quarter improved versus the 2006 quarter. Excluding
any unforeseen unfavorable development of cases, we expect insurance and claims
expense to return to a range of $.08 to $.09 per mile for the remainder of
2007.
In
general, for casualty claims, we have insurance coverage up to $50.0 million
per
claim. For the 2006 period, we were 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 resulted in
total self-insured retention of up to $4.0 million until the $2.0 million
aggregate threshold was reached. We renewed our casualty program as of February
28, 2007. In conjunction with the renewal, we are self-insured for personal
injury and property damage claims for amounts up to the first $4.0 million.
We
are self-insured for cargo loss and damage claims for amounts up to $1.0 million
per occurrence. Insurance and claims expense varies based on the frequency
and
severity of claims, the premium expense, and the level of self-insured
retention, the development of claims over time, and other factors. With our
significant self-insured retention, insurance and claims expense may fluctuate
significantly from period to period, and any increase in frequency or severity
of claims could adversely affect our financial condition and results of
operations.
Communications
and utilities expense increased to $1.9 million in the 2007 period from $1.5
million in the 2006 period. As a percentage of freight revenue,
communications and utilities remained essentially constant at 1.2% and 1.1%
in
the 2007 and 2006 periods, respectively.
General
supplies and expenses, consisting primarily of headquarters and other terminal
facilities expenses, increased $0.1 million to $5.8 million in the 2007
period from $5.7 million in the 2006 period. As a percentage of freight revenue,
general supplies and expenses decreased to 3.9% in the 2007 period from 4.1%
in
the 2006 period.
Depreciation
and amortization, consisting primarily of depreciation of revenue equipment,
increased $5.1 million, or 59.5%, to $13.6 million in the 2007 period from
$8.5 million in the 2006 period. As a percentage of freight revenue,
depreciation and amortization increased to 9.0% in the 2007 period from 6.1%
in
the 2006 period. The increase related to several factors, including: an increase
in the number of owned tractors and trailers in the 2007 period; a softer market
for used equipment resulting in a loss of $0.6 million in the 2007 period
compared to a gain of $1.5 million in the 2006 period; and increased
amortization expense of $0.4 million related to the identifiable intangibles
acquired with our Star acquisition on September 14, 2006 that were not present
in the 2006 period. The disposal of a substantial amount of assets held for
sale, including the reduction of our operating trailer fleet, decreased net
capital costs sequentially from the first quarter of 2007 by $0.02 per mile.
Depreciation and amortization expense is net of any gain or loss on the disposal
of tractors and trailers.
The
asset
impairment charge relates to our decision to sell our corporate aircraft to
reduce ongoing operating costs. We recorded an impairment charge of $1.7
million, reflecting the unfavorable fair market value of the airplane as
compared to the combination of the estimated payoff of the long-term operating
lease and current book value of related airplane leasehold
improvements.
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 $1.9 million, to
$2.8 million in the 2007 period from $0.9 million in the 2006 period. The
increase relates primarily to increased net interest expense of $1.9 million
resulting from the additional borrowings related to the Star acquisition.
Our
income tax benefit was $2.6 million for the 2007 period compared to income
tax
expense of $2.4 million for the 2006 period. 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. In addition, related to a change in our annual forecasted operating
income at June 30, 2007 as compared to the annual forecasted operating income
projected at March 31, 2007, our estimated annual effective tax rate changed.
This required a reversal of $1.7 million of tax benefits previously recorded
during the quarter ended March 31, 2007, resulting in an additional $1.7 million
non-cash accrual of tax expense in the three months ended June 30,
2007.
Primarily
as a result of the factors described above, we experienced net losses of $11.3
million and $0.4 million in the 2007 and 2006 periods, respectively. As a result
of the foregoing, our net loss as a percentage of freight revenue deteriorated
to (7.5%) in the 2007 period from (0.3%) in the 2006 period.
COMPARISON
OF SIX MONTHS ENDED JUNE 30, 2007 TO SIX MONTHS ENDED JUNE 30,
2006
For
the
six months ended June 30, 2007, total revenue increased $22.9 million, or 7.2%,
to $343.8 million from $320.9 million in the 2006 period. Total
revenue includes $49.3 million and $52.1 million of fuel surcharge revenue
in
the 2007 and 2006 periods, respectively. For comparison purposes in
the discussion below, we use freight revenue (total revenue less fuel surcharge
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.
On
September 14, 2006, we acquired 100% of the outstanding stock of Star
Transportation, Inc. ("Star"), a short-to-medium haul dry van regional truckload
carrier based in Nashville, Tennessee. Star operates primarily in the
southeastern United States, with shipments concentrated from Texas across the
Southeast to Virginia, and an average length of haul of approximately 423
miles. We are operating Star as a separate subsidiary, continuing
with substantially the same personnel, customers, lanes and terminal locations
as it had prior to our acquisition. The acquisition included 614
tractors and 1,719 trailers. Star's operating results have been accounted for
in
the Company's results of operations since the acquisition date. Star's total
revenue for the six months ended June 30, 2007 totaled approximately $48.9
million, which is included in our consolidated condensed statements of
operations for the six months ended June 30, 2007. Star's cost structure is
similar to that of our additional operating subsidiaries, and therefore has
a
minimal impact on expenses as a percentage of freight revenue.
Freight
revenue increased $25.8 million or 9.6% to $294.6 million in the six months
ended June 30, 2007 from $268.8 million in the same period of 2006. Average
freight revenue per tractor per week, our primary measure of asset productivity,
increased 0.4% to $3,037 in the 2007 period from $3,025 in the 2006 period.
The
increase was primarily generated by a 0.4% increase in our average freight
revenue per total mile, partially offset by a 0.1% decrease in average miles
per
tractor. Excluding Star, we downsized our tractor fleet with the goal of
achieving greater fleet utilization and improved profitability. In
general, excluding Star, the changes in freight mix as a result of the
realignment expanded the portions of our business with longer lengths of haul,
more miles per tractor, and generally lower rate structures, while shrinking
the
regional service offering, which had the highest rate structure but
significantly lower miles per tractor.
Salaries,
wages, and related expenses increased $13.5 million, or 11.0%, to $136.6 million
in the 2007 period, from $123.1 million in the 2006 period. As a percentage
of
freight revenue, salaries, wages, and related expenses increased to 46.4% in
the
2007 period, from 45.8% in the 2006 period. Driver pay increased $9.2 million
to
$93.6 million in the 2007 period from $84.4 million in the 2006 period. This
resulted in increased driver pay on a cost per mile basis of 3.0% in the 2007
period over the 2006 period. The increase was largely attributable to improved
driver retention that resulted in higher wages for more experienced drivers.
Our
payroll expense for employees, other than over-the-road drivers, as well as
our
employee benefits, increased $4.2 million to $42.9 million in the 2007 period
from $38.7 million in the 2006 period. These non-driver payroll
expenses increased to 14.6% of freight revenue in the 2007 period from 14.3%
of
freight revenue in the 2006 period. The increase was largely attributable
salaries for personnel in our growing non-asset based brokerage subsidiary,
and
additional office salaries and severance payments related to our business
realignment.
Fuel
expense, net of fuel surcharge revenue of $49.3 million in the 2007 period
and
$52.1 million in the 2006 period, increased $8.8 million to $48.9 million in
the
2007 period from $40.1 million in the 2006 period. As a percentage of freight
revenue, net fuel expense increased to 16.6% in the 2007 period from 14.9%
in
the 2006 period. Fuel surcharges amounted to $0.23 per total mile in the 2007
period compared to $0.26 per total mile in the 2006 period. In the 2007 period,
we had a lower surcharge collection rate due primarily to three factors: 1)
the
increase in freight obtained through brokers, 2) customer resistance to our
fuel
surcharge rates and bases, and 3) an increase in the percentage of non-revenue
miles, due to the decrease in freight demand. Our total miles
increased about 7.2% while our fuel surcharge revenue decreased 5.5%.
The resulting net effect was that our fuel expense, net of surcharge, increased
approximately $.03 per mile. 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.
Operations
and maintenance, consisting primarily of vehicle maintenance, repairs, and
driver recruitment expenses, increased $2.7 million to $20.0 million in the
2007
period from $17.3 million in the 2006 period. As a percentage of
freight revenue, operations and maintenance increased to 6.8% in the 2007 period
from 6.4% in the 2006 period. The increase resulted in part from
higher unloading costs, tractor maintenance costs, and tire expense, but was
offset by reduced driver recruiting expense.
Revenue
equipment rentals and purchased transportation increased $1.2 million, or 3.9%,
to $31.3 million in the 2007 period, from $30.1 million in the 2006
period. As a percentage of freight revenue, revenue equipment rentals
and purchased transportation expense decreased to 10.6% in the 2007 period
from 11.2% in the 2006 period. Payments to third-party transportation providers
primarily from our brokerage subsidiary were $4.9 million in the 2007 period,
compared to $0.3 million in the 2006 period. Tractor and trailer equipment
rental and other related expenses decreased $2.5 million, to $17.6 million
in
the 2007 period compared with $20.1 million in the same period of 2006. We
had
financed approximately 513 tractors and 6,713 trailers under operating leases
at
June 30, 2007, compared with 1,412 tractors and 7,021 trailers under operating
leases at June 30, 2006. Payments to independent contractors decreased $0.8
million to $8.8 million in the 2007 period from $9.7 million in the 2006
period.
Operating
taxes and licenses increased $0.6 million, or 9.5%, to $7.4 million in the
2007
period, from $6.8 million in the 2006 period. As a percentage of freight
revenue, operating taxes and licenses remained constant at 2.5% in the 2007
and
2006 periods.
Insurance
and claims, consisting primarily of premiums and deductible amounts for
liability, physical damage, and cargo damage insurance and claims, increased
$4.4 million, or 26.8%, to approximately $20.8 million in the 2007 period from
approximately $16.4 million in the 2006 period. As a percentage of freight
revenue, insurance and claims increased to 7.0% in the 2007 period from 6.1%
in
the 2006 period. The increase was a result of unfavorable developments on two
large claims where new information became available and the claims were
ultimately settled during the quarter, increasing our accrual for casualty
claims by $5.2 million. The underlying claims had occurred in 2004 and
2005. In contrast to these two settlements, our frequency and severity of
accidents during the 2007 period improved versus the 2006 period. Excluding
any
unforeseen unfavorable development of cases, we expect insurance and claims
expense to return to a range of $.08 to $.09 per mile for the remainder of
2007.
In
general, for casualty claims, we have insurance coverage up to $50.0 million
per
claim. For the 2006 period and through February 28, 2007, we were 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 resulted in total self-insured retention of up to $4.0 million
until the $2.0 million aggregate threshold was reached. We renewed our casualty
program as of February 28, 2007. In conjunction with the renewal, we are
self-insured for personal injury and property damage claims for amounts up
to
the first $4.0 million. We are self-insured for cargo loss and damage claims
for
amounts up to $1.0 million per occurrence. Insurance and claims expense varies
based on the frequency and severity of claims, the premium expense, and the
level of self-insured retention, the development of claims over time, and other
factors. With our significant self-insured retention, insurance and claims
expense may fluctuate significantly from period to period, and any increase
in
frequency or severity of claims could adversely affect our financial condition
and results of operations.
Communications
and utilities expense increased $0.9 million to $4.0 million in the 2007 period
from $3.1 million in the 2006 period. As a percentage of freight
revenue, communications and utilities remained essentially constant at 1.3%
and 1.2% in the 2007 and 2006 periods, respectively.
General
supplies and expenses, consisting primarily of headquarters and other terminal
facilities expenses, increased $1.5 million to $11.5 million in the 2007 period
from $10.0 million in the 2006 period. As a percentage of freight revenue,
general supplies and expenses increased to 3.9% in the 2007 period from 3.7%
in
the 2006 period. Of this increase, $0.7 million was for additional building
rent
paid on our headquarters building and surrounding property in Chattanooga,
Tennessee for which we completed a sale leaseback transaction effective April
2006 as described more fully in the following paragraph.
In
April
2006, we entered into a sale leaseback transaction involving our corporate
headquarters, a maintenance facility, and approximately forty-six acres of
surrounding property in Chattanooga, Tennessee. We received proceeds of
approximately $29.6 million from the sale of the property, which we used to
pay
down borrowings under our Credit Facility and to purchase revenue equipment.
In
the transaction, we entered into a twenty-year lease agreement, whereby we
will
lease back the property at an annual rental rate of approximately $2.5 million,
subject to annual rent increases of 1.0%, resulting in annual straight-line
rental expense of approximately $2.7 million. The transaction resulted in a
gain
of approximately $2.4 million, which is being amortized ratably over the life
of
the lease and recorded as an offset to general supplies and expenses
(specifically to building rent) on our consolidated condensed statements of
operations.
Depreciation
and amortization, consisting primarily of depreciation of revenue equipment,
increased $7.8 million, or 42.2%, to $26.3 million in the 2007 period from
$18.6
million in the 2006 period. As a percentage of freight revenue, depreciation
and
amortization increased to 8.9% in the 2007 period from 6.9% in the 2006 period.
The increase related to several factors, including: an increase in the number
of
owned tractors and trailers in the 2007 period; a softer market for used
equipment resulting in a loss of $0.9 million in the 2007 period compared to
a
gain of $1.7 million in the 2006 period; and increased amortization expense
of $0.6 million related to the identifiable intangibles acquired with our Star
acquisition on September 14, 2006 that were not present in the 2006 period.
Depreciation and amortization expense is net of any gain or loss on the disposal
of tractors and trailers.
The
asset
impairment charge relates to our decision to sell our corporate aircraft to
reduce ongoing operating costs. We recorded an impairment charge of $1.7
million, reflecting the unfavorable fair market value of the airplane as
compared to the combination of the estimated payoff of the long-term operating
lease and current book value of related airplane leasehold
improvements.
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 $3.8 million, to
$5.7 million in the 2007 period from $1.9 million in the 2006 period. The
increase relates primarily to increased net interest expense of $3.8 million
resulting from the additional borrowings related to the Star acquisition.
Our
income tax benefit was $6.2 million for the 2007 period compared to income
tax
expense of $2.7 million for the 2006 period. 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. In addition, we received a net tax benefit compared with the 2006
period because we reversed a contingent tax accrual effective March 31, 2007
based on the recommendation by an IRS appeals officer that the IRS concede
a
case in our favor. This concession resulted in recognition of
approximately $0.4 million of income tax benefit for the six months ended June
30, 2007.
Primarily
as a result of the factors described above, net income decreased approximately
$12.0 million to a net loss of $13.3 million in the 2007 period from a net
loss
of $1.3 million in the 2006 period.
LIQUIDITY
AND CAPITAL RESOURCES
Our
business requires significant capital investments over the short-term and the
long-term. In recent years, we have financed our capital requirements
with borrowings under our Securitization Facility and Credit Facility, cash
flows from operations, and long-term operating leases. Our primary
sources of liquidity at June 30, 2007, were funds provided by operations,
proceeds from the sale of used revenue equipment, proceeds under the
Securitization Facility and borrowings under our Credit Facility, each as
defined in Note 10 to our consolidated condensed financial statements
contained herein, and operating leases of revenue equipment. We believe our
sources of liquidity are adequate to meet our current and projected needs for
at
least the next twelve months. On a longer term basis, based on anticipated
future cash flows, current availability under our Credit Facility 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 $9.3 million in the 2007 period and $24.3
million in the 2006 period. Our cash from operating activities was lower in
2007
primarily due to our net loss, less efficient collection of receivables which
resulted in an approximately $10.3 million reduction in cash from operating
activities in the 2007 period, and the payment of our prepaid casualty
insurance premiums. During the 2007 period, we paid one year of prepaid
casualty insurance premiums equaling $3.8 million, while in the 2006 period
all
of our prepaid casualty insurance premiums had been paid as part of a two-year
policy that began in 2005.
Net
cash
used in investing activities was $11.6 million in the 2007 period and $17.0
million in the 2006 period in each case relating primarily to net purchases
of property and equipment. Assuming that we proceed as planned with
minimal new tractor and trailer purchase activity during 2007, that we dispose
of assets held for sale during 2007 at expected prices, and that we do not
complete any business acquisitions, we expect our capital expenditures, net
of
proceeds of dispositions, to drop to a range of $10 million to $15 million
for
fiscal 2007 from $100 million in fiscal 2006.
Net
cash
provided by financing activities was $1.6 million in the 2007 period, as we
borrowed additional funds primarily to fund our exercise of purchase options
available at the end of certain revenue equipment leases. Net cash used in
financing activities was $8.3 million in the 2006 period. At June 30, 2007,
the
Company had outstanding balance sheet debt of $162.0 million, primarily
consisting of $108.0 million drawn under the Credit Facility and approximately
$54.0 million from the Securitization Facility. Interest rates on this debt
range from 5.3% to 6.6%.
We
have 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. No shares were purchased under this plan
during the first six months of 2007. At June 30, 2007, there were
1,154,100 shares still available to purchase under the guidance of this plan.
The stock repurchase plan expires June 30, 2008.
Material
Debt Agreements
In
December 2006, we entered into our Credit Facility with a group of banks. The
Credit Facility matures in December 2011. Borrowings under the Credit Facility
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 0.625% and 1.625% based on a 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 1.25% at June 30, 2007). At
June 30, 2007, the Company had borrowings outstanding under the Credit Facility
totaling $108.0 million with a weighted average interest rate of 6.57%. The
Credit Facility is guaranteed by the Company and all of its subsidiaries except
CVTI Receivables Corp. ("CRC") and Volunteer Insurance Limited.
The
Credit Facility has a maximum borrowing limit of $200.0 million with an
accordion feature which permits an increase up to a maximum borrowing limit
of
$275.0 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 $100.0
million. The Credit Facility is secured by a pledge of the stock of most of
the
Company's subsidiaries. A commitment fee, which is adjusted quarterly between
0.125% and 0.35% per annum based on a 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, is
due
on the daily unused portion of the Credit Facility. At June 30,
2007 the Company had undrawn letters of credit outstanding of approximately
$66.1 million. At June 30, 2007, the Company had approximately $25.9 million
of
available borrowing capacity.
In
December 2000, we entered into an accounts receivable securitization facility
(the "Securitization Facility"). On a revolving basis, we sell our interests
in
our accounts receivable to CRC, a wholly-owned, bankruptcy-remote,
special-purpose subsidiary incorporated in Nevada. CRC sells a percentage
ownership in such receivables to unrelated financial entities. We can receive
up
to $70.0 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 Securitization Facility. The net
proceeds under the Securitization Facility are required to be shown as a current
liability because the term, subject to annual renewals, is 364 days. As of
June
30, 2007 and December 31, 2006, the Company had $54.0 million and $55.0 million
outstanding, respectively, with weighted average interest rates of 5.31% for
both dates, respectively. CRC does not meet the requirements for off-balance
sheet accounting; therefore, it is reflected in the consolidated condensed
financial statements.
The
Credit Facility and Securitization Facility contain certain restrictions
and
covenants relating to, among other things, dividends, tangible net worth,
cash
flow coverage, acquisitions and dispositions, and total indebtedness. At
June 30, 2007, we were in compliance with the covenants of the Credit Facility
and Securitization Facility, except for violating the minimum tangible net
worth, fixed charge coverage ratio, and leverage ratio covenants in the Credit
Facility. These violations were waived on July 27, 2007. Although
certain defaults under the Securitization Facility create a default under
the
Credit Facility, a default under the Credit Facility does not create a default
under the Securitization Facility. The
Company is currently in discussions with the bank group to modify the financial
covenants in the Credit Facility to levels better aligned with the Company’s
expected ability to maintain compliance. Without further modification, the
Company anticipates that it would be in default with one or all of these
same
covenants in the quarter ending September 30, 2007. Pursuant to Emerging
Issues
Task Force Issue 86-30, Classification of Obligations When a
Violation is Waived by the Creditor (EITF 86-30), the Company has
classified the Credit Facility debt as a current liability. The waiver is
viewed
only as a grace period because the Company has not yet obtained an amendment
to
the Credit Facility covenants which would allow the Company to conclude that
the
Company would be in compliance with all of its Credit Facility covenants in
the quarter ending September 30, 2007. Upon the expected completion
of a satisfactory amendment to the Credit Facility covenants during the third
fiscal quarter of 2007, the Credit Facility debt would then be reclassified
as a
noncurrent liability.
OFF-BALANCE
SHEET ARRANGEMENTS
Operating
leases have been an important source of financing for our revenue equipment,
computer equipment, the Company airplane, and certain real estate. At June
30,
2007, we had financed approximately 513 tractors and 6,713 trailers under
operating leases. Vehicles held under operating leases are not
carried on our consolidated condensed balance sheets, and lease payments in
respect of such vehicles are reflected in our consolidated condensed statements
of operations in the line item "Revenue equipment rentals and purchased
transportation." Our revenue equipment rental expense was
$17.5 million for the 2007 period, compared to $20.1 million for the 2006
period. The total amount of remaining payments under operating leases
as of June 30, 2007, was approximately $147.8 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, 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 June 30, 2007, the maximum amount of the residual
value guarantees was approximately $33.1 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 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
consolidated condensed financial statements is contained in Note 1 of the
consolidated financial statements contained in our annual report on Form 10-K
for the fiscal year ended December 31, 2006. 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.
Our
critical accounting policies include the following:
Revenue
Recognition – Revenue, drivers' wages and other direct operating expenses are
recognized on the date shipments are delivered to the customer. Revenue includes
transportation revenue, fuel surcharges, loading and unloading activities,
equipment detention, and other accessorial services.
Depreciation
of Revenue Equipment – Depreciation is determined using the straight-line method
over the estimated useful lives of the assets and was approximately $23.0
million on tractors and trailers in the first six months of
2007. 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 7% to 26% and new trailers over
seven
to ten years to salvage values of 22% to 39%. 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. Gains and losses on the disposal of revenue equipment are included
in depreciation expense in our consolidated condensed statements 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 assets, as appropriate. For the three
months ended June 30, 2007, related to our decision to sell our corporate
aircraft, we recorded an impairment charge of $1.7 million, reflecting the
unfavorable market value of the airplane as compared to the combination of
the
estimated payoff of the long-term operating lease and current net book value
of
related airplane leasehold improvements.
Assets
Held for Sale - Assets held for sale include property and revenue equipment
no
longer utilized in continuing operations which is available and held for
sale. Assets held for sale are no longer subject to depreciation, and
are recorded at the lower of depreciated book value plus the related costs
to
sell or fair market value less selling costs. We periodically review the
carrying value of these assets for possible impairment. We expect to sell these
assets within twelve months.
Accounting
for Investments - Effective July 1, 2000, we combined our logistics business
with the logistics businesses of five other transportation companies into a
company called Transplace, Inc ("Transplace"). Transplace operates a global
transportation logistics service. In the transaction, we contributed our
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. We account for our investment using
the cost method of accounting, with the investment included in other assets.
We
continue to evaluate our cost method investment in Transplace for impairment
due
to declines considered to be other than temporary. This impairment evaluation
includes general economic and company-specific evaluations. If we determine
that
a decline in the cost value of this investment is other than temporary, then
a
charge to earnings will be recorded to other (income) expenses in our
consolidated statements of operations for all or a portion of the unrealized
loss, and a new cost basis in the investment will be established. As of June
30,
2007, no such charge had been recorded. However, we have continued to assess
this investment for impairment as our evaluation of the value of this investment
had been steadily declining prior to the first quarter of 2007, at which
time Transplace’s cash flow improvements have steadied this decline. As
such, we do not currently believe that an impairment charge will be warranted
in
the near term. We will continue to evaluate this investment for impairment
on a
quarterly basis. Also, during the first quarter of 2005, the Company
loaned Transplace approximately $2.7 million. The 6% interest-bearing note
receivable matures January 2009, an extension of the original January 2007
maturity date. Based on the borrowing availability of Transplace, we do not
believe there is any impairment of this note receivable.
Accounting
for Business Combinations - In accordance with business combination accounting,
we allocate the purchase price of acquired companies to the tangible and
intangible assets acquired, and liabilities assumed based on their estimated
fair values. We engage third-party appraisal firms to assist management in
determining the fair values of certain assets acquired. Such valuations require
management to make significant estimates and assumptions, especially with
respect to intangible assets. Management makes estimates of fair value based
upon historical experience, as well as information obtained from the management
of the acquired companies and are inherently uncertain. Unanticipated events
and
circumstances may occur which may affect the accuracy or validity of such
assumptions, estimates or actual results. In certain business combinations
that
are treated as a stock purchase for income tax purposes, we must record deferred
taxes relating to the book versus tax basis of acquired assets and liabilities.
Generally, such business combinations result in deferred tax liabilities as
the
book values are reflected at fair values whereas the tax basis is carried over
from the acquired company. Such deferred taxes are initially
estimated based on preliminary information and are subject to change as
valuations and tax returns are finalized.
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 estimated 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 size of any potential damage award based on
factors such as the specific facts of individual cases, the jurisdictions
involved, the prospect of punitive damages, future medical costs, and inflation
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.
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 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. 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
proceeds from the sale of equipment under operating leases would exceed the
payment obligation on substantially all operating leases. 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 – 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. 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.
In
July
2006, the FASB issued Interpretation No. 48 ("FIN 48"), Accounting for
Uncertainty in Income Taxes. The Company was required to adopt the
provisions of FIN 48, effective January 1, 2007. As a result of this adoption,
the Company recognized additional tax liabilities of $0.3 million with a
corresponding reduction to beginning retained earnings as of January 1, 2007.
As
of January 1, 2007, the Company had a $2.8 million liability recorded for
unrecognized tax benefits, which includes interest and penalties of $0.5
million. The Company recognizes interest and penalties accrued related to
unrecognized tax benefits in tax expense. If recognized, $1.7 million of
unrecognized tax benefits would impact the Company's effective tax rate as
of
June 30, 2007.
Deferred
income taxes represent a substantial liability on our consolidated balance
sheets and are determined in accordance with SFAS No. 109. 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. Based on forecasted income and prior years’ taxable
income, no valuation reserve has been established at June 30, 2007, because
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. Should our tax
positions be challenged, different outcomes could result and could have a
significant impact on the amounts reported through our consolidated condensed
statements of operations.
Performance-based
Employee Stock Compensation - Effective January 1, 2006, we adopted the
fair value recognition provisions of SFAS No. 123R, under which we estimate
compensation expense that is recognized in our consolidated statements of
operations for the fair value of employee stock-based compensation related
to
grants of performance-based stock options and restricted stock awards. This
estimate requires various subjective assumptions, including probability of
meeting the underlying performance-based earnings per share targets and
estimating forfeitures. If any of these assumptions change significantly,
stock-based compensation expense may differ materially in the future from the
expense recorded in the current period.
INFLATION,
NEW EMISSIONS CONTROL REGULATIONS, 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. In addition, new emissions control regulations
and increases in commodity prices, wages of manufacturing workers, and other
items have resulted in higher tractor prices. The
cost of
fuel also has risen substantially over the past three years, although we believe
at least some of this increase 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 to limit the
effects of fuel prices through fuel surcharges.
The
engines used in our tractors are subject to emissions control regulations,
which
have substantially increased our operating expenses since the first round of
additional regulation in 2002. As of June 30, 2007, we are not
operating any tractors with the 2007-compliant engines, and our substantial
"pre-buy" in 2006 has reduced our need to acquire new tractors in the near-term.
Compliance with the 2007 standards is expected to increase the cost of new
tractors and could impair equipment productivity, lower fuel mileage, and
increase our operating expenses. These adverse effects combined with the
uncertainty as to the reliability of the vehicles equipped with the newly
designed diesel engines and the residual values that will be realized from
the
disposition of these vehicles could increase our costs or otherwise adversely
affect our business or operations as the regulations impact our business through
new tractor purchases.
Fluctuations
in the price or availability of fuel, as well as hedging activities, surcharge
collection, the percentage of freight we obtain from freight brokers, and the
volume and terms of diesel fuel purchase commitments may increase our costs
of
operation, which could materially and adversely affect our
profitability. We impose fuel surcharges on substantially all
accounts. These arrangements may not fully protect us from fuel price increases
and also may result in us not receiving the full benefit of any fuel price
decreases. We currently do not have any fuel hedging contracts in place. If
we
do hedge, we may be forced to make cash payments under the hedging arrangements.
A small portion of our fuel requirements for the first six months of 2007 were
covered by volume purchase commitments. Based on current market conditions,
we
have decided to limit our hedging and purchase commitments, but we continue
to
evaluate such measures. The absence of meaningful fuel price protection through
these measures could adversely affect our profitability.
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 generally increases as
a
result of increased retail merchandise shipped in anticipation of the
holidays.
ITEM
3. 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, or 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
June 30, 2007, 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. Currently, all of our borrowing is under
variable-rate agreements.
Our
variable rate obligations consist of our Credit Facility and our Securitization
Facility. Borrowings under the Credit Facility, 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 0.625% and 1.625% based
on a 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 1.25% at June 30,
2007. At June 30, 2007,
we had
variable borrowings of $108.0 million outstanding under the Credit Facility.
Our
Securitization Facility carries a variable interest rate based on the commercial
paper rate plus an applicable margin of 0.44% per annum. At June 30, 2007,
borrowings of approximately $54.0 million had been drawn on the Securitization
Facility. Assuming variable rate borrowings under the Credit Facility and
Securitization Facility at June 30, 2007 levels, a one percentage point increase
in interest rates could increase our annual interest expense by approximately
$1.6 million.
As
required by Rule 13a-15 and 15d-15 under the Securities Exchange Act of 1934,
as
amended (the "Exchange Act"), we have carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report. This
evaluation was carried out under the supervision and with the participation
of
our management, including our Chief Executive Officer and Principal Financial
Officer. Based upon that evaluation, our Chief Executive Officer and
Principal Financial Officer concluded that our controls and procedures were
effective as of the end of the period covered by this report. There
were no changes in our internal control over financial reporting that occurred
during the period covered by this report that have materially affected or that
are reasonably likely to materially affect our internal control over financial
reporting.
Disclosure
controls and procedures are controls and other procedures that are designed
to
ensure that information required to be disclosed in our reports filed or
submitted under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures
include controls and procedures designed to ensure that information required
to
be disclosed in our reports filed under the Exchange Act is accumulated and
communicated to management, including our Chief Executive Officer, as
appropriate, to allow timely decisions regarding disclosures.
We
have
confidence in our internal controls and procedures. Nevertheless, our
management, including our Chief Executive Officer and Principal Financial
Officer, does not expect that our disclosure procedures and controls or our
internal controls will prevent all errors or intentional fraud. An
internal control system, no matter how well-conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of such internal
controls are met. Further, the design of an internal control system
must reflect the fact that there are resource constraints, and the benefits
of
controls must be considered relative to their costs. Because of the
inherent limitations in all internal control systems, no evaluation of controls
can provide absolute assurance that all our control issues and instances of
fraud, if any, have been detected.
PART
II
OTHER
INFORMATION
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LEGAL
PROCEEDINGS
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.
We maintain insurance to cover liabilities arising from the transportation
of freight for amounts in excess of certain self-insured
retentions.
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ITEM
1A.
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RISK
FACTORS
While
we attempt to identify, manage, and mitigate risks and uncertainties
associated with our business, some level of risk and uncertainty
will
always be present. Our Form 10-K for the year ended December
31, 2006, in the section entitled Item 1A. Risk Factors,
describes some of the risks and uncertainties associated with our
business. These risks and uncertainties have the potential to
materially affect our business, financial condition, results of
operations, cash flows, projected results, and future prospects.
In
addition to the risk factors set forth on our Form 10-K, we believe
that
the following additional issues, uncertainties, and risks, should
be
considered in evaluating our business and growth outlook:
We
were in default of our financial covenants under our Credit Facility
as of June 30, 2007, and we may be unable to comply with the financial
covenants in our Credit Facility going forward. A default could
result in
the acceleration of our outstanding indebtedness under the Credit
Facility, increased fees and expenses, restrictions on our operations,
dilutive stock issuances, and an inability to obtain financing
on
acceptable terms, which would have an adverse effect on our liquidity,
financial condition, and results of operations.
We
have a $200.0 million Credit Facility with a group of banks under
which we
had borrowings outstanding totaling $108.0 million as of June 30,
2007.
The Credit Facility is secured by a pledge of the stock of most
of the
Company's subsidiaries. The Credit Facility includes a number of
covenants, including financial covenants.
Under
the Credit Facility, we were in default of our financial covenants as
of June 30, 2007, but obtained a waiver on July 27, 2007, from
our bank
group. Without further modification, however, we anticipate not
being able
to comply with these financial covenants in the quarter ending
September
30, 2007. We are currently in discussions with our bank group to
modify
these financial covenants in the Credit Facility to levels better
aligned
with our expected future results. There is no assurance that the
amendment
will be provided by our bank group or that we will be able to maintain
compliance with the financial covenants going forward.
If
we either fail to obtain the amendment or if we experience future
defaults
under our Credit Facility, our bank group could cease making further
advances, declare our debt to be immediately due and payable, impose
significant restrictions and requirements on our operations, and
institute
foreclosure procedures against their security. If we were
required 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 have difficulty in borrowing sufficient
additional funds to refinance the accelerated debt or we may have
to issue
equity securities, which would dilute stock ownership. Even if
new
financing is made available to us, it may not be available on acceptable
terms. As a result, our liquidity, financial condition, and results
of
operations would be adversely affected.
We
may not be able to renew Dedicated service offering contracts on
the terms
and schedule we expect.
As
part of the plan to improve profitability and increase the average
freight
revenue per tractor per week in our Dedicated service offering,
we are
attempting to renew and negotiate contracts covering the Dedicated
fleet. The current freight environment has resulted in
increased competition for these contracts, which has in turn placed
more
pressure on rates. If contract renewals do not proceed on an
acceptable basis, we may not be successful in executing this plan
on the
terms and schedule we
expect.
|
|
We
may not be able to cause the performance of Star Transportation, Inc.
to
return to historical levels.
The
profitability of our Star Transportation subsidiary has declined
substantially since we acquired Star in September 2006. We
believe the primary factor has been lack of freight demand in the
southeastern United States, where Star's operations are
concentrated. However, other factors may be contributing, as
well. We may not be able to cause Star to operate at its former
level of profitability. If we do not, our financial results may
suffer and we could be forced to write-down all or a portion of the
goodwill associated with the Star acquisition.
We
may not be able to successfully integrate the former operations of
our
Covenant Refrigerated service offering into our SRT and Expedited
Long-Haul operations.
In
the first quarter of 2007, we reallocated the assets formerly operated
by
our Covenant Refrigerated service offering to our SRT and Expedited
long
haul service offerings. The Covenant Refrigerated service
offering had produced significant losses, and absorbing these operations
adversely affected the results in our SRT and Expedited long haul
service
offerings. Particularly in the SRT service offering, we were forced
to
rely on freight from freight brokers to haul adequate loads and to
move
the trucks to lanes where SRT operates. Improving SRT's results
will require reducing the percentage of freight derived from freight
brokers, raising freight rates, and improving related fuel surcharge
collection. We may not be successful in reducing our dependency on
broker
freight or in returning our SRT and Expedited long haul service offerings
to their historical levels of profitability.
We
operate in a highly regulated industry and changes in regulations
could
have a materially adverse effect on our business.
Our
operations are regulated and licensed by various government agencies,
including the Department of Transportation ("DOT"). The DOT,
through the Federal Motor Carrier Safety Administration, 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 "2005
Rules"). On July 24, 2007, a federal appeals court vacated
portions of the 2005 Rules. Two of the key portions that were
vacated include the expansion of the driving day from 10 hours to
11
hours, and the "34 hour restart" requirement that drivers must have
a
break of at least 34 consecutive hours during each week. The
court's decision does not go into effect until September 14, 2007,
unless
the court orders otherwise, and the FMCSA has until such date to
request a
hearing on the matter. We understand that the FMCSA is
currently analyzing the court's decision, and we are unable to predict
whether the order will be appealed or the outcome of any such
appeal.
If
the court's decision becomes effective, it may have varying effects,
in
that reducing driving time to 10 hours daily may reduce productivity
in
some lanes, while eliminating the 34-hour restart may enhance productivity
in certain instances. On the whole, however, we would expect
the court's decision to reduce productivity and cause some loss of
efficiency as our drivers are retrained and some shipping lanes may
need
to be reconfigured. Additionally, we are unable to predict the
effect of any new rules that might be proposed, but any such proposed
rules could increase costs in our industry or decrease productivity.
|
|
SUBMISSION
OF MATTERS TO VOTE OF SECURITY
HOLDERS
|
|
The
Annual Meeting of Stockholders of Covenant Transportation Group,
Inc. was
held on May 22, 2007, for the purpose of (a) electing seven directors
for
one-year terms, and (b) approving the amendment and restatement of
the
Company’s restated articles of incorporation to change its name to
Covenant Transportation Group, Inc. Proxies for the meeting were
solicited
pursuant to Section 14(a) of the Exchange Act, and there was no
solicitation in opposition to the Board’s proposals. Each of
the nominees for director as listed in the Definitive Proxy Statement
filed with the Securities and Exchange Commission on April 20, 2007
(File
No. 000-24960) was elected.
|
|
|
The
voting tabulation on the election of directors was as
follows:
|
|
|
|
|
|
Votes "FOR"
|
Votes "AGAINST"
|
ABSTENTIONS
|
BROKER
NON-VOTES
|
David
R. Parker
|
14,786,905
|
—
|
1,353,741
|
678,758
|
Mark
A. Scudder
|
14,449,682
|
—
|
1,690,964
|
678,758
|
William
T. Alt
|
14,448,307
|
—
|
1,692,339
|
678,758
|
Hugh
O. Maclellan, Jr
|
14,652,873
|
—
|
1,487,773
|
678,758
|
Robert
E. Bosworth
|
14,654,148
|
—
|
1,486,498
|
678,758
|
Bradley
A. Moline
|
14,813,010
|
—
|
1,327,636
|
678,758
|
Niel
B. Nielson
|
14,814,105
|
—
|
1,326,541
|
678,758
|
|
The
name change to Covenant Transportation Group, Inc was approved with
16,135,651 “FOR”; 1,995 “AGAINST”; 3,000 abstentions; and 678,758 broker
non-votes.
|
Exhibit
Number
|
Reference
|
Description
|
3.1
|
(1)
|
Amended
and Restated Articles of Incorporation
|
3.2
|
(2)
|
Amended
Bylaws dated September 27, 1994
|
4.1
|
(1)
|
Amended
and Restated Articles of Incorporation
|
4.2
|
(2)
|
Amended
Bylaws dated September 27, 1994
|
|
#
|
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
|
|
#
|
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 Principal Financial Officer
|
|
#
|
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
|
|
#
|
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 Principal Financial
Officer
|
References:
|
|
(1)
|
Incorporated
by reference from the Company’s Schedule 14A, filed April 20, 2007 (File
No. 000-24960).
|
(2)
|
Incorporated
by reference from Form S-1, Registration No. 33-82978, effective October
28, 1994. |
#
|
Filed
herewith.
|
SIGNATURE
Pursuant
to the requirements of the
Securities Exchange Act of 1934, as amended, the registrant has duly caused
this
report to be signed on its behalf by the undersigned thereunto duly
authorized.
|
COVENANT
TRANSPORTATION GROUP, INC.
|
|
|
|
|
Date: August
9, 2007
|
By:
|
/s/
Joey B. Hogan
|
|
|
Joey
B. Hogan
|
|
|
Senior Executive
Vice President and Chief Operating Officer,
|
|
|
in
his capacity as such and on behalf of the
issuer.
|
32